Measuring the “financing gap“ of European corporations : an update.
Date: 2004-11-29
Institutions: Eurostat
Subjects: corporate finance, economic analysis, euro area, investment

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Measuring the
“financing gap“ of
European corporations.
An Update

E U R O P E A N
C O M M I S S I O N

 
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4TH EUROSTAT AND DG ECFIN  
COLLOQUIUM ON MODERN TOOLS FOR BUSINESS CYCLE ANALYSIS 

"GROWTH AND CYCLE IN THE EURO-ZONE" 

20 TO 22 OCTOBER 2003 

Luxembourg, European Parliament 
Hémicycle, Schuman building 

Measuring the “Financing Gap” of European 
Corporations. An Update 

Federico Galizia 

Operations Directorate, European Investment Bank, Luxembourg 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Measuring the “Financing Gap” of European 
Corporations. An Update 

Federico Galizia 
Operations Directorate 

European Investment Bank 

100 Bd Konrad Adenauer 

L-2950 Luxembourg 

Ph. 4379 -1 
f.galizia@eib.org 

JEL Classification codes:  

E2 - Consumption, Saving, Production, Employment, and Investment  

G3 - Corporate Finance and Governance 

Abstract 
The “financing gap” measures the need of  external funds for the corporate sector as 
the difference between gross “capital formation” and “savings”. Taking advantage of 
the recent release of data in the ESA95 standard, this paper assembles a set of stylized 
facts about the corporate financing gap for the main European economies and for the 
Euro area as a whole. Notably, quarterly data on bank lending to the Euro corporate 
sector  from  the  European  Central  Bank  enable  analysis  of  the  evolution  over  the 
current  phase  of  the  business  cycle.  The  results  update  and  are  consistent  with 
previous findings from data in the ESA79 standard (which cover the period 1970-97 
and  are  discussed  in  a  companion  study  entitled  “The  Savings  Gap  of  European 
Corporations. A first look at the available data”). In particular: (i) a large majority of 
investment remains funded from internal sources and (ii) bank lending is the principal 
source  of  external  finance.  However,  the  fact  that  (iii)  loans  to  corporates  tend  to 
overshoot the financing gap during an upturn emerges more clearly in the recent cycle 
than it did in previous ones. 

 
 
 
 
INTRODUCTION 

The “financing”  or “savings  gap” is generally defined as  the  difference between the 
“capital formation” and the “savings” of the corporate sector over a given period and 
measures  the  need  of  external  funds.  The  interpretation  of  this  measure  is 
straightforward;  for a given level of capital formation, whatever funds the corporate 
sector cannot generate from internal sources (retained earnings or cash flow), it has to 
raise  from  other  sectors.  These  funds  come  typically  in  the  form  of  loans  from  the 
banking sector, trade credit from the rest of the world, issues of shares and corporate 
bonds placed with households, the financial sector and the rest of the world.  

The goal of this paper is to provide a basis for further research by establishing a set of 
stylised  facts  on  the  flows  of  investment  and  savings  of  European  corporations,  as 
well as key financial sources and uses of funds. The analysis originates and partially 
relies on a companion paper, entitled “The Savings Gap of European Corporations. A 
first  look  at  the  available  data1”,  which  is  also  being  presented  at  this  conference. 
Based  on  recently  released  data,  published  by  Eurostat  in  the  ESA  95  standard, 
covering  EU  countries,  as  well  as  aggregate  flow  of  funds  data  for  the  Euro  area 
published  from  the  European  Central  Bank,  we  update  and  confirm  the  evidence  in 
the  companion  paper  (which  was  based  on  analogous  data  previously  compiled  by 
Eurostat  following  the  ESA  79  standard,  and  covering  the  period  1970-97).  A 
potential  interpretation  of  the  key  stylised  facts  is  set  forward,  which  can  be 
summarized  along  two  main  lines  of  reasoning.  On  the  one  hand,  cyclical  analyses 
detect a marked increase in bank credit as well as share and bond issues at the end of 
the  last  decade,  in  coincidence  with  a  more  dynamic  investment  environment  in 
Europe. On the other hand, long-term analysis of the corporate cash flows, suggests a 
more  prudent  assessment.  Currently,  not  unlike  the  1970s,  the  large  majority  of 
corporate  investment  (gross  fixed  capital  formation)  is  internally  financed,  with 
external  funds  contributing  at  best  for  a  small  fraction  of  investment.  Moreover, 
traditional bank lending  still  constitutes  the  bulk of  such external funds.  Underlying 
these  competing  (but  also  potentially  complementary)  economic  hypotheses  is  the 
deeper  question  of  whether  corporate  finance  is  demand  driven,  in  the  sense  that 
higher  capital  formation  induces  increased  offer  of  financial  sources,  or  instead, 
supply driven, so that increased availability of credit in general induces companies to 
invest more.  

