Historically, Europeans have saved a larger amount of money compared to US citizens. Currently, Europeans save around 15% of household income, more than three times the rate of US households. However, most of these savings are held in low-risk products such as bank deposits. Between 2015 and 2021, EU households held almost a third of their financial assets in cash and bank deposits compared to just 13% in the US. In times of high inflation, such as in 2022 and 2023 when inflation reached an average of 9.2% and 6.4% respectively, this money loses value. To counter this “money-under-the-mattress” problem, the European Union wants to give savers a stronger incentive to invest their savings in Europe’s capital markets. Or, as EU financial commissioner Maria Luis Albuquerque said: "The idea is giving European savers a solution to invest in Europe.... the opportunities will be there.".

But what will these effects entail for the distribution of wealth and income? Due to high inflation, lower-income households already face severe financial pressure, limiting their ability to save at all. As a result, tax incentives will not benefit citizens equally. Moreover, the higher risks involved in equity investments are unattractive for lower-income households as they cannot bear potential losses.

This article explains why the European Union needs tax incentives on investment accounts and what the effects would be on the broader economy, businesses, and inequality.

Why do we need tax incentives?

To get a better understanding of why keeping savings in deposits is costly, it helps to compare inflation with the long-run returns on European equity. The MSCI Europe index, an index that tracks the performance of stocks in Europe, shows that yearly gross returns of the ten years preceding 31 October 2025 are 8.13 percent. This means that, with average annual inflation of approximately 3 percent over the past ten years, investing in European equities would earn a real (inflation-adjusted) return of roughly 5 percent. On the other hand, returns on bank deposits in the Euro area have been relatively low due to low interest rates. Approximately between 0.25% and 1.71% for different time lengths. Therefore, for most of the past decade, the real return on bank deposits has been negative, implying that households lose purchasing power over the money they hold in bank accounts (Figure 1). However, the problem extends beyond low returns alone. A large amount of Europe's savings does not even end up within the EU’s financial system.

Figure 1: Real returns calculated using a 10-year average inflation rate of 3%, average euro-area household deposit rate over different maturities of 0.98% and annual 10-year MSCI Europe index returns

This imbalance becomes clear when looking at the scale of capital outflows. European families sent approximately €300 bln of savings outside EU markets, primarily to businesses in the United States. At the same time, the EU runs a significant trade surplus; they export more than they import. Economic theory states that when a country (or group of countries) run(s) a trade surplus, domestic saving is higher than domestic investment. In practice, this means that money is indeed flowing outside of the EU; so rather than financing productive opportunities at home, European money finances growth abroad.

These outward flows matter because they hinder the EU from competing in certain sectors. Investment as a percentage of GDP is higher in the EU than in the US. However, because the EU has a relatively small high-tech sector compared to the US, the share of investment going to high-risk high-return projects such as activities in IT, R&D, software and databases, and intellectual property is lower. This explains why, despite high levels of saving, Europe underinvests in projects that generate long-term growth within their own continent.

To address this imbalance, the European Commission’s Competitiveness Compass argues that countries should not only expand aggregate investment, but also redirect existing financial resources toward more productive and profitable opportunities. In other words, do not invest more in everything, but rather create incentives that direct savings into innovative sectors.

So, if countries in the European Union can encourage their citizens to invest their savings in European equities, specifically high-tech related, this could help retain more capital within the EU and support domestic innovative growth.

The effect on businesses

Many businesses, especially young and innovative ones, are very dependent on capital markets. They often lack sufficient internal funds to invest in new ideas, and traditional bank loans are difficult to obtain as they have little to no collateral and operate with high risk and uncertainty. Therefore, equity markets become an important source of funding, especially for firms that operate on the technology frontier, such as those in AI.

Tax incentives on investment accounts increase the after-tax return on equity, making such investments more attractive. The plan by the European Commission to lower tax on investment in European equity should therefore have the intended effect: shifting household savings away from bank deposits and towards investment accounts.

