Luc Frieden – Vice Chairman, Deutsche Bank Group
Vincenzo La Via – Director General, Italian Treasury, Ministry of Economy and Finance
Jacques de Larosière – President, EUROFI
Jacques de Larosière:
Ladies and gentlemen, it is a pleasure for me to moderate this panel where
Vincenzo La Via:who is the director general of the Italian Treasury and Luc Frieden, former Finance Minister of Luxembourg and now the vice chairman of Deutsche Bank Group are talking part.
Basically, the question I would like to ask you both is this one: how come, in Europe, we have an underlying rate of growth, a potential rate of growth, as we have just heard from Mr Reinesch, of 1% while we used to have 2 to 3% before the 90s, and how come we are now at such a low level of output growth? What are the reasons for this? It would be interesting to have your views on this topic. We suggested in the Eurofi briefing paper a few avenues to answering that question.
But if we can get in a first round your diagnosis of why Europe is a zone of very low growth nowadays, it would be interesting to have a second round which would be really about the actions that are required, either at national and/or EU levels, to improve the situation, to restart productive investment and perhaps all the structural reforms as rightly indicated by Mr Reinesch to change the environment of this low growth. So, this is basically the object of this panel and I could start with Luc Frieden for instance because you are to my right and say what you have to say in a short version.
There is a lack of vision for the future for the future of our continent
Well, Mr de Larosière, to answer the first part of the question - why do we have less growth- I think that the biggest criticism, and rightly so, is that there is a lack of vision for the future of our continent.
People do not exactly know where we are going and that is to some extent the result of a lack of political leadership. There is no confidence in the future. There is no common approach on how to solve these problems. We are dealing a lot with short-term issues. There were many crisis management meetings which were quite successful, but people are wondering where we should head in the long term.
This continent also faces three major challenges. One is that we are not living alone, we are in a globalised world so we have to adapt to this global economy where there are other competitors. Secondly, we are facing quite substantial changes due to digitalisation which takes away national borders quite naturally, and thirdly, this continent has an ageing population which entails all the problems related to financing social security, but also to consumer attitudes towards investment and consumption.
So we have to overcome all of these challenges together to devise a long-term policy and I think that this has to be done both at a national level and at the European level. Maybe we will come back to this later on.
Jacques de Larosière:
Thank you very much Luc. I will now call on Vincenzo to give his views on this subject.
Vincenzo La Via:
Luc put it very well. Despite positive developments, growth prospects remain weak and uneven. The causes are well-known and they range from demography to rapid technological change, from the legacy of the crisis to the persisting fragmentation of markets. We don't have a fully-fledged single market: barriers and bottlenecks still prevent it from fully deploying its benefits. I think it is urgent to actively implement policy actions that can address these causes and support steady recovery and growth.
We need reforms to improve the business climate
If we look at the main drivers of growth, one indicator clearly stands out, unfortunately in negative terms. Investment level is today the only macro-economic indicator which is still far below the pre-crisis levels. According to the Commission, the experienced fall in investment corresponds to a cut in potential growth of nearly 0.5%. If we compare this result with the current estimates of the potential output growth which is around 1% we get a gloomy picture. Therefore we need reforms to improve the business climate and restore favourable credit conditions which have been hampered by the deleveraging process put in motion by the crisis. In this regard, the Capital Market Union (CMU) is certainly a powerful response to broaden and diversify financial resources and to produce more efficient capital allocation.
The Juncker plan is obviously an excellent way to start moving investment. The resources generated by the Plan should address market failures in the financing of European public goods and be allocated in connection with the EU 2020 objectives and the completion of the Single market. Investments in knowledge-intensive initiatives as research, innovation, high-level education, are key for productivity and growth potential, especially in mature economies as the EU. Unfortunately, the crisis has led member states to cut resources in these areas. In this perspective, the Juncker investment plan should focus on education, research and innovation, as European public goods with the highest growth potential. High-level symbolic initiatives would help to keep alive the idea of a modern Europe, competitive at a global level. This would hopefully bring fresh private money to transport, energy, and information technology projects. Investments should not be regarded as a transfer but as a tool to generate future income. Concerning national contribution to growth and investment, I will only spend a few words on the long-debated balance between investment promotion and fiscal discipline. As already agreed, the possibilities to balance productive public investment needs with fiscal objectives within the Stability and Growth Pact should be fully exploited. Let me stop here.
