Dr. Werner Hoyer President of the European Investment Bank: Closing Europe’s Investment Gaps
Keynote speech at GLOBSEC Tatra Summit 2017 addressed by Vazil Hudák, Vice-president of the European Investment Bank in absence of President Hoyer 28 October 2017
It is a great pleasure to return to the Tatra mountains this year and to address you here this morning at such a wonderful location.
The Tatra Summit provides an excellent platform to exchange points of view on the pressing European political, economic and financial issues of our time. Events such as this can indeed make a positive contribution to shaping the future of our continent.
As I shall try to highlight in my intervention, the health of Europe’s investment climate is very much a reflection of the health of our political, financial and economic project as a whole… and Europe faces considerable challenges!
Chief among them is a destabilizing sense of uncertainty that has loomed over us since the beginning of the global financial and sovereign crisis. Initially, uncertainty plagued the economic outlook, but over time it spread to the realms of policy and politics.
Brexit confirmed the severity of the dissatisfaction of some; and it showed us that the EU’s narrative of multilateralism and openness no longer connected as it should with important parts of the population.
The single market – perhaps the one of the greatest achievement of the Union – has been called into question, as have the benefits of wider integration that has been such a driver for peace and freedom in the continent.
A new administration in Washington has publicly questioned the logic of the EU, the rationale for multilateral cooperation and core values we hold to be true.
Further destabilising, are the challenges of migration linked to crises in the EU neighbourhood and beyond, and those posed by climate change.
As we know, the vicious circle between uncertainty and its harmful effect on economic activity can be persistent.
Our living standards depend on our ability to sustain stable, thriving and innovative economies.
In turn, this ability rests on the capacity of both market forces and, when needed, public institutions to foster high quality investments – investments which then provide us with confidence in our prospects.
Against this background, my comments this morning shall be structured around three topics:
1. The investment gap in the EU and, in particular, in Central, Eastern and Southeastern Europe;
2. The role of the EIB, the EU bank, and
3. A call for greater cohesion.
The Investment gap in the EU and in Central, Eastern and Southeastern Europe
The EU is now facing its fifth consecutive year of growth… loose monetary policy and a more neutral fiscal policy stance in many countries have supported growth, as has a stronger global economy.
There have been encouraging improvements in labour markets and falling unemployment. The core inflation rate is forecast to remain stable and below 2% in the EU ,and well below 2% in the Euro area. And investment in 2018 is forecast to grow at around twice the pace of GDP.
The hopeful signs of recovery do not mean that we can relax about investment!
We do not need to stimulate investment for countercyclical reasons, but to address the backlogs that have built up over the crisis to address long-term structural needs.
EIB research suggests that we continue to face a structural investment gap, to be precise, our analysis suggests an annual investment gap in the EU of about 600 billion euro, including:
- 100 billion euros to upgrade energy networks to integrate renewables, improve efficiency and ensure security of supply;
- 80 billion euros to upgrade transport networks to reduce congestion costs and trade bottlenecks;
- 65 billion euros for broadband, data centre capacity and cyber security;
- 90 billion euros to rehabilitate environmental services and ensure water security in the face of climate change, and,
- An additional 130 billion euros a year needs to be invested in R&D to meet the EU target of 3% of GDP.
This investment gap raises considerable more concerns as it depicts the competiveness gap of the EU economy!
But let us turn our attention to the Central, Eastern and Southeastern Europe region, where we also continue to observe significant gaps in the stock of capital.
Before the crisis, investment in this region generally exceeded the EU average. However, investment has also been pro cyclical and more volatile than in the EU.
The crisis resulted in a marked slowdown in capital formation, which also contributed to a decline in the growth rate, along with slower dynamics in total factor productivity.
While public investment – supported by EU funds – has been relatively robust, private capital formation has been lagging.
The composition of investment is tilted towards machinery and non-residential construction; while the share of intangibles in general – and research, development and innovation in particular – is lower than in the rest of the EU.
EIB estimates of investment gaps in the region show that the level of public and private investment has been below levels experienced in countries that successfully graduated from middle to high income in the past.
Furthermore, for most Central, Eastern and Southeastern Europe economies, current investment levels are not sufficient to maintain the size of the capital stock relative to GDP under reasonable assumptions for economic convergence and growth.
The EIB Investment Survey survey shows that the investment outlook among firms in the region is cautiously optimistic… firms are more likely than the EU average to report that they had invested too little over the previous three years.
Uncertainty, business and labour market regulations, as well as availability of staff with the right skills, are the main long-term barriers to investment.
Even though the availability of finance does not seem to be a major obstacle for too many firms in the region, more firms than the EU average report being constrained by a shortage of external finance. The pre-crisis model of financing capital accumulation – based on foreign direct investment and cross-border banking – is not operating the way it did earlier, so domestic savings will have to play a stronger role in filling these gaps.
While countries in the region should continue to attract foreign capital, a more balanced growth and financing model would support further steady convergence.
Capital market development could be highly important in creating channels for savings and decreasing firms’ reliance on banks. For the firms to use more equity or bond finance for investment activities, more pro-active measures are needed to change economic conditions conducive to, and incentives for tapping, capital market financing.
The role of the EIB
Ladies and Gentlemen,
As the EU Bank, the EIB is committed to strengthening EU competitiveness and supporting investment where and when needed most.
For over 60 years the “raison d’être” of the EIB – together with the European Investment Fund since 1994 – has been to support cohesion, sustainable and inclusive growth in the EU.
We do this through financing of sound investments, creating growth and jobs across a broad range of sectors for which financing on reasonable terms is not sufficiently available.
