1. No category

The EU Growth Challenge and the
Investment Plan for Europe
Debora Revoltella
European investment Bank
Columbia SIPA, New York, April 20th, 2015
European Investment Bank Group
1
•
The EU competitiveness Challenge
•
The EU Investment Outlook
•
The EIB and the Investment Plan for Europe
European Investment Bank Group
2
A (slow) recovery path
Real GDP growth
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
EU
EA
-2.0%
EU pre-crisis av.
-3.0%
EA pre-crisis av.
-4.0%
2016
2015
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
EU
EA
DE
AT
FR
NL
BE
LU
FI
IE
EL
ES
IT
CY
PT
MT
EE
LV
LT
SI
SK
BG
CZ
HR
HU
PO
RO
DK
SE
UK
-3.0%
Source: EC Winter forecasts 2015, EIB calculations
Light colour: 2014
Dark colour: 2015
-1.0%
1.0%
3.0%
5.0%
Real GDP growth: green if GDP level year x above 2008, Red otherwise.
European Investment Bank Group
3
A two decade long decline in
competitiveness
Real GDP per capita developments in Europe, US and Japan
(in purchasing-power and inflation adjusted international dollar, 2013)
The crisis has not only had a cyclical
impact on EU growth. It has also
substantially reduced Europe’s
long term growth potential estimates
50,000
Estimates of potential growth
(in percent)
40,000
2
30,000
US
1
EU
EU
Japan
US
0
20,000
2007 2008 2009 2010 2011 2012 2013
1990
1995
2000
2005
2010
Source: European Commission, AMECO
Source: IMF, WEO
European Investment Bank Group
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Potential growth is the challenge
Change in real potential GDP growth
(average 2006-2015 vs 1995-2005)
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
Core
TFP
Cohesion
Capital
Workers
Vulnerable
Hours
PGDP
Source: EC Winter forecasts 2015
Nb: Potential GDP (PGDP) is the amount of GDP that an economy is able to produce if it employs all its workforce, leaving
only a small number of unemployed people (NAWRU), utilise all of its productive capital and combine these two inputs (capital
and labour) in the most efficient way available to it. TFP, Capital, Workers and Hours in the legend of the left hand slide stand
for contributions of total factor productivity, services of capital, number of workers and hours per worker to the growth of PGDP.
European Investment Bank Group
5
Capacity for change: innovation
Europe’s R&D intensity is persistently lagging behind that of other leading
economies, hampering the EU’s ability to innovate
Patent Applications
(Number per 1 million inhabitants)
Gross domestic expenditure on R&D
(in percent of GDP)
KOR
4000
JPN
3000
South
Korea
Japan
4
3
USA
EU
2
2000
US
CHN
1000
EU
1
0
0
2000
2002
2004
2006
2008
2010
2012
Source: OECD
 An additional € 130bn a year needs to be
invested in R&D to meet the EU target of
3% GDP.
2000 2002 2004 2006 2008 2010 2012
Source: World Intellectual Property Organization; Comparability across
countries is limited due to differing patenting systems.
 More than 30% less patents are
filed per EU citizen than per US
citizen.
European Investment Bank Group
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Capacity for change: innovation
Heterogeneous R&D intensity…
… with the crisis having an impact on some of the leaders
Change in R&D intensity
(in percentage points)
R&D intensity by Member State
(in percent of GDP)
1
4
0.75
3
0.5
0.25
% 2
0
1
-0.25
2013
Source: Eurostat
2002
SI
CZ
EE
HU
SK
BE
DE
NL
MT
DK
PL
AT
IE
BG
FR
EU28
LT
EL
IT
CY
LV
UK
HR
ES
PT
RO
FI
SE
LU
-0.5
FI
SE
DK
DE
AT
SI
BE
FR
EU28
NL
CZ
EE
UK
IE
HU
PT
IT
ES
LU
LT
PL
MT
SK
HR
EL
BG
LV
CY
RO
0
Target 2020
Change 2002-2008
Change 2008-2013
Source: Eurostat
European Investment Bank Group
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Capacity for change:
modernisation and reallocation
 EU firms are slow at absorbing new
technology. Keeping up with latest
technologies in the advanced
manufacturing sector will require
an estimated additional € 90bn a
year.
Share of firms by growth brackets,
EU-US comparison
Examples for modernisation needs
• IT upgrades and transition
• Modernisation of capital stock in
