Which EU Countries Have the Highest Equity Risk Premiums?

Key Takeaways

• Many countries in Southern and Eastern Europe show high perceived risks. This includes Greece and Romania, which have the highest equity risk premiums in the EU (7.08%).
• Romania stands out for being one of the most vulnerable EU countries, driven by fiscal imbalances, persistent inflation, and political uncertainty
• Many Northern countries sit at the lower end of the equity risk landscape.
• The lowest ERPs (4.23%) are found in mature markets such as Germany, the Netherlands, and Denmark, where investors perceive relatively strong institutions and stable economic conditions.
• A large group of EU countries, including Spain, Portugal, and Poland, falls within a mid-range of 5.0%–5.8% ERP, showing a risk gradient rather than a sharp divide.
• EU’s equity risk landscape is shaped not by geography alone, but also by country-specific factors like fiscal stability, credit quality, and market confidence.

Equity Risk Premium in the EU

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Equity risk premium measures the extra return investors expect for holding stocks instead of safer assets. In Damodaran’s framework, the country risk premium is estimated from the country’s default spread and then adjusted for relative equity market volatility.

Higher values mean investors require more compensation for taking on that country’s equity risk. In financial markets, this is typically linked to:

• public debt levels and fiscal stability
• economic volatility and growth uncertainty
• institutional strength and policy consistency

Across the EU, the highest equity risk premiums are found in Greece and Romania, both at 7.08%, followed by Hungary and Italy at 6.69%.

Romania stands out as one of the most vulnerable economies in Central and Eastern Europe. It reflects a combination of fiscal and external imbalances, persistent inflation, and political instability, alongside a slower recovery path compared to other EU economies.

Countries like Bulgaria and Croatia also fall into this higher-risk group, reinforcing the pattern across parts of Southern and Eastern Europe.

In contrast, many Northern countries sit at the lower end of the equity risk landscape. At the lowest level are countries with a 4.23% ERP, including Germany, the Netherlands, and Denmark. Compared with many other EU members, these are mature markets with stable institutions, predictable policy environments, and well-developed financial systems.

Together, these factors help explain why investors require less extra compensation for equity risk. Still, these markets are not as deep as the U.S. market, with fewer listed firms and thinner trading volumes.

Aside from the two ends of the equity risk landscape, a large group of EU countries clusters around 5.0% to 5.8%, including Spain, Portugal, and Poland.

This points to a regional gradient in equity risk premiums rather than a sharp division. It also suggests that the EU’s equity risk landscape is shaped not only by geography but also by country-specific factors such as fiscal stability, credit quality, and broader market confidence.