The  first  section  of  the  paper  quantifies  the  financing  gap  and  summarizes  well-
known evidence on the structure of sources and uses of funds by the corporate sector. 
The  second  section  offers  an  interpretation  of  the  developments  over  the  business 
cycle,  with  special  emphasis  on  the  current  phase.  The  final  section  concludes,  by 
summarizing  the  key  stylised  facts  supported  by  data  available  so  far  and  thus 
motivating  the  need  for  continued  improvement  of  data  coverage  at  a  quarterly 
frequency. Fortunately, such efforts are already under way. 

1  Federico  Galizia  with  Thomas  Steinberger.  The  paper  is  also  available  as  a  European  Investment  Bank  (EIB) 
Economic  and  Financial  Report  (2001/01),  on  the  web  at  http://www.eib.org/efs/reports.htm.  Both  studies 
reflect the author’s opinions and not necessarily the EIB’s. 

 
 
 
 
                                                           
A BIRD’S EYE VIEW ON CORPORATE FINANCE IN EUROPE 

In the National Accounts by Institutional Sector, the corporate financing gap is found 
under  the  name  of  “net  borrowing”.  The  latter  takes  into  account  not  only  the 
difference  between  “gross  capital  formation”  and  “  savings”  of  “non-financial 
corporations”, but also transfers to this sector. Figure 1 (drawn simply by dividing net 
borrowing  by  gross  capital  formation  in  each  country-year  data  point  and  by  taking 
arithmetic averages of the results) is meant to offer an overall view of the financing 
needs  of  European  corporates  in  the  five  largest  EU  countries  over  the  last  three 
decades. This figure  clearly  supports the conclusion that in recent years a large 
majority  of  investment  is  internally  financed.  In  the  following  paragraphs,  we 
present a brief historical summary on the evolution of the financing gap, we argue that 
it  is  largely  financed  via  bank  lending,  and  conclude  by  taking  a  closer  look  at  this 
form of financing. 

Figure 1. Financing Gap by Country and Decade
% of Total Capital Formation 

70%

60%

50%

40%

30%

20%

10%

0%

1970-79

1980-89

1990-99

2000-01

France

Germany

Italy

Spain

UK

Source: Eurostat ESA 79 and ESA 95 Sector Accounts

A summary of the historical evolution of the financing gap 

The  companion  paper  “The  savings  gap  of  European  Corporates”  presents  a  more 
detailed  historical  as  well  as  cyclical  perspective  of  the  evolution  of  the  corporate 
financing  gap until the mid-1990s, as it was determined by the specific evolution of 
savings  and  investment  flows.  Here,  we  limit  ourselves  to  a  short  summary  and  an 
update. Figure 1 shows that at one extreme, companies in the UK have always been 
and are almost entirely self-financed. At the other extreme Italian companies covered 
on  average  close  to  half  of  their  investments  from  external  sources2.  French  and 

2 Such a notable role of external finance in Italy is partly explained by a system in which a significant fraction of 
the corporate sector was state owned and financed by state owned banks. Substantial privatisations of banks 
and corporates in the 1990s thus significantly reduced the financing gap. 

 
 
 
 
                                                           
German  companies  represent  a  middle  ground,  with  financing  gaps  averaging  three 
quarters of investment, but with important variations over time. 

Over  time,  starting  in  the  1970s  and  until  the  mid-1990s,  most  countries  saw  a 
progressive reduction of investment as a percentage of GPD, while corporate savings 
remained stable or slightly increasing. Such dynamics de facto implied a disappearing 
financing gap in France and the UK, while halving it in Italy. In Germany the decline 
in  the  gap  was  limited  due  to  its  post-unification  investment  boom.  However,  the 
tendency  to  lower  gaps  has  been  reversed  in  the  second  half  of  the  1990s,  due  to  a 
generalized investment-led growth. Especially in Germany, France and Spain, the gap 
was twenty percentage points larger in 2000-01 than during the previous decade. Still, 
a simple arithmetic average across countries would indicate that over three quarters of 
corporate investment in Europe are internally financed. 