manufacturing sectors
• Factory automation and integration
of IT systems
 The share of fast growing firms is
more than 25% lower in the EU
than in the US.
Source: Bravo-Biosca, Criscuolo, Menon (2014), What drives the dynamics of
business growth, Nesta Working Paper 14/03,
Europe here corresponding to the average of AT, DK, IT, NL, ES, NO, UK
European Investment Bank Group
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The EU’s competitiveness gap is the result
of wide-ranging shortfalls
The building blocks of competitiveness
Wealth creation
Trade
Prosperity
Productivity
Capacity for change
…across the economy
…within firms
Innovation
- RDI investments
- Commercialisation
Absorption
- Uptake of innovation
Economic dynamism
- Ability to grow
- Substitution of less
competitive firms
Strategic sector presence
13/04/2015
Enabling environment
Institutions &
markets
- Competition
- Flexibility
- Regulations
- Integration
Financial sector
- Financing
innovation and
growth
- Venture capital
- Capital markets
Human
capital
- Skills
- Health
Infrastructure
- Transport
- Energy
- ICT
- Environment
European Investment Bank Group
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Enablers of competitiveness:
financial system
Shortfalls in the ability to finance growth
 Europe’s largely bank-based and
fragmented financial sectors face
challenges in financing young innovative
firms. Banks’ deleveraging needs
exacerbate this problem.
 In Southern and some Eastern Member
States, more than 20% of SMEs identify
access to finance as their most pressing
problem.
 Stock market capitalisation in the EU is not
only about half the US size; markets are
also highly fragmented.
Bank loans and Debt Securities (% of GDP)
150
100
50
0
US
Japan
EU
Private credit by deposit money banks to GDP (%)
Outstanding domestic private debt securities to GDP (%)
Source: World Bank, Global Financial Development Database
Stock Market Capitalisation (%GDP)
120
100
80
60
40
20
0
EU
Japan
US
Source: World Bank, Global Financial Development Database
European Investment Bank Group
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Enablers of competitiveness:
human capital
Shortfalls in human capital development
 Europe’s economy, which is based on
knowledge-intensive manufacturing and
related services, will generate a growing
demand for young people with excellent
post-secondary training and a relevant
skill-set.
 Nevertheless, the EU spends only slightly
more than 6% of its GDP on education
compared to the US and South Korean
education spending of around 7.3% of
GDP
 Despite its importance for a knowledgeintensive economy like the EU, the gap is
most pronounced in tertiary education,
where EU spending is more than 40%
below US or South Korean levels.
Education expenditure (% of GDP)
10% of the gap
estimated to
be for
education
infrastructure
7
6
5
4
Other
Tertiary
3
Gap in tertiary
education a
major risk for
EU competitiveness
2
1
0
United
States
South Korea
EU
Source: OECD
European Investment Bank Group
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The EU’s competitiveness gap:
infrastructure
Annual shortfalls in infrastructure
investments
 Additional € 100bn to upgrade energy
networks to integrate renewables,
improve efficiency and ensure security of
supply
 Additional € 50bn to upgrade transport
networks to reduce congestion costs and
trade bottlenecks,
 Additional € 55bn to reach the EU’s Digital
Agenda standards in broadband and data
centre capacity,
 Additional € 90bn to rehabilitate
environmental services and ensure water
security in the face of climate change.
Examples
•
•
•
•
•
Reinforced and smarter grids
Improved interconnections
Energy efficiency of existing buildings
High-efficiency combined heat and power
Offshore wind capacity
•
•
•
•
•
Motorway reconstruction & widening
Urban bypasses
Rail corridors
New container and LNG terminals
Airport capacity and air traffic management
•
•
•
•
Fibre-based and mobile (4G) broadband
Open networks in thinly populated areas
