Markus Ferber – MEP and First Vice-Chair of the Committee for Economic and Monetary Affairs, European Parliament
Peter Kažimír – Deputy Prime Minister and Minister of Finance, Slovak Republic
Isabelle Mateos y Lago – BlackRock
J. de Larosière – President, EUROFI
Jacques de Larosière:
Ladies and gentlemen, I am delighted to moderate this exchange of views on an enticing title which is: ‘Developing the International attractiveness of the EU Economy’.
We have eminent participants in this session, Mr Peter Kažimír Deputy Prime Minister and Minister of Finance of the Slovak Republic. Mr Markus Ferber, MEP and First Vice Chair of the Committee for Economic and Monetary Affairs in the European Parliament who was kind enough to come last time at a Eurofi panel which I chaired also. Then we have Isabelle Mateos y Lago who is speaking on behalf of BlackRock today. Mr Philipp Hilderbrand was not able to come because of a very unfortunate passing away of one of his colleagues in New York.
So I will just recall the setting of this. We have half an hour. I will give you the floor in a first round for you to be able to express your views on this important subject. Then after that first round, where I would ask you to be very brief, we could then react and inter-react to what we have heard. So without further ado I give the floor to Mr Kažimír.
Europe is currently not the most attractive place for investors, but if member states do their homework and deepen the European economic and financial integration, we can become the hotspots for investors again
Thank you very much for the floor, Monsieur. Good morning ladies and gentlemen. So the question is if whether Europe is attractive enough for investors. If we take a quick look at the current situation in Europe, notably the Eurozone, I think the answer is quite simple. In my view No.
Europe is not an attractive spot for investors at this moment. During my travels around the globe when meeting policy makers, I hear that Europe is currently thought of more as a source of problems rather than a solution to problems. We have a weak GDP growth, low inflation or, impolitely, deflation, high unemployment, especially high youth unemployment. We are ineffective at solving the financial crisis and most recently we have the refugee crisis, which is also creating huge tensions. We have a weak reform drive that is not even an indication that public finances could be held in check, and politicians are mostly local and short-term.
And now I will stop lamenting because I think that all these issues can be addressed and solved. We just have to take our heads out of the sand and look around. China and the US and emerging markets will not sit tight and wait for Europe to enter a never ending debate that only produces incomprehensible rules and mechanisms.
All in all, we need to focus, in my view, on two primary strands of work. The first big thing is doing your homework at a national level, not because the Commission or technocrats tell you to do so, but because it is in your own self-interest. But there is also the second big issue: investors also seek economic stability, but this is the opposite to the last minute deals on Greece, where many times after midnight we sent stock markets badly up and down.
So we need a really strong political commitment to deepen European integration. Therefore I very much welcome the five Presidents’ report, but even though good ideas and proposals are in it, we need to start working on them now instead of delaying the most essential proposals to the future. So all in all Europe is currently not the most attractive place for investors, but if we get to work, both taking on national responsibilities and deepening integration, I am certain we can become the hotspots for investors again. Thank you.
Jacques de Larosière:
Thank you very much for this clear message. Mr Ferber.
Yes, thank you very much. I don’t think that the European Union is such an ugly place where everyone tries to turn around and find other places. When I started in politics as a young boy, I read a lot of books about the Japanese century which would be the 21st one, that was in the late ‘80s and nothing of what has been promised there that Japan would overcome the world economically, has happened. It is rather the other way around, Japan has a lot of problems. In the ‘90s, of course, we thought, and were told by books as well that the European century would be the 21st because after overcoming the fragmentation of the European continent, the reunification of Germany, the integration of the Eastern countries such as Slovakia into the European Union, that would be a step forward and it would become the European century.
Now books tell us that the United States are the only ones who have survived everything, that we are an old economy, we are an old population, so Europe has problems. You look at the figures, it is right. We have a lack of investment. We have not yet regained the foreign investments we had before the crisis. So 2007 has not yet been achieved again, which indicates that there are some problems. But on the other hand, we are seeing for the moment what is happening in China and how this engine, who has brought a lot of life even to European economies, is slowing down and creating problems here as well. So we have to rethink the possibilities we have inside the EU taking into account the challenges which have been mentioned.
Firstly investment will only take place in growing markets and secured markets like the one we have in Europe. No-one will invest in a market which is unsecured and where no growth is visible. So we have to discuss why there is a lack of growth in the European Union. That is the issue number one and therefore I can fully agree with what Mr Kažimír has just stated. Of course, member states who have the key instruments of macroeconomics in their hands have to deliver. But sometimes I have the feeling that member states need a kind of guidance.