By exclusion, bank lending is the principal external source of corporate funding 

For  the  same  set  of  countries,  Figure  2  represents  the  main  financial  sources 
(“incurrence  of  financial  liabilities)  and  uses  (“acquisition  of  financial  assets”)  of 
funds starting in the mid-1990s. The figures are in millions of Euros and for ease of 
reference the financing gap is plot as a line in the sources graph, and similarly, gross 
capital formation is plotted in the uses graph for each country. Looking at the graphs 
in  the  left  column,  the  relation  between  the  financing  gap  and  the  incurrence  of 
financial  liabilities  is  remarkably  weak,  as  the  latter  is  several  order  of  magnitudes 
bigger  than  the  gap.  The  explanation  comes  from  the  set  of  graphs  on  the  right, 
showing  the  acquisition  of  financial  assets  is  of  the  same  order  of  magnitude  as 
investment.  A  closer  look  at  each  main  category  of  financial  sources  and  uses  is 
clearly needed in order to understand the economic determinants of such flows. 

Share  and  bond  issues  still  play  a  minor  role  in  aggregate  corporate  finance. 
Throughout the second half of the 1990s and until the recent stock market crash, the 
corporate sector as a whole has purchased more shares than it has issued. In part, this 
is  explained  by  the  difficulty  in  consolidating  intra-sector  transactions,  and  the 
ensuing potential double counting of such issues as both sources and uses of funds by 
the  corporate  sector3.  Another  explanation  comes  from  important  cross-border 
acquisitions  in  a  number  of  sectors  (notably  telecommunications,  but  also  car 
manufacturers,  utilities,  energy),  which  involved  both  European  and  US  companies. 
In  any  case,  it  is  well  known  that  financing  via  share  issues  is  limited  to  listed 
companies – particularly the larger ones – and that such companies represent only a 
fraction of the overall corporate sector. Figure 2 also shows that issues of bonds were 
very limited in all countries, including the UK, arguably the most developed corporate 
bond market in the EU over the period covered. 

Another source of funds that is important for a single company, but not on aggregate 
is trade credit. Figure 2 shows that especially in Spain, but also in France and Italy, 
“other  accounts  payable”  represents  a  significant  fraction  of  total  financial  sources. 
However,  “other  accounts  receivable”  represents  as  significant  a  fraction  of  total 
financial uses, and what is a “payable” for one company is a “receivable” for another, 
which  would  disappear  with  consolidation  across  the  corporate  sector  at  a  country 
level, and even more at a European level.  

3 As most countries do not publish consolidated data for the corporate sector, for comparability across countries, 

non-consolidated data are used in Figure 2. 

 
                                                           
 
The only remaining significant source of aggregate funding for the corporate sector is 
thus bank credit, as shown in Figure 2, amounting to one-third to half of total sources 
across different countries and years.  

The role of bank lending is however limited by other factors 

The logic outlined above, that, by exclusion, the financing gap of European corporates 
is filled  via bank lending, is weakened by  three  important  considerations.  Firstly,  at 
least  half  of  bank  lending  is  for  short-term  maturities  and  it  is  counterbalanced  by 
significant  build  up  of  cash  (“currency  and  deposits”  in  Figure  3).  Secondly, 
corporations  are  net  creditors  of  households  because  they  extend  consumer  credit 
(automobiles manufacturers, retail distributors) and of the public sector (construction 
companies). Such credits need in turn financing. Thirdly, in some countries corporate 
pension plans and/or severance grants are administered in such a way to provide a net 
source  of  funds  to  the  corporate  sector4.  One  is  forced  to  deduce  that  bank  credit  – 
even  medium  to  long-term  –  ends  up  financing  quite  a  limited  share  of  corporate 
investment.  This  conclusion  is  also  supported  by  analysis  of  earlier  periods  and  by 
company-level data to be found in the companion paper. 

INSUFFICIENT SUPPLY OF FUNDS OR SCARCE DEMAND? 

The long-term historical perspective should illuminate recent events, particularly the 
investment and stock market boom at the turn of the millennium and the current crisis. 
We  have  already  mentioned  that  corporate  investment  –  as  a  fraction  of  GDP  – 
followed a declining trend until the mid-1990s, while corporate restructuring and cost-
cutting  efforts  maintained  stable  or  slightly  increasing  profits.  In  some  countries, 
France  in  particular,  the  equity  base  of  the  corporate  sector  has  been  reinforced,  in 
Italy, it has stabilized5. Such a tendency was however reversed in the second half of 
the  1990s  and  notably  at  the  turn  of  the  millennium,  unfortunately  with  negative 
consequences on the business cycle.  

