EU Industry and Monetary PolicyClosing the investment gap

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EESC, 12 November 2015Guido NelissenEconomic AdviserindustriAll European Trade Union

• Industrial employment in the EU was 3.9 million lower in 2014 than in 2008.

• The level is almost as high as in 2010.

• Slight increase in 2014.

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Investment gap in Europe

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Share of manufacturing

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Without investments...

• Share of industry from 20 to 15%• Translates into 4m job losses• Industrial production still way lower than in 2007• Lack of +-300 bn compared to the historical level • Public investments declined from 2,5% in the pre-crisis period

to 2,1% (historical average=4,5%)• As a result growth remains subdued and at a much lower level

compared with the US• Paradox

Cash piles at European companies have swelled with 40% to 1,1trIntrest rates at almost zero

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...no industrial “renaissance”

•Without investmentsNo increase in productivity and thus economic growthNo technological progressNo proper replacement for our capital stock and decrease of our

potential outputSecular stagnation with permanent high unemployment, permanent

risk of sliding in recession again, permanent risk for deflationNo solution for our big societal challenges• EU 2020 strategy• Roadmap 2050: 1,5% additional investments required

No increase share of industry again to 20%

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How come?• Supply side factors

uncertainty about the global economic outlook a still fragile financial sectorOvercapacitiesBanks that have become risk averse

• but mainly the result of a massive shortfall of demand: investments follow demand!Lethal combination of

• A fiscal contraction of 5%• Processes of internal devaluation: creation of a low-wage sector, reduction of

purchasing power, deregulation of labour markets• Deleveraging in the private sector and in the financial sector

Only positive development was the increase in exports but exporting our way out of the crisis will become more and more difficult

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Role of the ECB: from conventional to unconventional policies

• 2008: unlimited liquidity for the financial sector• 2009: Covered Bond Purchase Programme• Mid-2010 till Jan. 2012: Securities Market Program (SMP): temporary and

limited purchase on the secondary market of bonds issued by the weaker ms• Longer-term refinancing operation (LTRO): ECB loans with a maturity of 3 years

at 1%• 6/9/2012: announcement that the ECB would do ‘whatever it takes to save

the euro’: Outright Monetary Transactions to buy public bonds on the secondary market with no time- or size-limit

• Juin 2014: TLTRO targeted longer term refinancing operation: auctioning of 4-year loans at ultra-low

interest rates under the condition that the institutions would pass on the funds to companies (funding-for-lending)

• first central bank to take interest rate on its deposit rate below zero (2014)• Since April 2015: the last bazooka or QE: 60 bn bond purchases per month till

september 2016

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Monetary investment easing (MIE): good reasons to use the very last bazooka

• The used recipes of structural reforms, fiscal austerity and unconventional monetary policies didn’t deliver

• Current policy of QE doesn’t lead directly to new investments and has some negative side effects

• Most pressing issue today for industry is raising production again to the level of potential output

• Make use of the very low interest rates to create assets for the next generation

• Combination of ECB and EIB will immediately lead to new investmentsMoney could be invested in the pipeline of projects drawn up for the Juncker

planAlso for R&D: 130bn required to achieve 3% Barcelona objective

• Objective: MIE should reduce unemployment till 7% (= QE policy of FED)

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Questions

• Who will carry the risks, • Which guarantees to ensure a triple AAA rating• Quality of projects Technical preparation Financial due diligence Implementation• Combining fiscal and monetary policies contains risks• Democratic deficit? EIB/ECB as the investment policy makers in the EU?• ECB covers only eurozone• Cofinancing?• Why not a European Treasury to finance investments?

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What else to restart investments?• A more flexible interpretation of the SGP

Strenghtening the flexibility clause of SGPRoom for manoever in MS with <3% deficit

• Promote internal demandRestore consumer confidence=restore workers’ confidence

• Shrinking the low-wage sector• Minimum wages• Reduce precarious work

Real wages in line with productity increases Juncker Plan: 1,8m new jobs (ILO)

• Restore trust in the financial sectorCompleting the banking unionSeparation of investment banking and retail bankingA Financial Transaction Tax will reduce speculative behaviour and provide

additional revenuesTransparency and regulate shadow banking

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• Restore monetary transmission: diversification in funding sourcesDevelop markets for high quality structured products, covered

bonds, corporate bondsBetter integrated capital markets will promote cross-border

investmentsAn integrated European market for venture capitalCooperative finance, micro-financeSupport to long term finance • ELTIF’s to mobilize funds of institutional investors• Project bonds• Green investment funds which couple finance with technical assistance and

risk sharing

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• Shape the supply side by an industrial policy in support of the ‘third industrial revolution’ based onRenewable energy and energy-efficiencyDigitalisation of economic activitiesNew materialsRenewable raw materialsCircular economySustainable transportBreakthrough techologies: nano-electronics, biotech, optonics

• With special attention for the market introduction of new products/services Joint European PPP’s: Shift2Rail, Biobased industries, Fuel Cells, Innovative

Medicines, ECSEL, Green Cars Innovative public procurementDynamic standardisation procedures

Addressing the big societal challenges will trigger new investments in high-value added activities and with a high multiplier

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Thank you for your attention!

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