We do not deliver European answers on European challenges. So we deliver 28 answers and weaken ourselves again. Where are the European players?
Secondly, we have to take care even on a European level that we are using the right tools. I have sometimes the feeling that we do not deliver European answers to European challenges. So we deliver 28 answers and weaken ourselves again. Where are the European players? In a lot of economic areas, we have national players who are huge in comparison to national competitors, but are small in comparison to global competitors. But according to our legislation and especially competition law, we avoid creating European players who I think could create more attractiveness.
Thirdly and this is something which fits closely to Eurofi and all the work that, Jacques, you have done with all of your colleagues, do we really have the financial markets to deliver support for those who could or should invest in the European Union? Therefore I think number one is to create growth otherwise we will not possess attractiveness for foreign investments. How to achieve that, I can only agree and not add anything to what Mr Kažimír has stated.
Jacques de Larosière:
Thank you Markus. I call now on Isabelle from her standpoint which is more financial.
Isabelle Mateos y Lago:
Thank you very much. I should say my standpoint is the one of somebody who spends her day walking around BlackRock, talking to portfolio managers and asking them what they are thinking of and they ask me questions about what is going well or what is not going well in the world, so that is the background.
And based on this, I would point out that Europe is actually a net exporter of capital to the rest of the world, particularly the Eurozone. So while it is, of course, a very important topic to think of how to be attractive to foreigners, it is at least as much a question of making sure Europe’s own investors invest in the Eurozone and in Europe as opposed to investing abroad because they see better opportunities there.
Raising the participation of women in the labour force can contribute to mitigate the ageing-related decline in the workforce
Now, having said that, when I talked to our portfolio managers and I said, "What do you care about? What do you want to see?" They care about two things: growth and about policy credibility. On the growth front, on the demand side things are more or less properly aligned right now in Europe. On the supply side we have talked about it, there are challenges. There are challenges of input so to speak and that is the demographic debates that people have alluded to. There are challenges in terms of productivity.
On the demographics, if I may just touch briefly on a point that was not mentioned earlier, people have said demographics are very bad, immigration is an opportunity, but politically difficult. But there is another angle which is the participation of women in the labour force, for which there is quite a lot of scope for improvement, particularly in some of the countries that are the most challenged in terms of growth potential.
Italy and Greece, for example, which have very low female participation rates in the workforce could have an increase in their GDP by as much as 15 per cent, if you think of it as a one off, if they could close the gap between male and female participation rates. So this is not a small issue. So let me stop here on growth.
Turning to policy credibility, foreign investors have really no patience for all these institutional games. Policy making on the whole is very complicated. It is unfair because it is really difficult to get 28 different countries to work together, but foreign investors have no patience for that. They want to know "is there a policy vision that we can rely on for the next five years?" Can we be assured that the next time when a crisis comes around or some stress comes around it is going to be addressed effectively?
Right now, unfortunately, the answer to both questions is No. The Five Presidents’ report is a great start, but when I tell people, "Well hold on, this is not a decision, nothing has been agreed upon, maybe none of it will be implemented" they sort of sit back and say "Well how are we going to know what the policy framework will be?" So I will leave it at that for now.
Jacques de Larosière:
Thank you very much. I would like to ask you in a second round about the following points: There are some fundamental structural reasons behind the very low potential growth that we observe in Europe. Potential growth in Europe is now considered as less than one per cent and clearly that is not something that is going to bring Europe to the forefront of global nations. If we continue to dwindle around the zero trajectory, it is absolutely clear that in 2050 not one member of the present Euro system would be present in the G7. So there is a decline. Now how do you get this potential growth up to, I would say, a US style three per cent. How do you do that? Now it is very tough to do it if your labour is declining. We had a very interesting session yesterday with Axel Weber who noted that in 2011 something extremely important happened. Actually, he called it a watershed for Europe. It was the first year when the active population, the working force started declining.
Now if it continues to decline, it is absolutely clear that potential growth will decline from its very low level of today. So behind the conjectural mistakes, the fiscal profligacy that we have been witnessing over the last 10 years, behind insufficient structural reforms of labour markets, etc., which are issues that Mr Kažimír was absolutely right to refer to, but behind that, there is a significant demographic problem and it is not exactly the same in each country. Some countries have a little better demography than others. Some have clearly a very damaging demographic trend, Germany for instance. Therefore you have to do something to address that problem. I don’t think it is a good idea just to say, "Demographic, ageing population" and then you pay lip service to that and then you go on and you say that we have other problems. I think this is a very central problem. Now how can it be addressed?
