Europe at the Crossroads of Innovation and Integration
A LHoFT-aligned response
The EIB Investment Report 2024/2025 frames the European Union’s economic prospects within three essential policy levers: innovation, integration, and simplification. These are fundamental prerequisites for Europe to reclaim technological sovereignty and adapt to the post-COVID, climate-aware, AI-accelerated economic order. In the sector of digital finance and fintech, these dynamics are particularly acute. This article explores how local infrastructure interfaces with structural policy barriers and opportunities outlined in the EIB’s analysis.
I. Europe’s Scale-Up Deficit and Strategic Vulnerabilities
- Structural Deficits in Scale-Up Finance
The EIB underscores a stark innovation financing gap, particularly in later-stage venture capital. European financing at Series C and beyond is 4.4x smaller than in the US, with a total gap exceeding EUR 88 billion. This directly impacts the scalability and survival of innovative firms.
- Technological Sovereignty and Startup Fragility
Heavy reliance on non-EU platforms for ICT infrastructure and cloud services is flagged as a critical vulnerability. Startups face obstacles accessing risk capital and infrastructure, compounded by EU underperformance in high-growth innovation sectors like FinTech, deep tech, and AI.
- Ecosystem Nodes and Local Policy Experiments
Innovation hubs are useful for testing regulatory sandboxes, promoting public-private dialogue, and connecting startups with incumbent institutions. However, they cannot offset the structural undercapitalisation and fragmented market dynamics limiting scale-up success. For instance, only 0.2% of EU SMEs access venture funding.
Innovation-support institutions should be nested within a coherent macro-policy framework that includes pan-European risk capital vehicles, deeper IPO markets, and institutional investor engagement.
II. Market Fragmentation as a Structural Drag
- Incomplete Integration vs Capital Allocation
The EU’s capital markets remain fragmented: post-trade infrastructures are 20 times more numerous than in the US, driving up costs and reducing IPO and M&A activity. While Luxembourg ranks above average in market integration indicators, much of the bloc suffers from subscale and poorly connected markets.
- Complexity Penalties for Small Firms
The report notes that 86% of EU firms dedicate resources to regulatory compliance. For smaller firms, this is especially burdensome: The bureaucracy cost “increases to 2.5% of turnover for small and medium-sized enterprises (SMEs).” This complexity also manifests in FinTech-specific compliance with regimes such as MiCA, DORA, and the AML/CFT frameworks.
- Simplification and Proportionality
The EIB supports simplifying reporting and compliance obligations, potentially through digital interfaces. FinTechs can serve as a testbed for such policy interventions, as they often lead in regtech, compliance automation, and cross-border digital onboarding.
While the LHoFT’s ecosystem activities contribute meaningfully to reducing friction at the local or national level, they operate within a broader European regulatory and institutional framework that remains fragmented and uneven. The overarching policy problem lies in the persistence of regulatory redundancy across EU member states. Even within the single market, FinTech firms often must navigate multiple layers of supervision, licensing regimes, and compliance expectations that vary by jurisdiction, therefore undermining the very concept of a unified digital finance ecosystem.
While regional initiatives are important for experimentation, dialogue, and proof-of-concept development, their impact is constrained unless matched by systemic EU-level simplification and supervisory coordination.
Conclusion: From Strategy to Structural Transformation
The EIB’s report lays out a macro-policy blueprint for a digitally sovereign and economically dynamic Europe. Its recommendations, ranging from scaling up investment, integrating capital markets, and reducing regulatory drag, apply with special urgency in FinTech, a sector that embodies both Europe’s potential and its current constraints.
Innovation ecosystems can serve as translational infrastructure, linking EU priorities to local capabilities. However, without systemic capital deepening, these hubs risk becoming islands of excellence in an underpowered ocean. Ultimately, transforming Europe’s investment environment will depend not on rhetorical alignment but on institutional coherence, policy discipline, and the strategic activation of local nodes within a continental framework.
For those seeking a deeper understanding of how FinTech ecosystems can drive regulatory innovation and cross-sector collaboration, Luxembourg offers a compelling case. Explore how local experimentation meets European ambition at LHoFT.
Footnotes:
Image: Midjourney
1) EIB (5 Mar 2025) “EIB Investment Report 2024/2025 – Innovation, integration and simplification in Europe”
2) “In Series C rounds, investors inject capital into successful businesses in an effort to receive more than double that amount back. Series C funding focuses on scaling the company, growing as quickly and successfully as possible.”
3) See page 129 “Capital invested and the gap with the United States (EUR billion), by instrument type”
4) See page 38.
5) See page 128 “Part I – Public and corporate investment in a challenging environment”
6) “An IPO, or initial public offering, is the term for the first time that a private company sells shares of its stock to the public on a stock exchange.”
7) See page 133.
8) See page V.
9) See page 39.
