Europe’s Growth Prospects in a Globalised Economy - How to Fill the Investment Gap
Ladies and gentlemen,
Let me start with my view, which you might find provocative: you can blame bankers for many things, but not for being unwilling to support projects that would contribute to economic growth. The European banking sector is indeed still in the throes of restructuring. Good projects are however not lacking adequate financing opportunities. Maybe the only serious identified market gap for financing lies in the start-up/SME sector due to the high risks and lack of collateral, but otherwise financing conditions for European companies are good.
Of course there are differences between EU countries, but in general, the banking sector and investors have substantial liquidity available, actively looking for investment opportunities.
Interest rates are at an all-time low, banks are willing to accept aggressive debt/equity ratios and loan margins are very competitive.
But still investments are not getting off the ground. Today, we have hardly reached the pre-crisis level.
The two biggest longer-term challenges for the European economy are the unfavourable demographic developments and the slowdown in productivity growth. As the number of potential workers is expected to decline, productivity gains and increased employment of the labour force are the main sources of growth. Against this background, the slowdown in productivity growth caused by the widening technology gap with peer economies is very alarming. We have to find a solution to these issues before we can expect the investment gap to be filled.
Europe suffers from a history of remarkable underinvestment in important areas. A study by EIB economists released recently shows that we require:
• An additional 130 billion euros a year to meet the EU’s target of spending 3% of GDP on research and development, which would take us close to the R&D investment ratios of other leading economies,
• 90 billion a year to keep up with advanced manufacturing technology,
• 35 billion a year to match US venture capital financing,
• 10 billion a year for state-of-the-art education facilities,
• And 65 billion a year to reach EU targets for broadband, data centre capacity, and cyber-security.
And these are only examples of the gaps in some sectors.
The problem of low investment has been present since the crisis years. Low interest rates and liquidity have stabilised the situation and paved the way for increased investment. However, the availability of liquidity and the improving balance sheet structures of European corporates alone are not sufficient to convince market participants to react accordingly. It is clear that we need both enhanced competitiveness and a greater willingness to take risk among European investors and corporates to jump-start economic activity in Europe.
There are neither single nor simple answers.
At least partly to tackle the issue, the Juncker Commission launched the Investment Plan for Europe, with the European Fund for Strategic Investments, EFSI, at its centre. The European Investment Bank is implementing EFSI with the aim of mobilising 315 billion euros of investments in the EU economy within the next three years. EFSI is about mobilising private capital in order to invest into projects that require an appetite for taking risks that private investors currently do not seem willing to take alone. Our aim is to identify such market failures and provide incentives to remedy them. In the implementation of EFSI we will ensure that investments are only channelled into sound, economically viable projects in sectors that are critical to Europe’s competitiveness, such as energy; transport and telecommunications infrastructure; research and development; education; the financing of young, innovative companies; and the adoption of advanced technologies and practices by businesses, including SMEs.
One can ask the question: is 315 billion euros over three years enough? Yes, of course it is a lot of money, but, for example, when compared to the total outstanding loans of the European banking sector, over 20 trillion euros, you see the big picture: this effort can on its own have only an incremental effect. EIB financing accounts for only approximately 3% of total investment in Europe, even if the EIB is by far the biggest International Financial Institution in the world – and EFSI represents only a quarter of our activities. Don’t get me wrong – EFSI and the EIB are having a positive effect and will contribute to investment growth in Europe, but only to a limited extent.
The question is twofold: do we have enough innovative, competitive, sound and viable ideas; and secondly, is Europe a sufficiently lucrative and trustworthy place for realising these ideas? It is a question of competitiveness, innovativeness and confidence. It is not only companies but also societies themselves which are facing global competition each and every day. Without going into details, the efforts of the private sector should be accompanied, among other things, by decisive action on the regulatory front, both at national and EU-wide levels, to create an environment more conducive to private investment.
Europe has ample strengths: the diversity of its people, an abundance of intellectual, scientific and technological capacity, a rich history of intellectual and business endeavour, and even its climate. Going forward, we need to ensure that Europe remains competitive in a globalised world. Since the onset of the financial and then economic crisis, we have been forced to focus primarily on the short term. Now we also need to take a longer-term view. It is the only way for us to successfully address the economic and societal challenges that Europe faces.
To put all these good intentions into practice and turn them into economic growth, European companies need to play their role as well. Companies need to take a longer-term view beyond the next quarter to seize the growth opportunities in the global economy. Prevailing megatrends, including urbanisation, digitalisation and the fight against climate change will not lose their importance. We need to build successful global businesses around these megatrends – without forgetting many other important sectors.
To summarise, everybody needs to work towards the common goal: to ensure that Europe remains a major player in the world economy and its citizens can prosper in the face of the new economic realities. The public sector must ensure that Europe is the preferred and competitive place to do business. The private sector needs to invest in research and development to innovate new products and services that are best-in-class worldwide. If this materialises, the banking sector, both private and public banks, will certainly provide the necessary financing to support the investments that will follow.
I believe in the market economy and its ability to allocate capital to projects which deserve it. The public sector – on the local, regional, national and EU level – does however play a key role in creating lucrative circumstances for the market players to utilize their creativity.
Aristoteles once said that people move to cities in order to get a job and make their living, but they stay there in order to live a good life. To put it in the language of the corporate life – as a wise man once said – capital goes where it is made welcome and stays where it gets looked after.
Thank you very much for your attention.