Europe has been discussing competitiveness, strategic autonomy and digital transition for many years. However, leading SME associations bemoan that a fundamental paradox remains unresolved: the Union’s economy is regulated as if it predominantly comprised large corporations, whereas the vast majority of its firms — and employment — depend on small and medium-sized enterprises.

This disconnect between the regulatory scale and the real scale of the economy has a direct impact on our ability to grow, innovate and compete. This is not to criticize, but rather a diagnosis that is widely shared by business institutions across Europe and by the European Commission, which has already taken steps to simplify procedures and reduce administrative burdens. Nonetheless, a considerable gap remains between intention and reality. Spain is no stranger to this challenge. While its business fabric stands out for being dynamic, adaptable and export-orientated, it’s also highly fragmented, which weighs on productivity and hampers the transition towards larger-scale business models.

Spain needs more SMEs in a position to grow, increase scale, adopt technology and expand internationally. And this requires more than just financing: it calls for simpler regulatory frameworks, less administrative friction, and a genuinely European vision that considers the economy as a whole, not only its upper tier. It also requires truly enabling those SMEs that wish to grow, and whose business models can scale up, to operate within a framework that means they can expand across Europe and compete with large Chinese or US-based companies that already operate in every EU country.

This challenge is not unique to Spain, but one that affects Europe as a whole. According to the IMF,¹ Europe has a higher proportion of small enterprises than the United States: one in five EU workers is employed by a company with fewer than 10 employees, which is twice the share observed in the US. Fragmentation and regulatory disparity among Member States make it harder for businesses to benefit from operating in a single market of 450 million potential customers. A more integrated market would enable companies to compete, grow and thrive, while contributing to higher productivity and economic growth in the EU. Building large pan-European companies that are capable of competing with major Chinese and US-based firms is part of the EU’s broader objective of strategic autonomy and economic security.

The excessively complex and restrictive regulatory framework of Europe’s banking sector prioritizes financial stability over economic growth. As a result, the additional capital requirements and buffers that supervisors impose accumulate on banks’ balance sheets instead of being used to finance strategic sectors of the economy. According to European Banking Federation estimates,² this excess capital in Europe’s banking sector could be reducing the economy’s financing capacity by as much as €2.7–4.1 trillion (equivalent to around 100 million SME loans).

Simplifying regulation and removing regulatory barriers would foster a more integrated single market and bring benefits for all. According to the ECB,³ internal barriers between EU Member States in goods and services markets are equivalent to tariffs of around 100% and 65%, respectively. Eliminating these barriers could add several percentage points to the EU’s GDP growth in the coming years.

The objective is not to weaken financial stability, but to support economic growth, which is essential to addressing all other challenges — from sustainability to inclusion. However, growth requires regulatory frameworks that encourage investment, innovation and competitiveness, rather than holding them back through complexity and fragmentation.

Market fragmentation is also evident in energy, infrastructure, finance, and many other areas. The persistent fragmentation of financial markets and the difficulty in channeling savings towards the productive economy are often cited as factors that contribute to the relocation of the most innovative SMEs and start-ups, which seek to scale their activities in other regions that are more conducive to growth. Europe has world-class science, talent and industry, but its single market still lacks the depth and integration of China or the US. Between 2008 and 2021, 30% of European unicorns relocated their headquarters outside Europe, mainly to the US. The main reason was the shortage of specialized investors and market-based finance willing to support Europe’s most innovative and successful firms through successive capital rounds, in the absence of a truly integrated market where these companies can fully realize their potential.

The Savings and Investment Union (SIU) is revered as one of the EU’s most ambitious projects to address this financing and innovation gap with other regions. The EU has a significant volume of fragmented and underused savings. Eurozone residents now hold almost 10% of their equity portfolio investments in US shares (some €6.5 trillion⁴), which is roughly double the level at the end of 2015. One of the SIU’s objectives is to encourage European savings to remain within the EU and to promote the integration of capital markets so that the most innovative companies can access the specialized financing they require. Against this backdrop, the SIU provides a framework to strengthen strategic autonomy, boost investment and enhance the competitiveness of Europe’s business fabric.

Completing the Banking Union and the Savings and Investment Union, as well as driving supervisory and regulatory harmonization, would make it possible to mobilize these resources and foster a deeper, more integrated and efficient market in which SMEs with the capacity and ambition to do so can expand their activities with a pan-European vision.

As a bank with a strong foothold in SME financing, this debate is essential to Banco Santander. A more integrated market, with greater liquidity and more coherent rules, would make it easier for companies, and especially SMEs, to grow, innovate and compete in a global environment.

1. Deepening the European Single Market (link)
2. EBF Capital Demand study (link)
3. Christine Lagarde: From resilience to strength: unleashing Europe’s domestic market (link)
4. ECB (2025), “Euro area quarterly balance of payments and international investment position: fourth quarter of 2024 (link)