More investment needed in Research, Innovation and Digitalization to catch up with other leading countries
Greek Business File, April – May 2019 – Interview by Lalela Chryssanthopoulou
The policy of fiscal rectitude had negative results during the recent economic crisis in Europe, especially on countries with bail-out programs, with Greece being an obvious example. In contrast, Germany seems to be the main winner, a view that has contributed to the rise of Euroscepticism, which threatens to change the status quo in upcoming European elections. Do you think that it is time for a reassessment of the economic and fi scal policy rulebook?
I think that the crisis exposed unsustainable domestic policies in certain countries; excessive domestic growth financed by short-term loans, lack of international competitiveness and excessive domestic consumption. The original diagnosis was that if those
domestic policies were reformed and fixed and put on a sustainable reform path, then the crisis would ease. Over time, there was a growing realization that domestic mistakes were made in terms of sustainable policy choices. However, the crisis also refl ected the incomplete nature of the Economic and Monetary Union, which did not have in place the necessary institutions to support countries that in fact pursued sustainable policies. In the last few years there has been progress in addressing some of the deficiencies in the design of the Monetary Union. For example, there has been a lot of progress obviously in the banking union; the establishment of the Single Supervisory Mechanism, the backstop from the ESM for the Single Resolution Fund have been agreed. Quite clearly, there is more work to be done in designing a Monetary Union that will be resilient to any future shocks and we are watching with great interest the developments in a common budgetary instrument, to promote greater convergence within the EU and the Eurozone in particular. Perhaps in the longer run, we will see the creation of an instrument able to deal with counter-cyclical shocks that are outside the control of individual member states that no longer have the exchange rate and monetary policy fl exibility to deal with them. So, there has been progress, I think there is a more mature conversation now that the crisis was not only the fault of individual countries, that there were problematic issues in the architecture of the EMU. There is a programme at work now to fix those things and we can only hope and pray that the politicians will make those decisions quickly enough, before the next shock comes. The economic and political situation in Europe is too fragile for us not to have those institutions in place before the next downturn.
Better policies for the short and longer term
There are signs of an economic slowdown in Europe, amid rising internal and external risks, from Brexit to the adverse eff ects of trade wars and the slowdown in China. In your opinion, how should the European policymakers respond to those risks?
Yes, we have seen a change in the business cycle over the course of the last 6-9 months, we have seen the data like everybody else. Quite clearly, Europe is responding. We have a very supportive low interest rate environment. We also have an increasingly supportive fi scal policy stance and we have seen quite a change in the cyclically adjusted fiscal balances across Europe, which are accommodating the slowdown and providing support for the economy. But these are short-term measures. What is obviously required is better policies for the short term and the longer term. There has been this temptation to pursue trade protectionism to respond to populist pressures and that is causing the deterioration in business and consumer confi dence. We really need a global recommitment to pursuing mutually supportive trade openness in order to restore business confidence and give a short term impetus to the economy. Brexit isn’t helping either. This is an unfortunate point in Europe’s history, but we need the best deal we can possibly get, that keeps the markets open and maintains business confidence. The real challenges are in the longer run. Europe is simply not growing enough. Even at the height of the recovery of the last 18 months, it was not growing at a suffi ciently robust pace to keep public fi nances sustainable and pay pensions in the long run. We need a stronger structural growth rate in Europe, we need higher productivity growth.
EIB focus on investment in Research & Innovation
So, the particular focus of European Investment Bank is financing those projects and investments that can support a structural improvement in Europe’s economic performance and productivity. We need more investment in Research & Innovation, in digitalization. Europe has been very inward focused over the last decade, throughout the crisis. We have been obsessed with the macroeconomic crisis within Europe and we haven’t really been watching what is going on in the rest of the world. For the last 15 years, while we have been focusing on the crisis, every year we have been investing every year 1% of GDP less in R&D and innovation than the United States, China, South Korea and Japan combined. That had a major impact on our competitiveness over the last 15 years as a Union, and we see it in the fi gures. For example, no European company is ranked in the top ten global companies in terms of digitalization. These are “winner takes all’ markets, if you are not one of the bigger companies, you will not get the benefits of digitalization for your citizens and for your workforce. So there are the things that Europe now needs to concentrate on. We need to reinforce the Single Market, particularly for the digital economy. We’ve got 28 diff erent digital markets and that doesn’t make any sense in the modern world. We haven’t got the Capital Markets Union that we need to fi nance innovation. Don’t forget that banks are not going to finance innovation since these are intangible assets. When companies are investing in intellectual property, in software, in human skills they haven’t got assets that they can take to the bank as collateral. So, you need capital markets, equity markets to fi nance these assets. We have got 28 diff erent capital markets in the EU, this is not going to work in the future. These are the type of things that the EIB is also financing and that’s where we think the next European Parliament, the next European Commission, the next European Council President should concentrate.
The US is ahead in most of the industries of the future
Could we say that the banking union is the fi rst step in this direction?
Yes, it is a first step, we ‘ve got to reverse the re-nationalization of the banking systems that happened during the crisis. We still don’t have a lot of cross-border flows between banking systems within Europe and that is an impediment to growth, that is an impediment particularly for countries that need capital infl ows in order to accelerate growth and economic convergence with the rest of Europe. However, banking union is not going to be enough. As I have pointed out, banks will not fi nance the industries of the future. If you look at the US, 75 % of private enterprise investments are financed by capital markets and only 25% by banks. In Europe, the situation is exactly the opposite, companies are fi nanced 75% by banks and 25% by the capital markets. Τhat is why the US is ahead of us in most industries of the future. These are the issues we need to start paying attention to.