Large and secure data centres for intra-EU IP traffic
Secure ICT applications for SMEs and public
administration
• Flood risk protection
• Water network, waste water treatment and water
efficiency
• Material recovery
European Investment Bank Group
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The EU’s competitiveness gap is the result
of wide-ranging shortfalls
Wealth creation
Trade
Prosperity
Productivity
Capacity for change
…across the economy
…within firms
Innovation
- RDI investments
- Commercialisation
Absorption
- Uptake of innovation
Economic dynamism
- Ability to grow
- Substitution of less
competitive firms
Strategic sector presence
13/04/2015
Enabling environment
Institutions &
markets
- Competition
- Flexibility
- Regulations
- Integration
Financial sector
- Financing
innovation and
growth
- Venture capital
- Capital markets
Human
capital
- Skills
- Health
Infrastructure
- Transport
- Energy
- ICT
- Environment
Annual shortfalls – examples
Estimates
Innovation and modernisation
- R&D investment:
- Industrial modernisation:
(EUR bn)
130
90
Finance for growth
- Net bank lending*
- Venture capital financing**
55
20
Human capital development
- Educational facilities
- Educational operational spending
10
90
Infrastructure investments
- Broadband and data centres:
- Energy:
- Transport:
- Environmental rehabilitation
55
100
50
90
* Compared to pre-crisis flows
** Compared to US VC financing flows
Source: EIB (2105) “Restoring EU Competitiveness” available at
http://www.eib.org/infocentre/publications/all/restoring-eu-competitiveness.htm
European Investment Bank Group
13
•
The EU competitiveness Challenge
•
The EU Investment Outlook
•
The EIB and the Investment Plan for Europe
European Investment Bank Group
14
Depressed investment, below
depreciation
Real fixed investment
Intangible investment
(% of GDP)
110
12%
100
10%
90
8%
6%
80
4%
70
Core
VMS
2%
Cohesion
1995
60
2007 2008 2009 2010 2011 2012 2013 2014
2000
Core
VMS
2005
Cohesion
2010
US
Real infrastructure investment
•
•
•
•
110
100
90
80
•
70
Core
VMS
Cohesion
60
structural impediments
lack of confidence
need of reallocating resources
low risk bearing capacity in the
system
in some cases impaired access to
finance (SMEs)
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
Source: EIB Investment and Investment Finance 2015
European Investment Bank Group
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A world of low interest rates
Yield Curves
Eurozone AAA Sovereign Bonds
Index various dates
Yields curve
10/03/2015 various issuers
ECB Euro Area Yield Curve Spot Rate
2.5
Average Spain/Italy
04/06/2014
2
1.5
Pre QE announcement (1/21/2015)
1.4
Bank - BBB
Post QE announcement (1/23/2015)
1.2
Non-Financial - BBB
Post Start QE implementation (3/10/2015)
1
0.8
1
0.6
0.4
0.5
0.2
0
3M 6M
1Y
2Y
3Y
4Y
5Y
6Y
7Y
8Y
9Y 10Y
0
3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
-0.2
-0.5
Source: Bloomberg
-0.4
European Investment Bank Group
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Structural post-crisis financing challenge:
Risk bearing constraints
Need to alleviate
medium-term fiscal
space constraints
Need to alleviate
short-term fiscal
space
constraints
The current need to provide riskbearing products varies across
Europe
Moderate
Medium
Strong
No data
Need to alleviate banks’
capital constraints
Need to
corporates’
Need
toalleviate
alleviate
constraints
corporates’
deleveraging
pressure
Depicted variables and sources:
Short-term fiscal: Sovereign ratings
(S&P, Moody’s and Fitch)
Medium-term fiscal: EC medium-term
sustainability indicator (2014)
Banks: Capital adequacy ratio under the
ECB asset quality review adverse
scenario
Corporates: Private sector deleveraging
needs in Europe as estimated by Cuerpo
et al. Journal of Economic Modelling 2015
European Investment Bank Group
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•
The EU competitiveness Challenge
•
The EU Investment Outlook
•
The EIB and the Investment Plan for Europe
European Investment Bank Group
18
The EIB at a glance

