Facing a recession, Europe should focus on its mid-caps

In her coming State of the Union speech, Commission President von der Leyen must address how Europe can face the energy shock and avoid long-term economic damage from the war and tightening investment conditions. Part of the solution lies in nurturing Europe’s middle-market companies.

Europe’s economy is being hit by the double shockwave of a wartime economy and monetary tightening. The fallout of the war in Ukraine means soaring energy and supply costs across the economy. Forced by inflation, monetary tightening is another blow to investor confidence and consumer demand. The International Monetary Fund suggests that a Europe-wide recession is likely, be it only from the sky-high energy costs associated with decoupling from Russian gas, raising the risk of stagflation.

Europe must not allow these supply and demand shocks to destroy its long-term economic potential. If investment and innovation are permanently impaired, the continent’s predicament will be not only lower growth but also a weakened capacity to take on the deep economic shifts of this decade.

The twin green and digital transitions are at the centre of the EU’s priorities, thanks to the European Green Deal and Europe’s Digital Decade strategies, and call for major efforts across society. What’s more, in today’s hardening geo-economic environment, two acute shifts have become three: Europe must also adapt to a new paradigm of economic security, starting with the dramatic, forced turnaround of its energy system ahead of the coming winter.

At the hard edge of Europe’s economy

As monetary tightening hits public and private investment, policymakers must examine potential levers for shoring up resilience and guiding the economy. The great recession of 2007-10 provides a cue: the segment that proved most hardy was Europe’s middle-market economy, even creating jobs in Germany and the UK in the depths of the financial crisis.

Wedged between the small and medium-sized enterprise (SME) sector and largest companies, which more easily catch the ear of politicians, the mid-caps’ specificities, exposure and potential can be overlooked, resulting in sub-optimal policy choices at the national and European levels. There is currently no EU-wide definition of mid-caps based on actual turnover or employee numbers, but different methodologies can serve to identify this economic segment and a shared set of characteristics.[1]

As territorially anchored, entrepreneurial companies, mid-caps tend to focus on innovation and international markets, actively exploiting economic shifts and global niches.[2] This makes middle-market companies often punch above their weight in terms of revenue generation and sustained job creation but also places them at the hard edge of current economic debates.

Mid-caps are important enablers of Europe’s energy transition. Europe boasts a rich fabric of innovative companies in energy storage, hydrogen and other green technologies, registering 50% more green patents than the US, with Japan and China even further behind. Should the investment push stop, Europe’s green transition and leadership are at risk. From solar and wind to hydrogen, China is already a core player in new technologies.

Middle-market firms are crucial as the EU aims to shore up its resilience and autonomy amid growing East–West strategic competition. They have less capacity than bigger multinationals to monitor and diversify supply chains but are – as often highly specialised and internationalised companies are, notably in manufacturing – essential vectors for Europe to address critical resource, technology and trade dependencies.

Finally, if Europe is to bridge its two-decade-long productivity gap with the US, it must accelerate the digitalisation of its economy. Many European firms started their digital journey during the pandemic, but to a lesser extent than in the US. Mid-caps are now key to boosting the uptake of advanced digital technologies (e.g. 3D printing, the Internet of Things, big data analytics, artificial intelligence, advanced robotics) across Europe’s economy. The share of European firms engaging in complex digitalisation processes specific to their sector is currently stalling around 60%.

A European strategy for mid-caps

Much speaks, therefore, for a renewed focus on Europe’s middle-market firms. The European Investment Bank is an important mid-cap champion through targeted instruments like venture debt, but the European Commission and Eurostat have hesitated to recognise the segment formally. The coming State of the Union speech of European Commission President Ursula von der Leyen would be a timely moment to announce a European mid-cap strategy.

A central question is the access to finance and investment. The EU’s real GDP was back to pre-pandemic levels at the end of 2021, but firms’ investment has not fully recovered. In the coming months, firm profits will be hit, and so might liquidity and solvency positions in a context of credit tightening from banks. Turning this corner requires making progress in decades-old debates on the financing of Europe’s economy.

A key objective, in addition to strengthening bank lending, is to provide companies with more diversified sources of funding. The EU lags behind the US by a factor of six in terms of venture capital subscribing to large-deal values. Despite the launch of the Capital Markets Union initiative in 2015, EU capital markets remain fragmented. EU programmes like InvestEU and Horizon Europe propose funding instruments for high-growth enterprises, but these remain insufficient.

A mid-cap strategy must also consider the framework conditions for businesses. SMEs and mid-caps generally have small administrative capacities and are less equipped to deal with complex rules than big companies. With some scattered exceptions, the EU legislation labels all companies with more than 250 employees as ‘large’ without exploring the challenges this entails.

In order to be effective, regulatory requirements must be manageable and fit for purpose. Facing a recession, the EU must examine more actively how its current regulatory ecosystem impacts European businesses and, more specifically, mid-caps. This could take the form of an impact assessment or a ‘mid-cap test’, consistent with the EU’s Better Regulation agenda, on current legislation and new regulatory initiatives.

A stronger focus on middle-market needs and challenges could help energise the EU’s Single Market agenda by delivering regulation that is more pro-innovation. Using public procurement is an important area where the Single Market is not delivering to its fullest potential in this regard. Another is the EU’s services market, which displays lower growth and productivity than other comparable trade blocs, and where lingering trade barriers mean growing firms are limited in their ability to scale up across borders. This hurts smaller firms more than the largest.

All said, there are many ways a mid-cap plan would benefit Europe’s wider economy. At a time of significant economic challenges, we must take all opportunities with both hands.


Francesco De Angelis is a Junior Policy Analyst in the Europe’s Political Economy programme at the European Policy Centre.

Georg E. Riekeles is an Associate Director and Head of the Europe’s Political Economy programme at the European Policy Centre.

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[1] The European Investment Bank defines mid-caps as companies with 250 to 3,000 employees. Member states and the private sector also use other combinations of turnover and employee numbers. Methodologies like inflection point analysis can pinpoint the section of the economy that could be described as mid-market. Small, medium-sized and large firms are then defined when different parameters (e.g. turnover, productivity, employee numbers) show relatively large jumps on the firm size continuum.
[2] Different studies have looked into the economic role mid-caps play at the European and national levels, such as in France, Germany, Spain and the UK.