American Finance Has Left Europe In the Dust. The Tables Aren’t Turning.

After a decade and a half of seeing the U.S. economy pull ahead thanks to its outsize technology sector, European politicians are desperate to fight back in emerging industries such as green energy. One challenge they face is that America also keeps pulling ahead in the business of financing the investments required.

On Thursday, Luxembourg for Finance—a public-private partnership that seeks to promote the financial industry in the low-tax city state—published a report detailing the different ways in which European banks and asset managers might regain an edge relative to U.S. and Asian peers.

This is part of an effort by officials across the European Union to give firms a break. “Old economy” industries such as car manufacturing face rising competition from China and higher energy costs since Russia invaded Ukraine. The U.S. Inflation Reduction Act also has drawn investment across the Atlantic. Last year, the European Commission tasked former Italian prime ministers Mario Draghi and Enrico Letta with drafting a report on European competitiveness.

Luxembourg for Finance Chief Executive Nicolas Mackel echoes a common refrain: “Europe can take the lead in financial services when we eliminate fragmentation.” His report points out that the return on equity of European banks has bounced back in recent years. But it also showcases the gulf that has opened up relative to U.S. financial firms.

European lenders’ return on equity is now around 8%, compared with 12% across the Atlantic and 10% in Asia, in part as a result of stricter regulations following the 2008 banking crisis. Most European banks trade below book value on the stock market, having returned a negative 14% to investors since the April 2009 trough. Large American banks trade above book value and have gained 113%.

In services particularly exposed to international competition, American banks dominate in Europe too: In 2023, they took the top five positions for mergers and acquisitions deals, Dealogic data shows, with France’s BNP Paribas coming in sixth, and the top six spots for issuing equity.

And this isn’t just about banks. In 2007, top European and U.S. asset managers roughly split the global market between them. By 2022, European fund managers had just 22% of total assets under supervision, with only France’s Amundi playing in the big leagues. This reflects their failure to jump on the train of low-fee passive investment as effectively as U.S. giants such as Vanguard and BlackRock. Ironically, the latter’s dominance in exchange-traded funds resulted from its acquisition of iShares from Britain’s Barclays in 2009.

European officials are taking some useful steps. They admitted in 2022 that a directive aimed at harmonising securities markets, known as Mifid 2, has done more harm than good, and have agreed to amend it. New EU-wide savings products give pensioners greater choice, and might help address the lack of sophistication that characterises European individual investors relative to Americans used to managing 401(k)s. Stringent constraints on what asset managers can offer are being relaxed, and the rules governing sustainable finance—where Europe has an edge—are being clarified.

Meanwhile, the fallout from last year’s Silicon Valley Bank debacle will bring U.S. regulation closer to Europe’s.

Such rule changes might narrow the gap, as investors have recognised: The stock-market discount at which European lenders trade compared with American ones has shrunk over the past three years. But it is hard to see the tables fundamentally turning. In the digital era, economies of scale are even more powerful. The European Union comprises many countries with different languages, whose firms and investors have local financial relationships and strong home biases. The obstacles to eliminating fragmentation are huge.

If Europe can’t compete with America’s private financial muscle, it is doubly problematic that its efforts to mobilize industrial investment through the public sector have been meek compared with the U.S. Inflation Reduction Act. Promoting more sustainability-minded funds isn’t an adequate fix.

Elon Musk’s SpaceX is set to make its stock-market debut Friday in the largest IPO ever—and perhaps the most closely watched. The company sold an outsized portion of the offering to individuals. Its performance on Friday will be a crucial gauge of investor appetite for mega-offerings from OpenAI and Anthropic expected later this year.

The rocket maker, which derives most of its revenue from its satellite internet unit and has a nascent artificial-intelligence business, will trade under the ticker “SPCX.” It sold 555.6 million shares at $135 each, raising about $75 billion in a deal that valued the company at roughly $1.77 trillion.

When will shares open for trading?

SpaceX executives are set to ring the Nasdaq’s opening bell in New York, but shares in buzzy initial public offerings don’t tend to start trading until later in the day.