In 2016, the EIB Group provided around EUR 84 billion in long term finance to support private and public investment addressing economic needs and our economists estimate this this supports investment projects worth roughly EUR 280 billion. And please bear in mind that all the projects the EIB finances must not only be bankable, but also comply with strict economic, technical, environmental and social standards, fully supporting the EU acquis, in order to yield tangible results in improving people’s lives.
Faithful to its role and mission, the EIB, together with the European Commission, has undertaken the Investment Plan for Europe, commonly known as the “Juncker Plan”, to further
enhance the EU policy response to relaunch investment and restore EU competitiveness. It aims not only to address cyclical weaknesses in investment, but also to address the structural investment and competitiveness gap. It can influence firm productivity and overall, the long-term EU growth potential.
The European Fund for Strategic Investments, or EFSI – one of the plan’s three components – has enabled the EIB Group to step up its provision of much needed risk-bearing financial products and further improve its capacity to perform its catalytic function.
As of 18 October 2017 we have approved over 640 EFSI transactions, mobilising 76% of the 315 billion euro target.
Together with the EU Commission we have been working on a proposal to extend the Investment Plan until 2020. Accordingly, total investment mobilised under EFSI 2.0 would be about half a trillion euros… intended to partially address the significant gap I mentioned earlier.
But we need to remember that EFSI is only one of the three pillars of the IPE…
The second pillar aims to ensure that investment finance reaches the real economy. It encompasses the European investment advisory hub – housed within the EIB – that provides technical assistance and advisory services and the European investment project portal that helps potential investors find information about projects and existing investment opportunities.
The third pillar seeks to improve the investment environment. Its overall objective is to remove barriers to investment and create simpler, better and more predictable regulation in the EU, especially in infrastructure sectors, where investments span several years or decades.
All of this… that is to say, the EU Bank’s activity, is having an impact on the ground!
Econometric estimates of our impact suggest that by 2020, the EIB Group’s financing approved by the end of 2016 under the
Investment Plan for Europe will:
- support EUR 161 billion of investment
- add 0.7 percent to EU GDP
- add 690,000 jobs
Moreover, total operations in the period 2015-2016 by the EIB group in the EU will:
- support 544 billion of investment
- add 2.3 per cent to EU GDP, and
- add 2.25 million jobs.
A more cohesive Europe
Even if EU economy returns to growth, we cannot champion competition and openness as enhancing global welfare unless we install mechanisms to ensure inclusiveness, as well as
protection of the weakest in society.
In a world where technological frontiers are shifting swiftly, ensuring that the working age population maintains adequate and up-to-date skillsets is as much an economic as a social
Recent political developments have provided us with first-hand experience of the consequences of leaving too many members of society left behind.
A major challenge for European and global economies is thus to make economic growth more inclusive, supporting opportunities and social mobility.
Reinforcing economic and social cohesion and convergence is also an important priority for the EU Bank!
The EIB helps to deliver growth, jobs and cohesion in Europe by addressing economic and social imbalances, by promoting the knowledge economy, skills and innovation and by linking regional and national transport infrastructure.
It supports the implementation of EU regional policies and often co-finances projects alongside EU funds, helping to attract other investors whether they are needed the most and to
maximise the impact of their financing throughout Europe.
Economic and social cohesion is integral to the vetting and approval of EIB projects. While the Bank does not set itself explicit lending targets towards less developed or transition regions, it has mechanisms and procedures in place to ensure special emphasis on convergence.
In 2016 EIB’s support for cohesion objectives within the EU accounted for 29% of total support, that is to say, it amounted to EUR 21.6 billion.
EIB advisory activities complement the Bank’s lending activities and provide an additional contribution to the convergence objective. Particularly successful, the Jasper program provides technical assistance to member states in structuring viable financial project proposal targeted at a better absorption of EU funds in potentially recipient countries.
The EIF is promoting regional development and EU cohesion policy through activities like the JEREMIE initiative – the Joint European Resources for Micro to Medium Enterprises – as well as country and sector-specific initiatives, namely the Baltic innovation fund and the Polish Growth Fund of Funds.
The EU Bank has therefore favoured less developed regions both in terms of exposure levels and signatures in recent years. Indeed, expressed as a percentage of GDP, EIB exposure is highly concentrated on countries made up predominantly of convergence regions; for instance, EIB exposure to Greece – of 10.27% – is about 10 times that of Denmark – of 1.01%.
Expressed as share of total investment in countries, EIB support for less wealthy Member States and those still struggling from the effects of the financial crisis is particularly pronounced.
In 2016 EIB lending to Cyprus was 8.6% of total Gross Fixed Capital Formation; in Greece it stood at 7.2%. This contrasts with Luxembourg – 0.6% -, Denmark – 0.7% – and Germany – 1.2%.
In light of Brexit and new challenges that the EU faces, such as migration, defence, and Eurozone reform, there is a clear need to review the EU’s areas of expenditure, but we must remain completely committed to supporting the important role played by cohesion policy.
With the need for stable, sustainable and inclusive growth in mind, we must find the right balance between increased cooperation and subsidiarity in our continent, and our Bank stands, as always, ready to continue supporting this effort!
Ladies and gentleman,
The EIB Investment Survey confirms that the investment recovery is strengthening and that companies plan to invest more… in the coming financial year, more firms expect to increase their investment than to decrease it.
If governments do more to strengthen the investment framework within which we invest, then I am convinced that the inclination to take more risk and renew the entrepreneurial spirit, which has always been a core feature of innovative European SMEs, will come back.
Liquidity is there abundantly and our experience on the ground indicates sound projects for investment are there.
The necessary confidence to get the investment machinery going again therefore needs to be strengthened and we must all do our share!