J. de Larosière – President, EUROFI
SpeechGood evening. I will only request a few minutes of your attention because the day is done.
I have noticed today as I have unfortunately too often in the past, a gap between on the one side, the skills, intelligence and technical competence of those who have spoken, and on the other side, the very slow, to say the least, progress that has been achieved on the subjects that are at hand.
Leadership is missing
You know the theorem: the more you have technical quality in a staff and the less motion you have emanating from it, means that there is one thing missing. And the thing that is missing is not competence, it is leadership. That is a universal rule. So I just want to leave that sobering thought with you.
Now, the name of the game as I thought it should be, is restarting investment growth in Europe. That is the priority item on the agenda, at least I thought so. What do we see? We see that productive investment in Europe is not moving and that growth is lagging, it is very timid and that potential growth is getting more and more questioned. The only advantage of less potential growth is that the gap between real growth and potential growth is lessening but it is a very relative advantage. So, coming back to my theorem let me finish this way:
In the United States, typically productive investment in volume as a percentage of GDP is around 12.5% to 13% and in Europe it is less than 10%. Now that is a big discrepancy; two and a half points of GDP less investment in Europe which is an economic zone comparable to that of the US. It is a lot.
If you look at it in cumulative terms over the period, let's say 2000 to 2015, you have much less investment in cumulative terms in Europe than in the US. The cumulative difference is in the order of 20 to 25 points of GDP. That is a fact and if you look at productivity you see that between 2000 and 2014, productivity grew by a little bit less than 11% in the US but only by 1.4% in the Eurozone. So the story is there.
The Eurozone or even the EU to some extent is a much less performing economic ensemble than the United States. It has monetary union and it has quantitative monetary policy, it has zero interest rates and still it's not moving. Now, why is it so? I think we need to ponder that question. There are several reasons of course. There is the ageing population in Europe that brings down automatically potential growth and that is a demographic factor that can be mitigated, that must be mitigated but it is part of the structural problem we have at hand.
Another reason is that European enterprises are less free to work, to make business, to make money than they are in the United States and that also is a fact as shown in all the comparisons and statistics that you can read. I think that more regulation and more inflexible markets, be they production markets or be they labour markets are the important factors. Europe imposes a lot of administrative burdens on the creation of a new enterprise and there are many arbitrary rules that when you get a little bit bigger having been recently created you bump into thresholds that then trigger increases in compliance obligations. And you don't have that to the same extent in the United States.
Now the paradox of that is that we have more buoyant savings in Europe than in the US but those savings are not put at work in, what I would say, moving the real economy as much as it should be.
European enterprises rely much more on banks as we all know for their financing than in the US and they are more indebted than they are in the United States because they are relying less on capital markets and equity.
Having said these very simple things, if there were to be a vision as Jean Lemierre has rightly called for in Europe then you will arrive necessarily at the conclusion that you need structural reforms because structural reforms are at the heart of the discrepancy in the competitiveness and in the performance of the European economy vis-a-vis the American one.
So, we should be working on reducing regulatory barriers to entry of new enterprises, increasing competition by more comprehensible application of the single market, reducing ineffective public expenditure which is in some cases, France for example, much too high and very difficult to make compatible with a productive economy. So that is the chapter of structural reforms. I don't say it's easy, I do think it's difficult because it touches vested interests but it is a precondition for relaunching growth, investment and employment.
Now on the financial market which is more this specialty of our gatherings, I have an unconventional view to present and it is this one:
The European corporate sector in reality has no problem to access finance for their investments. So, let us not believe that large companies that are listed on the stock exchanges are in need of inventive new systems emanating from Brussels to help them out. That would be, I believe a complete misconception. They find money on the market either European or international markets and they find that money at a lower cost. You will see no large enterprise saying: what a pity I'm missing that investment because I don't have access to financing. So what is the problem?
The problem is twofold: the problem is that SMEs do not access markets as freely and as easily as large companies and that they are very much reliant on banks. The second issue is infrastructure investment. We should narrow the problem to those elements.
Now, I think the Juncker Plan is a grand idea. It is a leverage idea. It's a little amount of EU guarantee funds, budgetary funds and a big amount of private funds which supposedly will be enticed by the guarantees; it is the quintessence of a leverage story: I put a little you put a lot. That is okay, that is how finance works, through leverage.
So it is okay but, and there is a but, and that is where my friends of the regulatory system are not going to be happy with what I’m going to say. The secret of the success of the Junker plan is that indeed the big battalions of private investment come and are attracted by the little amount of budgetary European funds. In order to attract those private investments, one has to see to it that they are going to be attracted because the proof of the pudding is in the eating. If private investors tell you that they are not going to be attracted by the infrastructure investments or the SMEs securitisation under the model of simple and transparent, then it is not going to work, then you won’t have the miracle of leverage. Now why is that not going to happen?
We heard it this afternoon. We heard insurance companies telling us that the modalities of the definition of simple and transparent standardised instruments to be securitised were too complex. We heard that the capital requirements for investors or banks who would like to hold those assets on their books are excessively punitive. Now I don't say that they are necessarily right but I beg my friend, Gabriel Bernardino to listen to me for two minutes with some benevolence.
What I say is that if investors haven't got enough appetite to move towards this securitisation or this holding of infrastructure assets because they feel that regarding capital charged it is too expensive and that they are not going to do it, then we get nowhere. So what I would suggest and I go back to the vision or the leadership theorem of mine. I would say this:
The industry is telling us that 3 to 4 times more capital charge on the instruments that I have spoken of and which are the essential bridges between the money by the Commission and the investment we hope the private investors will make, is really too big. Then why don't we start, if we really believe in the revamping of growth which is my premise, why don't we say all right maybe the regulators have been excessively prudent in the calibration of these things, maybe they have, and we could open a period that could be one or a couple of years where we would see how the rules on securitisation on the one side and the rules on infrastructure and investment on the other side, the Junker plan would work. If indeed we see the sorts of things that regulators are afraid of, that is, bubbles, excessive enthusiasm for these investments in Europe with prices that go sky high and returns that go to bottom floor and yes, we could and should change gears. That is what I call a flexible reaction to things. But I would give it a chance.
If investors are really convinced that regulation is so punitive that they are not going to touch it, we should listen and try something more friendly. And if we err on the side of being too bold, we can correct that but if we err on the side of being too prudent, we cannot correct it because by definition nothing will have happened. That is how I personally would try and move this immobile locomotive, so thank you very much for your attention and have a good dinner.
By J. de Larosière – President, EUROFI
By J. Guill - Director General, Commission de Surveillance du Secteur Financier (CSSF), Luxembourg
By G. Reinesch – Governor, Banque Centrale du Luxembourg