An increasing amount of money in equity markets is generally associated with more research & development (R&D). R&D is the engine of innovation, it turns ideas into products or services that can increase productivity, solve societal problems, and help build the foundation for long-term growth. R&D funding is particularly essential for startups because they have not yet had the opportunity to build capital with previous ideas or products. Entrepreneurs may hesitate to start or scale R&D projects if they are unsure whether they can secure enough funds to complete them. Smaller companies in particular often leave innovative unimplemented projects in their portfolio as they are not able to receive sufficient funding.

Evidence also suggests that taxation affects the price that firms pay for funding they receive. When investors receive tax benefits, they keep more of the returns from their investments. This means they are satisfied with a lower pre-tax return, enabling firms to raise money more cheaply. After dividend tax cuts, firms that had limited internal funds increased productivity. Most likely because cheaper external funding allowed them to invest more. However, other research shows the other side of the coin, a dividend tax cut mainly leads to higher payouts to shareholders rather than an increase in investment. This shows that tax policy lowers firms’ costs of funding, but its effect on investment ultimately depends on how firms choose to spend their money.

European policymakers are right to view tax incentives as a way to shift household savings toward more productive uses. While no single solution will solve Europe’s long standing investment problem, shifting the balance from deposits to equity investment could help narrow the gap in innovativeness with economies that rely more on market funding such as the United States.

Inequality

As suggested earlier, unequal participation in equity markets suggests that the benefits of tax incentives are unlikely to be evenly distributed. Currently, many countries inside the EU apply progressive tax rates on income (Figure 2).

Figure 2

This entails that in most cases, when a person earns more, their marginal effective tax rate (METR) increases. This is the amount of tax someone has to pay on every additional unit of money earned. However, tax structures are different depending on asset classes. Capital assets, such as investments, savings, and a second home are taxed differently. In the Netherlands, individuals pay no tax on these assets below €57,000, but once this threshold is exceeded, the “deemed” return is taxed at 36 percent. In Germany, investment income is taxed above €1,000 per year for a single person household. However, in other countries in the EU: Spain, Italy, and France for example, investments are taxed from the first euro earned.

Low-income households generally pay low levels of tax because their taxable income and assets are limited. Therefore, if EU member states decide to employ uniform tax incentives on investment accounts that invest in European equities, the benefits would most likely disproportionately accrue to higher-income households who are far more likely to own financial assets and invest larger amounts.

On the other hand, individuals or households that qualify as low- to moderate-income do tend to increase participation and contributions with well-designed and accessible tax-favoured investment accounts. This matters because higher-return assets such as equities are concentrated among higher-income groups, so improving their access can broaden involvement in higher-return investment opportunities.

Conclusion

The European Union is right to address the problem of persistent underinvestment, particularly in innovative and high-growth sectors that are essential for long-term growth.

In principle, tax incentives on investment accounts should help achieve this objective by encouraging households to shift their savings away from bank deposits with low returns and into European equity markets. This will result in increasing access to financing for firms. However, the resulting effect will ultimately depend on how companies decide to spend their funds. If they invest in new ideas, the policy could contribute to innovative growth. If instead firms distribute these gains to investors through higher payouts, the real benefits would remain limited.

Lastly, the distributive effects of the policy cannot be ignored. Access to equity investments remains concentrated among higher-income households that have sufficient savings and are able to afford losses. As a result, tax incentives are likely to disproportionately benefit those that are already well positioned to invest, leaving households that are constrained by wealth and inflation behind. Therefore, while tax incentives may help address the EU’s lack of investment, they are not a complete solution. Europe must decide whether its investment strategy will solely focus on economic growth or will promote growth that involves citizens from all layers of society. Shall we choose inclusion?

This article is part of The Outside World, ftrprf’s very own research center.

For organizations, it’s pivotal to thoroughly understand what is happening in society. We help companies generate comprehensive insights into societal change and its potential effects on their strategy and operations, both negative and positive. With actionable societal insights, courageous plans, and a can-do mentality, we connect the outside world to your company's strategy. For these outside-world insights, we use a rigorous methodology that includes data processing, quantitative and qualitative analysis, and a thorough review process to ensure the accuracy and consistency of our findings.

For more information, please contact theoutsideworld@ftrprf.com.