The Juncker Fund
One of the most important EU initiatives where EIB plays a leading role is the European Fund of Strategic Investments, widely known as the “Juncker Fund”. Could you elaborate a bit on the state of play? I’d be very happy to! So, the so-called Juncker Fund is essentially a guarantee from the EU budget for the EIB that allows the Bank to fi nance higher risk projects that would not easily have attracted commercial fi nancing, or that the EIB would not have been able to finance without the benefit of that guarantee. The original aim of the guarantee was to mobilize up to 315 billion euros in additional investments in Europe by mid- 2018. I am glad to report that we were able to significantly exceeded that target. The success of that initiative and its implementation by the EIB was reflected in the fact that the European Parliament, European Commission and European Council agreed to provide additional guarantees to the EIB and to set a more ambitious target to mobilize at least 500 billion euros in additional investments by the end of 2020. We are now well on the way to delivering on that target, I think that we have now mobilized about 380 billion euros of investments in total. This is providing real economic benefits in areas like energy, infrastructure, SME financing, corporate innovation and environmental protection. We estimate that the programme is going to add 700.000 jobs in the European economy by 2020.I think that this is one of the great success stories of the EU in the recent period. We are now in very detailed discussion with the Commission about what happens after 2020, in the new EU budget for the period 2021-2027. The Commission has promised that under what is called “Invest EU” which will be the successor of EFSI, the EIB will continue to be the main implementing partner. So we look forward to building on the success of EFSI and continuing to support European investment in key areas into the future.
New priorities emerging
In your opinion, what should be the main priorities of the new EU Multi-Annual Financial Framework?
Well, there is a range of priorities. There is an increasing priority being attached to security within Europe, to better border controls and managing migration. This is obviously the main priority going forward. There are also more “traditional” priorities that have to be maintained, like supporting food security and food production within Europe, promoting regional and social cohesion and so on. Of course, there are new priorities emerging that need resources from the EU budget. I would like to talk about two in particular. The fi rst is climate action. The European Commission has estimated that every year between 2020 and 2030, Europe will have to invest 4-5 billion euros in energy infrastructure and energy effi ciency in order to meet the targets of the Paris Agreement. That is twice what has already been invested, so we are talking about a massive increase. Of course not all investments will be financed by the EU or national budgets, but we do need EU budget money – including through fi nancial instruments of the EIB – to help stimulate private sector investments in these areas. The second priority is innovation and digitalization. Europe has a long way to go to catch up with the leading countries in terms of investment in R&D. If we don’t catch up in the race, we will lose out in areas like artifi cial intelligence, emobility, intelligent transport systems, pharmaceuticals and healthcare, the industries that will dominate the economy of the 21st century. We will lose out in those sectors if we don’t invest more and obviously the EU budget has a role to play in that.
Greece has to stick to the path
How would you evaluate the course of the Greek economy after it exited the last of the bailout programmes? Do you see the country regaining the confidence of the markets in the near future?
We certainly welcome the signs of recovery in the Greek economy which grew by almost 2% last year and according to the more recent European Commission forecasts, growth will accelerate this year and in 2020. These are encouraging signs, but Greece needs to grow faster than that in order to recover the lost economic production, which resulted from the crisis. We think it has the potential to grow a lot faster than that if the right policies are pursued, in the right international environment. Of course, there are a lot of things that are outside Greece’s control, like Brexit, trade protectionism etc. However, there is a lot that is within Greece’s control as well. As the EU bank, we can only encourage Greece to stick to the path that it has agreed with its European partners. I know from my experience in Ireland (having acted as economic advisor to the Prime Minister during the fi nancial crisis) that pursuing the right policies requires patience and persistence. So, I encourage Greece to stay the course.
There is a lot of talk – in Europe and internationally – about “reducing imbalances’ and ‘inclusive growth’, but few concrete plans on how this can be achieved. What is your take on this?
This is a huge challenge and that sense of a two speed economy in Europe, where the major capital cities are moving ahead and rural areas and regions are falling behind has been a major cause of the political fragmentation leading to the rise of more extreme political forces. So, this is a major priority and we need to design policies consistent with that. Let me give you some examples of what the EIB can do. We can only play a small role in this particular challenge, as it involves social policies, labor market policies, taxation policies and so on. First, we are committed to financing more SMEs in cohesion regions than elsewhere. Second, we are designing many programs for female economic empowerment, credit lines for banks to be used for companies that encourage female entrepreneurs, business whose governance is dominated by women in terms of the management teams and the Board of Directors. We are also expanding our support for the bioeconomy sector and agriculture, because it is the rural areas that are being left behind. Considerable investment is required to upgrade the sophistication of our food industries, because if we can keep these industries growing and investing, they can bring numerous regions that have been left behind with them.
Andrew McDowell joined the European Investment Bank as Vice-President on 1st September, 2016. He is the first Irish member of the bank’s Management Committee in 12 years. Prior to joining the EIB, he had served as Economic Advisor to the Taoiseach, Ireland’s Prime Minister, from 2011. He has 20 years of experience in economic policy and public service management. Prior to working for the Taoiseach, Mr. McDowell was Chief Economist at the Irish business development agency, Forfás, and European Deputy Editor at the Economist Intelligence Unit. He holds an MBA from the Michael Smurfit Graduate School of Business and studied at John Hopkins University and University College Dublin