Bankers leading an IPO typically want to match buyers and sellers for about 10% of the shares sold before opening trading to lessen volatility. For SpaceX, that would be about 55 million shares, or roughly $7.5 billion worth.

Because pre-IPO investors are restricted from selling shares for a while, it can take time to find willing sellers among those who bought shares in a high-demand IPO.

Shares of Alibaba , the largest U.S. IPO until SpaceX, opened for trading a little before noon in its 2014 offering. Last year, one of the highest-profile offerings was that of software maker Figma , whose shares started trading just before 2 p.m.

It is possible that SpaceX’s bankers will decide to start trading without matching the typical portion of orders to ensure the shares have several hours of trading on their first day, people familiar with the matter say.

How volatile will the stock be?

Bankers and traders expect SpaceX’s share price could be volatile in initial trading, thanks in part to the large portion of its shares expected to be held by individual investors. Some who anticipate individuals will rush into the shares worry they could just as easily get spooked and rush out.

Any sharp movement in stock price could trigger so-called circuit breakers that could pause trading. For most newly listed companies, a 10% swing in either direction prompts a five-minute pause. Companies that had their shares halted include Figma and Cerebras Systems , the chip company whose shares soared in its May debut.

These forced timeouts applied to single stocks came after the so-called flash crash in 2010, when the Dow Jones Industrial Average fell 700 points in eight minutes before recouping much of the loss.

What is all the talk about the ‘green-shoe’ option?

If the stock starts trading erratically, bankers have a secret weapon to attempt to calm things down.

Underwriters typically sell more shares to investors than an IPO’s total offer size, colloquially called the green shoe. In SpaceX’s case, they sold about 15% more shares than the stated offering size.

Because this means they technically allocated more than the offering amount, the so-called stabilisation agent, in this case, Morgan Stanley , needs to buy back the excess number of shares to deliver them. If the stock starts to fall, the bank will buy the shares in the open market, which helps buoy the stock price. If the stock isn’t faltering, the stabilisation agent can buy the additional shares they need to deliver to investors directly from the company.

The term “green shoe” comes from the first company to employ a version of this method years ago, a shoemaker that was a predecessor to Stride Rite. When Meta Platforms , then known as Facebook, went public in 2012, its shares started dropping and its bankers stepped in to buy more shares.

How will Elon Musk’s take-it-or-leave-it pricing fare?

Like all things Musk, SpaceX’s IPO bucked the norms. Instead of approaching prospective investors with a possible price range for shares ahead of the IPO and incorporating their feedback, the company set an exact share price from the beginning: $135.

The idea was to limit drama for what is already the biggest IPO of all time. It did, however, remove what many see as an important step along the way: price discovery. The success of this approach will partly be judged by how SpaceX’s shares trade Friday. If the stock surges, critics will say SpaceX left money on the table by not pricing shares higher. If the stock falls or trades flat, there will likely be critiques that SpaceX and its advisers overestimated demand.

Will the machinery hold up—and what will be the wider market impact?

The sheer size of SpaceX’s IPO will test the trading infrastructure at Nasdaq and could have ripple effects in the broader market.

Nasdaq has practiced with mock openings to make sure its trading platform is prepared. When Facebook went public, some investors who tried to change or cancel orders ahead of trading didn’t get confirmations because of a technology malfunction. The confusion contributed to Facebook shares dropping on the first day of trading. They didn’t return back above their IPO price for more than a year.

Meanwhile, some market watchers expect added activity Friday in stocks that individual investors might sell to buy SpaceX shares, such as those of technology companies and Musk’s electric-car maker Tesla . Such sales already appeared to be under way earlier in the week, when individual investors dumped single-stock holdings on a net basis for two days in a row, according to Vanda Research. (To be sure, those sales came on days that were poor showings for tech stocks broadly.)

It will take several days for SpaceX shares to show up in any major index funds , so the offering’s wider impact on the market could play out over the next several weeks or longer.