The Outside World Weekly

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Next articleEconomics of War and Peace: How Mediation Shapes Post-Conflict Futures

Wars leave behind more than destruction; they shatter lives and displace entire communities. Families are forced to leave their homes and don’t have access to food or healthcare. The human cost of war is immense, measured in the suffering of civilians who endure violence, fear, and instability. By mid-2024, nearly 123 million people worldwide were forcibly displaced by conflict and human rights violations. Refugees numbered 43.7 million, while internal displacement reached 72.1 million, with most coming from different countries, such as the Democratic Republic of the Congo, Haiti, and Mozambique. Yet alongside the human tragedy comes economic devastation. Wars destroy vital infrastructure, such as roads, schools, and hospitals, leaving massive reconstruction costs that require years of sustained investment. Conflicts also drain a country’s human capital, as casualties, injuries, and displacement weaken the workforce and reduce productivity. For example, in the Gaza Strip, two years of war have killed over 67,000 people and displaced around 100,000 among the 2.2 million people living in the territory. Since the start of the war, the population has fallen to an estimated 2.1 million due to death and displacement. These losses account for more than 10% of the pre-war population. This highlights that future reconstruction will face severe shortages of skilled labor and community capacity, making the recovery of Gaza’s infrastructure and economy even more difficult. Therefore, understanding both the human and economic costs of war is essential to grasping the full impact of conflict on societies and their path to recovery. This raises a central question: To what extent do the economic consequences of war affect a nation’s ability to rebuild and achieve peace? Beyond national economies, wars impose heavy costs on businesses, threatening their operations and trade. Operating in conflict zones exposes organizations and global markets to serious risks that can easily disrupt normal business activity. Wars disrupt shipments, limit investments, and increase transportation and labor costs. When supply chains break down, companies struggle to keep production going. In many cases, companies lose access to workers, as wars displace many families, including young professionals. This leaves fewer people available to work. Businesses may also face shortages of raw materials or enormous damage to critical infrastructure. This makes it extremely difficult for a company to maintain trade or meet demand. This is where peace agreements take on a crucial role. They do more than stop violence and save lives. Additionally, they create conditions for economic recovery by allowing investments to resume and facilitating reconstruction plans. These plans are often backed and implemented by international actors such as the World Bank, the IMF, UN agencies, bilateral donors, and even private sector investors. In this way, mediation can serve as a powerful tool not only for peace but also for long-term stability. Wars impose immense economic costs. They cause the loss of lives and human capital and destroy critical infrastructure. On the economic level, conflicts create severe macroeconomic disruptions, including rising national debt, inflation, and a major decline in GDP. All these effects leave economies fragile and slow down recovery. They also limit the ability of both governments and businesses to stabilize and grow. The ongoing wars in Ukraine and Sudan highlight a shared reality. The cost of war reaches far beyond human loss, leading to economic collapse and the widespread loss of livelihoods. For example, the Russian invasion of Ukraine has caused immense economic devastation, adding to the human toll of death, injury, and displacement. In the first half of 2022, Ukraine’s economy collapsed by nearly 30 percent as large parts of its territory were occupied. Key industries were destroyed, and around three-quarters of small businesses stopped operating. Mining, metallurgy, and manufacturing also shut down. Despite some recovery and reconstruction efforts by mid-2022, particularly in agriculture, Russia renewed its attacks on key electricity infrastructure. These renewed strikes damaged production and disrupted exports. As a result, it slowed economic growth. Moving to the ongoing humanitarian crisis in Sudan, the war erupted from a power struggle between the Sudanese army and the Rapid Support Forces (RSF). This happened after disagreements over merging the RSF into the national army and transitioning to civilian rule. Their rivalry for control turned violent in April 2023, unleashing brutal fighting that devastated cities and displaced thousands. From an economic perspective, the war in Sudan had caused economic losses exceeding $26 billion by November 2023. This represents over half of the country's economic value from the previous year. The industrial sector, including manufacturing and oil refining, has lost more than 50% of its value, according to the Sudanese finance minister. The conflict has also resulted in a loss of 4.6 million jobs and pushed over 7 million more people into poverty. Furthermore, the agrifood system alone has shrunk by 33.6%. From these examples, it is clear that operating in such conflict zones poses extreme risks for businesses. The disruption of supply chains and damage to