A strong supply of funds to corporates characterized the “roaring 1990s”  

Figure 3 shows that corporate investment as a fraction of GDP increased significantly 
in all countries from 1993-94 until 2000. In the presence of stable corporate savings, 
the financing gap progressively widened, and this was reflected in important growth 
in the sources of funds for the corporate sector, being then bank credit, shares or bond 
issues. 

4  This  reasoning  could  however  be  turned  on  its  head,  and  pension  plans  become  a  net  use  of  funds  by  the 

corporate sector as payment of accrued benefits begins to exceed receipts. 

5 The point is covered in more ample detail in the companion paper “The Savings Gap of European Corporates”, 

also relying on studies by the European Committee of Central Balance Sheet Offices. 

 
 
 
 
                                                           
Figure 3. Corporate Gross Capital Formation

France
Italy
UK

Germany
Spain

16

15

14

13

12

11

10

P
D
G

f
o
e
g
a
t
n
e
c
r
e
P

9

8

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

However, Figure 2 demonstrates that the absolute amount of sources of funds was a 
multiple  of  the  financing  gap.  For  instance,  in  Germany,  total  financial  sources 
amounted to over EUR 350 bn, compared to a financing  gap of EUR 120 bn. Other 
than  for  special  needs  (e.g.  payment  of  UMTS  licences)  such  an  abundance  of 
financial sources has been used to invest in financial assets or to fund acquisitions in 
Europe  and  beyond.  These  annual  data  suggest  that,  in  the  presence  of  a  renewed 
demand of funds for both real and financial investment, banking and financial markets 
have responded making abundant funds available. 

Recently  published  Euro-wide  data  from  the  ECB  also  support  the  thesis  that 
availability of financial sources, particularly bank credit, overshot the financing gap in 
the late 1990s. The left panel in Figure 4 summarizes total sources and uses of funds. 
Consistently with the analysis in the previous section, issues and purchases of shares 
balance each other out and the same applies to bonds. Thus loans are left to cover the 
financing gap, as well as holding of cash and loans to other sectors. The right panel of 
the figure further demonstrates the point by plotting the annual financing gap for Euro 
area corporations alongside a moving average of quarterly expansion in bank lending 
to corporates (at annual  rate to ensure  comparability). At the business  cycle  peak in 
2000, while the corporate financing gap amounted to 25% of total gross fixed capital 
formation, bank lending provided finance exceeding twice that amount, at 60%. Quite 
interestingly  the  phenomenon  reversed  over  2001  and  2002,  with  the  financing  gap 
decreasing  by  a  third  (from  25%  in  2000  to  16%  in  2002)  against  our  indicator  of 
lending decreasing by three quarters (from 60% in 2000 to 16% in 2002). Thus, at the 
end of last year, bank lending appeared to be more or less in line with the financing 
gap. The point deserves some further elaboration. 

 
 
 
 
 
 
Figure 4. Eurozone
Financing Gap, Uses and Source of Funds and Bank Lending

Main Uses and Sources of funds
Eurozone 1995-2002

s
e
c
r
o
S
/
s
e
s
U

l
a
t
o
T
f
o
%

100%

80%

60%

40%

20%

0%

Shares

Loans

Bonds

Cash

Uses

Sources

Investment vs
Savings

l
a
t
i
p
a
C
d
e
x
i
F
s
s
o
r
G

f
o
%

Source: European Central Bank

Financing Gap and Total Bank Lending

Financing Gap (left scale)

Bank Lending (right scale)

n
o
i
t
a
m
r
o
F

30%

25%

20%

15%

10%

5%

0%

Q4-1995

Q4-1996

Q4-1997  

Q4-1998  

Q4-1999  

Q4-2000  

Q4-2001  

Q4-2002  

70%

60%

50%

40%

30%

20%

10%

0%

Are  current  credit  markets  are  characterized  by  scarce  demand  or  scarce 
supply? 

There  are at least two sets of reasons currently limiting the willingness of European 
corporates to invest. Firstly, investment is the most volatile component of GDP, often 
the first to drop at the onset of a recession. Available data confirm that this is indeed 
happening.  Secondly,  the  ample  volume  of  debt,  which  was  accumulated  in  the  last 
few years in order to finance both an investment and an acquisition boom, has become 
particularly difficult to sustain during a bear market, due to reduced value of corporate 
assets. Based on such considerations, most economists attribute the current slowdown 
in bank lending to demand factors.  

