Sat, Feb 09, 2013 - Page 9 News List

Private investment should be a key EU goal

By Eric Labaye

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

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