critical infrastructure caused by these violent conflicts often halt production. Furthermore, companies must face threats to their workforce, including displacement, safety hazards, and reduced productivity stemming from the trauma of war. Given the high cost of all of these factors combined, peace mediation becomes an essential requirement. Building on this, the link between peace and economic recovery becomes evident. When meditation and dialogue are effective in stopping violence, they not only save lives but also serve as the first steps to rebuild infrastructure and revive industries. This, in turn, lays the foundation for longer-term economic stability. However, when mediation fails, these opportunities become limited, leaving economies fragile and communities vulnerable. This connection shows how peace mediation can stimulate economic renewal. It also highlights why, despite its potential, mediation sometimes falls short. But what exactly is mediation, and how does it influence a country’s economic recovery? Peace mediation is a voluntary process where a neutral third party helps resolve disputes through dialogue. It can take place at international or national levels. A variety of actors may be involved, including governments, international organizations, or independent mediators. When peace negotiations begin, they represent the first steps toward recovery. Even the early stages of mediation can ease tension between conflicting parties. Mediation plays a crucial role in restoring stability and rebuilding economies; however, its success is never guaranteed. Mediation efforts and peace agreements sometimes fail because modern conflicts have become deeply complex. They involve fragmented groups and constantly shifting alliances. Rather than clear state-to-state rivalries, they are defined by deep mistrust among parties. In such contexts, peace agreements are not enough to address the underlying political, social, and economic tensions that fuel violence. Many peace talks collapse because the parties enter negotiations not to compromise. Instead, they do it to gain time, rebuild strength, or seek international legitimacy. The Sudan war illustrates this clearly. The repeated mediation attempts by regional and international actors have failed to end the conflict between the army and the Rapid Support Forces. Both sides continue to seek military advantage and distrust external involvement. One of the major causes of failure of peace mediation is the deep divisions among both the warring factions and the mediators involved. The mediation attempts also lacked any real enforcement or accountability. It failed to pressure foreign backers to stop supplying weapons. Rather than tackling the root causes of the conflict, such as power struggles, governance failures, or foreign interference, efforts have mostly targeted short-term ceasefires. Even ceasefire attempts in Sudan have collapsed, with the fighting now spreading to more cities and intensifying the conflict. Similarly, in Ukraine, several mediation efforts, including the Minsk agreements, have not led to lasting peace. Both sides have refused to compromise on essential matters such as sovereignty and territorial integrity. Additionally, talks between the United States and Russia reached a deadlock. This happened because neither party was prepared to make progress on key concerns like security guarantees or Ukraine’s independence. These examples show that mediation often fails when there is no genuine political will and when the balance of power on the ground keeps shifting. Without strong mechanisms for enforcement and long-term peacebuilding, peace agreements are more likely to fail. When peace mediation fails, businesses operating in conflict zones face serious multifaceted challenges. They face rising security costs as well as frequent disruptions in supply chains. This uncertainty makes long-term planning and investment extremely difficult. In response, many companies reduce their operations or withdraw from the country entirely, further slowing economic activity and hindering recovery. This failure may create a broader climate of economic instability that can persist long after the conflict ends. A prominent example is Lafarge, the French construction company, which continued operating a cement plant in northeast Syria during the civil war in 2011. The company faced extraordinary challenges, including disrupted supply chains and extreme security risks. It also received constant threats from multiple armed groups controlling the region. To maintain operations, Lafarge reportedly made payments to local militias for protection, a decision that later sparked controversy and legal scrutiny. Ultimately, the intensifying conflict made it impossible to continue, forcing the company to shut down the plant and withdraw completely from the area. The company’s exit from the region resulted in significant financial losses as well as reputational damage, combined with ongoing severe legal consequences. This case highlights the complex ethical and operational dilemmas businesses face in conflict zones. On the contrary, when peace mediation actually succeeds in ending violence, it allows governments and international organizations to step in and coordinate reconstruction efforts. This cooperation strengthens the country’s institutions and lays the groundwork for long-term growth. A clear illustration of this process can be seen in the case of Bosnia and Herzegovina. This case shows how coordinated