Isabelle was absolutely right to say that one way of activating the workforce is to make use of the people, women in particular, who are in a way candidates to be in the workforce but are not. That is a structural answer to a structural demographic problem. You are absolutely right to say so. It may not be enough and if it is not enough I think there is only one solution and that is immigration. That is how the United States maintain their output growth and avoid a demographic downturn. It is not politically very easy always, but it is probably indispensable. Probably easier in countries that have reached full employment more or less like Germany, more difficult in countries like France or Italy which have a very large unemployment rate. Therefore it makes it more difficult to tell people that you have to immigrate more people into the country whilst the economy is not able to put to work the people who are in the country itself.
So I would like you to perhaps to return on this idea and tell us how you feel about it. Maybe the refugee problem could be an opportunity instead of a disaster. Who would like to take the floor? Mr Kažimír?
All the member states have to do their homework
Thank you. So I will start with this potential growth. I don’t know if you know but coming from Slovakia, from the Slovak Republic, formerly part of Czechoslovakia, our potential growth is about 3%. Therefore at this moment we are lucky because we can count on a growth rate of about 3.5 per cent in 2016. We keep public finances in good shape. Our workforce is well educated and we try to talk and listen to businesses.
Talking about the Eurozone, there are differences between member states. So, in such a context, it is really important that each country should do its homework in order to keep order in our house. We have to recognise that too many countries in the Eurozone are behind the curve with structural reforms. They stopped the reforms.
I just mentioned this idea about the politicians how they are local and short-term. Unfortunately that is true. The problem is that over the last year there was strong leadership during the financial crisis; but management just focused on ad hoc solutions.
About demographics I have three children, a new born son, so this is the right approach. And talking about solutions, I am really pretty sure that we need new robust macroeconomic stabilisation instruments in the Eurozone just to deal with market stress instead of relying on ad hoc solutions. I am sure that the common fiscal capacity for the Eurozone in the future will be an inevitable part of the discussion which is ahead of us, just to deal with symmetric and asymmetric shocks inside the union.
Jacques de Larosière:
Thank you for these really reasonable statements. Markus
I think we are in a good place to discuss this issue in Luxembourg, as thanks to its history, Luxembourg is a kind of angle between France and Germany and that brings me to what Isabelle has already said. Although we have answered the question in the treaties, what economic model is (the right) one for a European Union, we are still discussing whether we have a demand or a supply driven economy. So, the angle between Germany and France may indicate that some member states are on one or the other side. As long as we do not answer this question clearly and not only in the treaties but in the daily work as well, we will not address appropriately these problems.
France and Italy should make their labour market more flexible to increase sustainable growth and jobs
We see in Spain for the moment, that the reform of the labour market creates huge employment growth. So, Spain has brought more than one million people in the last year into new jobs, after they had carried out structural measures.
And the problem is that those structural measures are only taken if a state is under the safe control of those who are granting money to them, and those who are not in this honourable area - in quotes please- do not do the things which have to be done. So, we still have rigid labour markets in Italy, in France and have not yet opened them. In the European parliament, we always have the same discussion as well, how social is the European Union and how market driven is the European Union? Sometimes, I have the feeling that the social model is more important than the market driven model and that is why that is a very important question.
The second one, as you said, is immigration. What we see for the moment is not a kind of immigration seen in the United States. We do not ask people to come to the European Union based on their attractiveness, their brain or their capital, we give humanitarian aid for those who want to save their lives. So, it cannot be the solution, it is not only engineers and doctors coming to us or economists, it is PEOPLE.
Jacques de Larosière:
I can reassure you in the United States there is what you have said, but there is also the permanent immigration from the south and Mexico, which is not at all selective and chosen.
Yes, but the United States had, from the beginning, an immigration programme and know how to organise it. We do not have that in Europe beyond a few systems like the Blue Card System. We have not yet developed in that area, whether we can organise immigration according to criteria, which people we want to have in the EU. I am not blaming anyone for what is happening at the moment, what has to happen because we can’t say, "Okay you are really confronted with fundamental problems and you are trying to save your lives, but we don’t need you in our labour market, so we will not help you". That is a humanitarian issue which we have to consider for the moment, but this is not the solution and we have to examine that.
