When the European Council next meets, it should look at private investment as a means to kick-start Europe’s stagnant economy. With the usual drivers of GDP growth constrained across Europe, the one economic sector able to spend is the non-financial corporate sector.
Indeed, publicly traded European companies had excess cash holdings of 750 billion euros (US$1 trillion) in 2011, close to a 20-year high. Unlocking that cash would give Europe a much larger stimulus package than any government can provide. For example, in 2011 private investment in Europe totaled more than 2 trillion euros, compared with government investment of less than 300 billion euros.
And yet, while trends among European economies have varied, private investment was, overall, the hardest-hit component of GDP during the crisis, plunging by more than 350 billion euros — 10 times greater than the fall in private consumption and four times more than the decline in real GDP — between 2007 and 2011. The magnitude of the private-investment downturn was, in fact, unprecedented — and lies at the heart of Europe’s economic malaise.
Likewise, by historical standards, the private-investment recovery is running late. In more than 40 past episodes in which GDP fell and private investment declined by 10 percent, recovery took an average of five years. Europe is four years removed from the onset of recession, but private investment in 2011 was still lower than its 2007 level in 26 of the EU’s 27 member states.
To be sure, that companies are holding on to their cash, rather than paying it out in dividends, signals that they expect investment opportunities to return — a far more positive situation than in Japan, for example, where companies lack cash to invest. However, European companies remain hesitant, despite low interest rates, keeping private investment well below its previous peak.
Governments can help to persuade companies to let go of their cash by removing regulatory barriers such as zoning regulations in retail and a plethora of requirements in the construction sector concerning everything from the height of ceilings to the size of staircase areas. They should also address the lack of uniform standards across Europe’s internal borders; for example, there are 11 separate signaling systems for rail freight in the EU-15.
After Sweden eased planning laws in its retail sector during the 1990s, the country posted the strongest retail productivity growth in Europe (and outstripped that of the US) between 1995 and 2005. Standardization and liberalization in European telecoms underpinned 9 percent growth in value added and productivity in this period, compared to 6 percent growth in the US.
The largest scope for renewed private investment is in capital-intensive sectors in which government has a major presence as regulator. Even if European countries were to close only 10 percent of the variation in capital stock per worker at the sub-sector level, the impact could be more than 360 billion euros in additional investment — offsetting the 354 billion euros difference in private investment between 2007 and 2011.
REFORMS
Many projects, from airports to university campuses, benefit from returns over decades, which implies that weak demand in the short term will have only a limited impact on their overall viability. Even among more near-term projects, some — for example, retrofitting buildings with more energy-efficient features — could become viable with action from policymakers. Some degree of investment will add to demand, which may persuade others to invest — a virtuous circle.
This approach is not about “picking winners and losers.” It is about targeted microeconomic reforms that reduce or remove barriers to private investment, thereby encouraging the non-financial corporate sector to propel European GDP growth. However, it is important to get this policy activism right.
First, governments need to focus on sectors in which action is likely to trigger renewed investment on a scale large enough to boost GDP — and quickly enough to enable private investment to drive the recovery. Governments often become enamored of innovative sectors, such as semiconductors, that account for only a very small share of total investment. Policymakers may wish to develop these sectors as a catalyst to innovation, but they should not expect that such initiatives alone can spur a recovery in private investment.
In fact, construction and real estate are the most promising candidates, as they account for roughly one-third of European fixed investment and more than 17 million jobs. Although these sectors are unlikely to rebound to pre-crisis levels in Greece, Ireland, and Spain for many years, other European economies, including the UK, Italy, and Sweden, as well as some Eastern European economies, have scope for further investment.
To meet Europe’s ambitious 2020 energy targets, retrofitting existing buildings and improving new buildings’ energy efficiency, including the use of more energy-efficient materials and equipment, could lead to roughly 37 billion euros in additional annual investment between now and 2030. In most European countries, action to spur private investment in local services and transport — both large sectors — should also be considered.
However, governments need to understand the barriers to investment: regulatory failures; weak enablers, including financial and human capital; poor infrastructure; and substandard technology. And they must undertake rigorous cost-benefit analyzes, in order to ensure that any intervention translates into private investment that promotes productivity growth.
It is here — at the level of execution — that governments often perform poorly. Too often, they spend money to support private-sector projects that fail to provide a positive return for the broader economy.
Three ingredients are vital to getting it right: Backing for initiatives at the highest political level; participation by all key stakeholders in deciding what action to take and driving its implementation; and establishing small, high-powered delivery units with clear mandates to coordinate interventions.
Europe’s leaders need to put private investment at the center of their growth strategy by devising policies that open the gates to large potential flows.
Eric Labaye is chairman of the McKinsey Global Institute.
Copyright: Project Syndicate
Two sets of economic data released last week by the Directorate-General of Budget, Accounting and Statistics (DGBAS) have drawn mixed reactions from the public: One on the nation’s economic performance in the first quarter of the year and the other on Taiwan’s household wealth distribution in 2021. GDP growth for the first quarter was faster than expected, at 6.51 percent year-on-year, an acceleration from the previous quarter’s 4.93 percent and higher than the agency’s February estimate of 5.92 percent. It was also the highest growth since the second quarter of 2021, when the economy expanded 8.07 percent, DGBAS data showed. The growth
In the intricate ballet of geopolitics, names signify more than mere identification: They embody history, culture and sovereignty. The recent decision by China to refer to Arunachal Pradesh as “Tsang Nan” or South Tibet, and to rename Tibet as “Xizang,” is a strategic move that extends beyond cartography into the realm of diplomatic signaling. This op-ed explores the implications of these actions and India’s potential response. Names are potent symbols in international relations, encapsulating the essence of a nation’s stance on territorial disputes. China’s choice to rename regions within Indian territory is not merely a linguistic exercise, but a symbolic assertion
More than seven months into the armed conflict in Gaza, the International Court of Justice ordered Israel to take “immediate and effective measures” to protect Palestinians in Gaza from the risk of genocide following a case brought by South Africa regarding Israel’s breaches of the 1948 Genocide Convention. The international community, including Amnesty International, called for an immediate ceasefire by all parties to prevent further loss of civilian lives and to ensure access to life-saving aid. Several protests have been organized around the world, including at the University of California Los Angeles (UCLA) and many other universities in the US.
Every day since Oct. 7 last year, the world has watched an unprecedented wave of violence rain down on Israel and the occupied Palestinian Territories — more than 200 days of constant suffering and death in Gaza with just a seven-day pause. Many of us in the American expatriate community in Taiwan have been watching this tragedy unfold in horror. We know we are implicated with every US-made “dumb” bomb dropped on a civilian target and by the diplomatic cover our government gives to the Israeli government, which has only gotten more extreme with such impunity. Meantime, multicultural coalitions of US