Jacques de Larosière:
Thank you very much Vincenzo I think we have got a rather good backdrop to this. What strikes me in what you have said are two notions that should be reflected upon. One is the lack of vision in a more integrated world, more complex world, where Europe, with its ageing population in a way, is less adequately mobile or sensitive to the need for change. That is one avenue which is not that easy to tackle because it is in a way a sociological remark. The other one is perhaps more pragmatic by Vincenzo. He stated that we really have a problem in productive investments, and if we want to restart private investment and, in some areas, public investment then we have to improve the business climate. I think this is very important.
So, I would like you to elaborate a little bit on those measures that could be taken to improve on the lack of vision and confidence problem that Luc was referring to, and also to improve the outlook for investment.
I was struck in reading some papers a few days ago, by a comparison between the United States and Germany and the European zone in terms of investment, private productive investment. If you take in a cumulative way, a look at the relationship between private productive investment and GDP in the US on the one hand and in Germany on the other - I took on purpose a rather well performing country in Europe in order to compare it with the United States - I noted that since 1998 to 2015, there is less productive investment in terms of GDP, of 20 points of GDP in Germany versus the United States.
Companies in Europe have less ease, less freedom, to invest, to work, to employ and to make money than in the United States
Of course, this is over a number of years. That is 17 or 18 years. This is very striking. I said the same thing that Luc and Vincenzo are saying to myself: why is there significantly less direct productive investment in this region? And I came up with the same notions. Firstly, I came up with the idea that firms and companies in Europe have perhaps less ease, less freedom, to invest, to work, to employ and to make money than in the United States. That is the first line which is the business climate of Vincenzo.
And the second line was that many structural reforms in terms of making the labour market more flexible, reducing some less productive public expenditure, improving on the pension systems which are absolutely called into question by the ageing population and in a way force us all to retire later than we used to.
All these things are absolutely at the heart of investment, even more so, in my view, more so than the details of financial markets. My view is that large companies in Europe can find financing easily and very cheaply now for their investments. So it is not a question of markets that are insufficiently present and reactive and that I think it is more a question of confidence in the business environment.
And for SMEs, who do not have the same easy access to finance as large companies, there are regulatory problems that are making their lives difficult in terms of financing investment but we must not forget that investment in a way is the result. You invest when you make enough money to invest and you invest when you have clients that can underpin the extension of your productive base. If you don't have those things because your margins are reduced by excessive taxation or social contributions and the like, then you just sit back and my fear is that it is those factors more than the intricacies of financial rules, that are behind the problem. But now I would like to call on you both, Luc?
Mr de Larosière, I tend to agree with what you said and I would like to add two dimensions. First, I think that, in this whole context, we did not make sufficient use of all the possibilities of the single market. Actually, to a large extent the single market does not exist in many areas or does not sufficiently exist. Both companies – be they small companies or financial institutions – and governments need to make an additional effort to fully take advantage of the potential of the single market.
The CMU, the digital union, the energy union- these are the right directions but there is a lot more that needs to be done to achieve a proper single market at the end of the day. If we use the single market more, if companies cooperate cross-border, then it becomes much easier to raise funds in one country, even for small and medium-size companies and to use it and to invest in another country, and the Capital Markets Union indeed might help in this undertaking.
Explaining to citizens and to companies the potential benefits of the single market is the biggest challenge
I think that the single market offers a real growth potential for this continent, but again, it requires political courage because very often the single market is not seen as an opportunity but rather as a short-term threat to a number of services and professions. The biggest challenge is to explain to citizens and to companies the potential of the single market in the long term.
And then the second dimension I would like to add is to have a slightly more common approach towards economic policy. I can tell you, having sat in the Eurogroup and the ECOFIN Council for many years, we discussed fiscal policies much more than the economic reform agenda. That remains largely national and I am not saying that there should be a one-size-fits-all program for each and every country of Europe. However, there are today a number of aspects that have cross-border effects and therefore, it is much more important that those policies are being discussed at a European level to achieve growth in the medium and long-term on our continent.
Taxation is one of the aspects, but there are many others. Regulation has to be balanced with the aspect of growth and I very often see that we indeed have a tendency of regulating to achieve stability which is often necessary, especially after the crisis. Well, you must make sure that at the end of the day we are not counter-productive. Are we really encouraging large European companies to compete with American and Asian companies or are we breaking their efforts due to competition laws or sometimes due to other draft regulations that are being discussed, for instance within the financial world? Are we coherent in our policies to achieve growth? Is a text like the bank structural reform really helping European financial institutions to compete with US financial institutions? Is introduction of the FTT really helpful for achieving growth in Europe? I believe we need to have a more comprehensive approach towards a growth policy in Europe and let's do it in an enhanced single market.