The  possibility  of  a  drop  in  credit  supply  should  also  not  be  overlooked,  as  the 
deterioration  in  both  corporate  and  bank  balance  sheets  may  reduce  the  latter’s 
willingness to lend, and possibly lead to a flight to quality and credit rationing. Since 
both credit demand and supply depend on cyclical factors and should be expected to 
co-move  we  are  unable  to  distinguish  between  the  two  competing  (but  also 
complementary hypothesis) based on aggregate data. What we find most interesting is 
the  potential  to  use  the  quarterly  data  on  corporate  loans  compiled  by  the  ECB  in 
order  to  forecast  evolutions  of  the  corporate  financing  gap,  which  is  currently 
measured solely at annual frequencies. 

CONCLUSIONS AND AGENDA FOR FUTURE RESEARCH 
In  coincidence  with  the  adoption  of  the  Euro  and  the  ever-closer  integration  of  the 
European economies, important progress has been realised in the collection of flow of 
funds  data.  The  researcher  has  now  available  a  much  richer  and  consistent  set  of 
information compared to even a couple of years ago. In particular: 

•  Aggregate sector-level information is assembled in the New Cronos Database, 
published by Eurostat. The corporate sectors of the largest European countries, 
notably Germany, France, U.K., Italy and Spain (EU5 henceforth) are covered 
at annual frequency. Annual data on the saving, investment and financing of 
Euro-area  non-financial  corporations  are  published  by  the  ECB.  Adoption  of 
the ESA 95 standard has greatly enhanced comparability across countries. Due 

 
 
 
 
 
 
 
 
 
 
 
 
to issues of comparability between this standard and the former ESA 796, this 
paper only uses ESA 95 data, while a detailed historical analysis using ESA 79 
data  is  found  in  a  companion  paper  “The  savings  gap  of  European 
Corporations”. 

•  Coverage,  at  quarterly  frequency,  of  amounts  outstanding  as  well  as 
financial transactions in financial assets and liabilities by the corporate sector 
are published by the National Central Banks at country level and in aggregate 
for the Euro area by the ECB. In this paper we only look at the latter data. 
•  For  a  more  disaggregate  view  of  the  corporate  sector  the  companion  paper 

relies on two company-level sources. 

o Financial  reports  (including  cash-flow  statements)  for  companies  that 
are listed on a European stock market are collected in the Worldscope 
database  from  Bureau  Van  Dijk  and  Disclosure,  again  at  annual 
frequencies. 

o Assets and liabilities (but not cash-flows) of both listed and not listed 
companies  are  analysed  by  the  European  Committee  of  Central 
Balance  Sheet  Data  Offices  (ECCB)  and  collected  in  the  BACH  and 
European Sectoral References databases. 

While  results  from  such  a  disparate  set  of  sources  are  not  immediately  comparable, 
they are obviously complementary and do provide consistent information, especially 
concerning the business cycle dynamics. Accordingly, the nature of this paper, and its 
companion  one,  was  one  of  a  “first  step”.  Primary  concern  is  about  getting  stylised 
facts  right,  by  assembling  and  comparing  evidence  from  several  sources.  Since  this 
first step already implies a sizable amount of work we choose to restrict attention to a 
descriptive analysis and only suggest a preliminary explanation of what is observed. 
Interpretation  will  follow  as  a  topic  of  further  research.  The  key  findings  are  as 
follows: 

1.  While  notable  differences  exist  among  countries  and  time  periods,  internal 
finance  is  the  principal  source  of  funds  for  the  corporate  sector  in  the  main 
European  economies,  covering  in  recent  periods  less  than  three  quarters  of 
investment.  The  importance  of  internal  finance  has  been  increasing  from  the 
1970s through the mid 1990s, in coincidence with a slowdown in investment 
and  stable  to  increasing  savings.  Current  levels  are  close  to  a  long-term 
average. 

2.  If one abstracts from privatisation and stock market boom episodes, loans are 
the principal source of external finance, followed by trade credit. On average 
half of the loans are short-term and are offset by the presence of cash balances 
in  the  sector’s  accounts.  Similarly,  accounts  payable  are  largely  offset  by 
accounts  receivable  from  households  and  the  public  sector.  Bond  issues  are 
minimal.  

3.  Analysis of yearly flows shows that the savings gap can vary enormously over 
the business cycle. Notably, the financing gap attained its lowest level in the 
mid-1990s in all countries, to rebound strongly towards the long-term average 

6 In Germany, the housing activities of private households are included as part of the corporate sector in the ESA 

79 accounts. 

 
                                                           
of  three  quarters  of  investment  by  the  end  of  the  millennium.  A  reversal 
followed, chiefly determined by shrinking investment.