Coming from Germany I have had this discussion for decades, as we have never established immigration policies in Germany, but have always had immigration, but never according to the needs of the labour market, only for those who had the chance to come to Germany. That is not a policy; that is what I wanted to say. So we have to give solutions as European, but it is not the answer to the challenge you rightly mentioned. Therefore, of course, we have to develop instruments in the European Union, in order to organise an immigration policy to overcome these problems.
Just one comment on immigration. In my country, I know that it is extremely delicate at this moment, but just two figures. I was quite happy with growth, but on the other side, I have to stress that our unemployment is around 12 %, and employment is below 70 %, so this is my answer.
Only a short remark. Firstly, we have to take care of our national labour market and then of the European labour markets. Afterwards, we have to discuss whether there is a need for employees coming from third countries.
Jacques de Larosière:
Isabelle would you like to step in?
Isabelle Mateos y Lago:
I have already touched on the demographic challenge or other solutions, so let me offer one more thought on another way to raise the growth potential of the European Union, which has not been talked about much in the last three days and it revolves around SMEs.
There seems to be a kind of sentimental attachment to SMEs and everybody has talked about how to get financing to SMEs and securitizing SME loans, etc. But there is a major difference between the German Mittelstand SME which is super productive (and an export powerhouse) and the myriad of micro enterprises that you find predominantly in the southern part of Europe, and even in France, which are entirely unproductive, which are a recipe for resource misallocation and which are frankly preventing productivity gains from spreading around the economy.
Germany has four and a half times as many medium sized enterprises, which are between 50 and 250 employees, as Spain does. This is a major issue, which is being obscured by just talking of being kind and good to SMEs. The key focus should be to help SMEs grow from micro enterprises to medium sized ones that can be competitive.
Jacques de Larosière:
Thank you very much, yes indeed that is a major issue. Well it is the end of our time. Thank you very much for having participated. Of course, this is a piecemeal discussion and we are not going to solve all the European problems in this little gathering. I will just pick up a few ideas that I think are useful.
One is the idea expressed by Mr Kažimír, which is, "we have to do our homework". I think this is basically important. There is no magic solution that will come from Brussels. You have to do your homework. And, the nations are very different. As the Vice Prime Minister said, I mean, Slovakia is different, they have a growth of 3 %, they have some unemployment, unfortunately, but it is a country that has enormously advanced in terms of reforms. That has been, in a way, gratified by this effort. So the homework exercice is essential.
Over regulated zones are those with lesser growth and the Eurozone is an over regulated area
The homework has to address not only the macro conjectural problems, fiscal excesses, etc., but also the structural problems, making labour markets more and more flexible, making the general regulation on opening new enterprises more user-friendly. I mean, we are in an over regulated zone. I am sure that if you painted a geographic atlas, and if you put a colour on the regulated or over regulated zones, and other colours on less regulated zones, and then you looked at the relative growth of these zones, I am pretty sure that the over regulated zones would be those with lesser growth.
And we are in an over regulated zone. Now, not everywhere, so you come back to the homework, but this is a factor. On demography, the temptation is to say, "This is something that we have no control of". It is the product of years and years of evolutions, on fertility, death rates, mortality, etc., and this is a given. Now, I think this is wrong. Markus was right to point out that there are nations who have a selective, well devised policy of immigration and a policy that is geared to attracting the people you need, and the people who can contribute to increasing the output and the economic situation of the nation. I think Europe should have such an instrument. The instrument can be nationally crafted because of the differences in the countries, but I think at one stage it has to be the object of a European policy.
On structural reforms, the job is basically national because these are decisions that have a political dimension and in a democracy you have to refer to parliament. But, I also believe that Europe should be a little more present in the monitoring, in the accompaniment of these national structural measures in order to put some, I would say, European framework in the application of all this.
If we do those things, then hopefully we will see that our rates of growth will come up. The pluses of Europe are phenomenal in terms of knowledge, culture, climate. I mean, the ability to grow is there. It’s one of the most attractive regions in the world and it does attract people from the rest of the world who are flabbergasted by it. Now, they don’t stay, they don’t work in it, they don’t have to pay the social security bills, but it is a fantastic region. So, we should put more people to work. Your figure of 70 % is absolutely pertinent, more people to work, liberate, free the ability to work for enterprises. Yes, let bad, small enterprises collapse and have them replaced by good ones and put the right incentives in place. So, all this is easier said than done; thank you for your thoughts and we will give the floor now to another session, thank you.
By M. Ferber - MEP, First Vice-Chair of the Committee for Economic and Monetary Affairs, European Parliament
By P. Kažimír - Deputy Prime Minister and Minister of Finance, Slovak Republic