WARNING SIGNALS
Reading Crisis Economics
There investment levers should be used in Europe
Everyone seems to agree that more investment would help to strengthen a worryingly feeble European economy.
Instead, three investment levers should be used.
The first lever is budgetary: Governments that enjoy fiscal space should spend on economically sound projects. Public investment is a complement to private investment; if designed and targeted well, it can trigger more private investment, rather than crowding it out.
The second lever for investment is regulatory in nature. Many large-scale investments that only pay off over the long term – for example, in energy, digital infrastructure, and transport – are concentrated in state-regulated sectors, giving governments the power to influence business decisions.
The third lever is financial. Investment demand has slackened not because interest rates are too high, but because there is not enough risk appetite within the banking system. Financing in continental Europe is traditionally bank-based, unlike in the US, where capital markets reign supreme. But banks are being told by regulators to reduce their leverage and to post higher capital when they embark on risky lending, and their creditors are being told that they should not expect to be bailed out if banks get into trouble.
Would these three types of initiatives add up to €300 billion? No one knows at this stage. But this route would be the surest way to reach the goal.