Jacques de Larosière:
Thank you very much Luc, Vincenzo?
Vincenzo La Via:
Yes, very much along the same lines of Luc. To improve the investment climate, you need to address reforms in many sectors and a comprehensive approach is required. Europe is in a phase of transition. How do you make it happen? You make it happen if you have a vision, if you can ensure markets that rules are there and they are going to stay. Rules need to be predictable because investment is not something you do overnight. It is not a trading opportunity, investment is a long-term commitment so you need to know what the rules are, you need to have a system which is conducive to making long-term decisions.
Structural reforms are of the essence and should be better coordinated at the EU level
How do you make that happen? As I said, national efforts in the adoption and implementation of structural reforms should be geared up. All Member States need to appropriately tackle their idiosyncratic structural weaknesses. In this sense, the focus should be on those reforms that make private investment in the euro area more attractive. Reforms aimed at deepening the Single market can also give considerable boost to growth. Domestic resistance, defence of national interests, institutional barriers and bottlenecks still prevail in many areas. Further progress is needed in crucial sectors such as product markets, energy, transport, civil justice, intellectual property, digital economy, as well as in the financial sector. By the way, we are discussing more of those issues at the Euro group and this is a welcome development for the deepening of the monetary union. I am also convinced EU could benefit much from a stronger coordination: country specific structural reforms should be adopted within a systemic frame, ensuring their overall coherence, evaluating their impact on the functioning of the euro area, their spill-overs and budgetary implications. Reforms, as mentioned by Governor Reinesch, can entail short-term negative impacts so we need to provide the most appropriate incentives for their implementation especially if a country is in bad economic times.
In order to fully exploit economic and political positive spill-overs reforms need to be simultaneously enacted in by countries. At the same time, we need a better understanding of spill-overs. An overall appraisal at the aggregate euro area level, of the impact of a comprehensive structural reform effort to foster long term growth potential and convergence would be welcome. So the more we have discussions at European level to have a policy agenda which is a truly positive European agenda for structural reform, the better off we will be.
All in all I think we should have a consistent package where we have investment and structural reforms since these two pillars reinforce each other.
Jacques de Larosière:
Thank you very much Vincenzo. Because we are now reaching the 2:45 limit I think this provides me with the elements to wrap up with. I think that we all agree that if we want to revive growth and more specifically growth productive investment in Europe. We must be more investment friendly and have a more open and effective regulatory policy governance framework.
I liked what both of you said on the need for structural reforms. I think you cannot dissociate the discussion on reviving investment on the one hand and structural reforms on the other, because if you continue to negatively affect the capacity of firms to work, to make money and to invest then you are not going to get any investment. Then chiselling investment rules makes no sense. I think structural reforms are a precondition for this revival of productive investment.
I also believe that restoring the full potential or instituting the full potential of a single market is something which is very important because we often say that we have a single market and Luc is right and in fact we have a partially single market often inhibited by a lot of national laws that reduce the effectiveness in terms of productivity of the single market.
So it is important to remind ourselves of that because we tend to think of a single market. Delors did it in 1990 or whatever and that's it. In fact it is an on-going task because the single market can close itself by the day. I take this on board Luc and I am encouraged by what Vincenzo said because I am getting a little bit distant from these discussions. He said that the Euro group is getting more involved in structural reforms; the Euro group is now looking at it in a more collegial way. I think this is very important because if the Euro governance does not grapple with the structural matter, if it focuses too much on the 3% deficit, which is important but it is not the be all and end all. So if Europe does not grapple with these structural measures, does not monitor their progress in a consistent way, as you rightly said, then they are not going to get anywhere. So the important words on this panel are the four words, the moment of truth. And unfortunately there is a question mark which we have to ponder about.
I think we are at the last moment, do we believe we are at the last moment? It is perhaps another story. I would very much like to engage you since you are an active person in the EU governance because you are not only the head of the Treasury in Italy but you are also the chair of the Financial Services Committee, so the more you can preach these types of notions the better it will be, and I thank both of you very much for having contributed to this debate.
By V. La Via - Director General, Italian Treasury, Ministry of Economy and Finance, Italy
By R. Gualtieri - MEP and Chair of the Committee on Economic and Monetary Affairs, European Parliament