post-conflict support can help a country take practical steps toward recovery. Despite heavy casualties and widespread destruction, the World Bank’s financial aid and technical guidance in the late 1990s helped the country begin its transition to a market economy while restoring essential services. Over the following two decades, much of the damaged infrastructure was rebuilt, and institutions were strengthened. Consequently, the economy gradually stabilized, which laid the foundation for longer-term reforms and progress. While mediation is often associated with governments, UN agencies, or international organizations, it is not limited to them. Businesses operating in or around conflict zones are directly affected by instability, and this creates both an incentive and an opportunity for them to contribute to peacebuilding efforts. As violence escalates, companies face significant operational risks. These risks include damaged assets, shrinking markets, and rising security costs. Supporting initiatives that reduce tensions or strengthen local resilience can, therefore, help safeguard their operations and create more stable conditions for investment. Companies can play an important role in peacebuilding through their core business activities. They can help stabilize communities affected by conflict by creating jobs and providing essential goods and services. Especially, businesses that have strong local ties with communities and therefore understand the social and political dynamics of a country can act as anchors of stability even in fragile environments. Companies can also support post-conflict recovery by partnering and working with NGOs and development agencies. These organizations provide funding, expertise, and guidance for post-conflict reconstruction, while companies implement projects on the ground. This creates jobs, restores essential services, and helps revive local economies. At the same time, businesses can earn financial returns while contributing to peacebuilding. A clear example comes from Benghazi, Libya. The INGO, Agency for Technical Cooperation and Development (ACTED), partnered with local construction companies to rehabilitate the city’s water authority, schools, and a psychiatric hospital. These efforts restored essential services and enabled over 800 children to return to school. These efforts helped communities recover and encouraged displaced families to return. Beyond their economic role, companies can also engage in what is known as corporate peacemaking. This involves using their influence and networks to support peace efforts directly. For instance, by facilitating dialogue between conflicting parties, raising awareness, or advocating for peace-focused policies. Businesses can also help prevent conflict by offering early warnings about rising tensions and encouraging cooperation between communities, governments, and other relevant stakeholders. Businesses can contribute meaningfully to the peacebuilding process in different ways, both to support stability and to protect their own long-term interests. They can contribute by partnering with international organizations to implement reconstruction plans or by using their local networks to facilitate dialogue. Businesses can help create the conditions in which recovery and sustainable investment become possible. Wars leave profound damage that extends far beyond the immediate conflict zones. They destroy lives and weaken societies and economies. Understanding these costs reminds us that peace is not only a moral goal but also an economic necessity. Peace mediation plays a critical role in post-conflict recovery. It helps rebuild trust and restore stability, enabling communities to shift their focus from survival to sustainable growth. Yet modern conflicts are often highly complex, involving multiple actors with competing interests, which can limit the effectiveness of mediation efforts and, in some cases, lead to their failure. Achieving sustainable peace, therefore, requires more than the engagement of governments and diplomats. International financial institutions, NGOs, and businesses also have an essential role, contributing through investment, participation in reconstruction efforts, and job creation. Businesses can help stabilize fragile regions and provide communities with a pathway toward hope and resilience. Ultimately, peace is a shared responsibility. When governments, mediators, and the private sector collaborate, the devastation of conflict can be transformed into practical foundations for long-term stability and prosperity. Shall we? This article is part of The Outside World, ftrprf’s very own research center. For organizations, it’s pivotal to thoroughly understand what is happening in society. We help companies generate comprehensive insights into societal change and its potential effects on their strategy and operations, both negative and positive. With actionable societal insights, courageous plans, and a can-do mentality, we connect the outside world to your company's strategy. For these outside-world insights, we use a rigorous methodology that includes data processing, quantitative and qualitative analysis, and a thorough review process to ensure the accuracy and consistency of our findings. For more information, please contact theoutsideworld@ftrprf.com.

2025-11-24

Economics of War and Peace: How Mediation Shapes Post-Conflict Futures

The Future of European Investments

Why do we need tax incentives?

The effect on businesses

Inequality

Conclusion