Towards a European investment and a key for Europe’s future

Philippe HERZOG

President of Confrontations Europe

Five years ago, our association joined forces with the Long-Term Investors Club to address an issue that is decisive for Europe’s future: the revival of investment. Our efforts have been tireless; there are many more of us today. We have to act now if we are to stave off the threat of further recession in Europe.

The Commission is drafting a €300 billion recovery plan for the next three years. It wants to use available public funds to leverage private investment in projects of European interest. It’s a good idea but it’s just a start. We won’t deny that, to pull it off, the Member States and the Union will have to make a huge effort to work together in a spirit of co-responsibility. And that in-depth reforms of market and public governance structures will be needed to rebuild confidence and boost project numbers, with the aim of achieving significant progress in the medium and long term.

The purpose of our European Long-Term Investment Conference is to initiate a dialogue between all the stakeholders, as cooperation between the public, private, business and financial sectors is a decisive factor. We would like to develop a joint, in-depth and holistic analysis of the factors underlying the investment crisis in Europe.

Our societies are experiencing a profound crisis of confidence. Our dwindling hope in the future goes hand in hand with the fear that our social model is being eroded. The uncertainty arising from long-term geopolitical tensions and from the declining integrity of the Eurozone and the Union has increased risk aversion among businesses and investors. It is vital to establish a more long-term outlook for the Union through an investment strategy that increases growth potential and meets future needs.

The economic policy debate keeps getting bogged down in arguments for and against austerity. Public spending discipline is necessary – within reason – as unsustainable levels of debt obliterate the future. Only by increasing investment, and not consumption, can we stimulate both supply and demand. The economic and political structures of the past are now a handicap when it comes to taking risks for the future: the general level of skills and training is inadequate to meet the challenges of innovation; the internal market is still fragmented and pro- vides neither a common space for innovation nor the scope needed to promote projects of common interest; public administrations are inefficient; and the financial system is in cri- sis, having created a gap between financial value and the real value of investments.

It is widely agreed that incentives and public investment are needed to restore the confidence of private investors. However, the only way to achieve this is by strengthening the market to reduce market “failures” and by promoting a spirit of co-responsibility to improve coordination between the Member States and the Union.

Massive investment is needed to pursue sustainable development. And stakeholders must be able to take advantage of the opportunities that present themselves: the digital revolution, low-carbon energy, changing urban and rural needs, the growth of emerging markets and so on. Yet large companies are not taking the risk of investing in Europe. SMEs do not have the profit margins needed to do so and are unable to obtain loans, and the infrastructure projects proposed by the Union are not getting anywhere. Costs are high and anticipated rates of return are low. The reform of the internal market, the development of industrial and training policies, and the complementarity between the public and private sectors should help by facilitating and promoting the sharing of risks and opportunities. What we are missing today is an inclusive, coherent and competitive economic union.

A policy of supervision and regulation has been adopted in response to the economic crisis, the aim being to stabilise the financial system and make it more secure. However, savings are not being channelled into investment. Financial institutions and investors are extending finance to governments at historically low interest rates but SMEs, infrastructure companies and manufacturers are unable to obtain either the support or the funds they need to invest in the future. It is vital to restore both bank lending and market financing by setting up risk-sharing mechanisms between banks, long-term savings institutions and investors. The role played by insurers, pension funds and asset managers must be reviewed and substantially increased. This will require in- depth reforms of savings and tax policies. Europe must affirm its autonomy while attracting external investors and investing abroad itself, in a global context of fierce financial and regulatory competition.

The European Central Bank is strongly committed to supporting lending and business activity but it cannot be expected to do everything single-handedly. The coordination of national budget policies must be adjusted: the requirement to curb the rise in public debt will not be eased, but priority must be given to public investment and there must be a stronger commitment to structural reform in education systems, labour markets and government services. We must forge a common culture of public decision-making – based on principles of solidarity and democratic control – at least in the Eurozone, which is suffering seriously from the lack of a budget and financial policy.

The ability of public financial institutions to cooperate and to select and guarantee investment projects of general interest is a concrete but essential issue. Redefining the role of the EIB, creating mutual investment funds and coordinating the actions of national public investment banks with those of the EIB and the Commission are not easy tasks. The time has come to set up a European long-term investment system. There is growing doubt about the efficiency of public decision-making. The tendency to delegate powers, the violence of conflicting ideologies, the ignorance of other cultures that is driving nations apart and market malfunctions are serious impediments. Civil societies must step up their involvement and work together to achieve objectives and introduce reforms. It is just as much an ethical and anthropological challenge as a democratic and political one.