Shareholders: the 28 EU Member States.

Raise funds on the international capital market and pass on favorable borrowing
conditions to clients

Support projects that make a significant contribution to growth and employment in Europe

Activities focus on four priority areas: innovation and skills, access to finance for smaller
businesses, climate action, strategic infrastructure

Some 440 projects each year in over 160 countries
The EIF at a glance

Shareholders: EIB: 62.2%, European Commission: 30%, Financial institutions: 7.8%

EU specialised institution for SMEs risk financing

Debt finance: structuring and guaranteeing portfolios of SME loans/leases and microcredit

Equity finance: venture capital and mezzanine (fund of funds)

Multilateral Development Bank (MDB) status, Basel III 0% risk weighting, Aaa/AAA/AAA
ratings (Moody’s/S&P/Fitch)
European Investment Bank Group
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EIB lending since its foundation
European Investment Bank Group
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Lending priorities
04/05/2015
European
Investment
Bank
Group
European
Investment
Bank
Group
21
21
Lending outside EU in 2014: EUR
8bn
(EIB signatures)
European Investment Bank Group
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EIB Group in perspective 2013/2014
European Investment Bank Group
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The Investment Plan tackles all those - a
concerted action to create an environment
conducive to investment
•
•
Generate an environment conducive to investment
•
Structural reforms to generate an innovation and investment friendly environment
•
European market integration (institutionally and physically), creating competitiveness
enhancing investment opportunities
Public support, via the EFSI and EIB activity, can help to kick-start
•
Public stimulus targeting competitiveness-enhancing investments with positive spillovers like research, development, innovation, skills and infrastructure
•
Targeting commercially sound, economically and technically viable projects and trying
to avoid market distortion (new focus on smaller projects, not only targeting market
leaders)
•
Turning grants into catalytic financial instruments. As public stimulus will cover for
some of the risk taking, abundant market liquidity will be attracted in an easier way
•
Advisory and coordination of project preparation
European Investment Bank Group
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Going forward: European Fund for
Strategic Investments (EFSI)
European Investment Bank Group
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What’s new?
 Concerted approach of the “Investment Plan for Europe”: fiscal
sustainability, structural reforms, and the European Fund fir Strategic
Investments (EFSI)
 Bundling of 21 billion EU level equity (supporting risk-absorbing
financing volumes of around EUR 60 billion), of which EUR 16 billion EU
budget guarantee that will require some provisioning from existing
budget lines (max. EUR 8 billion) (from grants to loans).
 Enhanced EC-MS-EIB cooperation including through initiatives like the
“project identification task force”, closer cooperation with national
promotional banks and a reduction of red tape in the use of EU funds
 Evolution of financial products mix offered by EIB group:
complementing classic high-volume/low-risk EIB products with more
capital intensive higher risk-bearing financial products providing a higher
catalytic effect, ranging from high risk senior debt to equity.
European Investment Bank Group
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6
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Evolution of the financial product mix of EIB group
Ratio of total supported investment cost over employed EIB capital (multiplier)
EIB “Standard”
Internal
leverage
on EIB capital
6x
Catalytic
effect of EIB
financing
2.5x
Conceptual**
“Special Activities”
Internal
leverage
on EIB capital
Equity type
Catalytic
effect of EIB
financing
Internal
leverage
on EIB capital
5x
1x
3x
Catalytic
effect of EIB
financing
15x
FINAL MULTIPLIER
FINAL MULTIPLIER
FINAL MULTIPLIER
15x
15x
15x
Focus of capital
increase activity*
Focus of EFSI
supported activity
* With some increase in special activity, actual multiplier of capital increase supported activity is now expected to be greater than 18x
European Investment Bank Group
** Quoted multipliers are for illustration only
27
Does it matter?
 The investment plan is just one of various elements to support
investment
 It concentrates on a specific subset of investments – investments in
merit goods
 EUR 105 bn is
 0.8% of GDP
 3.9% of investments
 25.9% of public investment
 11.8% of investment in target areas (sum of R&D, technology
adoption, education infrastructure, transport, energy, environment,
broadband and data centres)
 Structural reforms
 QE and oil prices helping on growth
European Investment Bank Group
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Thank you!
European Investment Bank Group
Potential benefits from EU market completion
•
Achieving an integrated market for goods & services, capital and labour has the potential to
improve EU consumers’ welfare and firms’ competitiveness, and attract FDIs through several
channels:
•
increased size of the market: efficient global value chains, larger pool of consumers,
economies of scale, improve investment opportunities…
•
stiffer competition encouraged by lower entry barriers: exit of less efficient firms, lower
prices, wages and borrowing costs, diversification of products leading to enhanced quality
and R&D…
•
direct cost reductions due to the abolition of border formalities and national
regulations: harmonisation of standards facilitating intra-EU trade…
•
Estimated impact on EU GDP:
•
Structural reforms in EU and EA could increase output by around 7% after 10 years, with higher
employment and improved fiscal positions.
•
In the short run labour market reforms (increased participation, active labour market policies, and benefit
reforms), tax reforms (shifting taxation towards indirect taxes) and product market reforms (higher
competition in services sector and lower entry costs) have the largest effects
•
Skill-enhancing and R&D promoting policies have a major impact on GDP in the very long run, and
account for more than one third of the long-term GDP effects. (See Varga and Jan in’t Veld, 2014).
•
EC estimates better integration of renewable energy: +EUR 15.5 to EUR 30 bn per annum.
European Investment Bank Group
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Key institutional changes following the crisis in Europe
European Insurance and
Occupational Pensions Authority
(EIOPA)
Debt crisis
Financial crisis
Micro prudential supervision
European System of Financial
Supervision (ESFS)
European Securities and Markets
Authority (ESMA)
European Banking Authority (EBA)
Macro prudential supervision
European Systemic Risk Board
(ESRB)
Single Rulebook
Single Resolution Mechanism
(SRM)
Banking Union
European Stability Mechanism
(ESM) (formerly EFSF)—EA MS
only
Single Supervisory Mechanism
(SSM)
European Financial Stabilisation
Mechanism (EFSM)—all EU MS
European Financial Stability
Facility (EFSF)—replaced by
ESM
European Investment Bank Group
201
0
201
1
201
2
201
3
201
4
31
Key institutional changes
following the crisis in Europe
Addressing the financial crisis
•
Creation of the European System of Financial Supervision (ESFS). Two levels:
1. Micro prudential supervision ensured by three European supervisory authorities (ESAs)
• European Banking Authority (EBA)—bank supervision and recapitalisation
• European Securities and Markets Authority (ESMA)—supervision of capital markets (e.g.
credit rating agencies and trade repositories)
• European Insurance and Occupational Pensions Authority (EIOPA)—insurance supervision
2. Macro prudential supervision ensured by the European Systemic Risk Board (ESRB)
•
Creation of the Banking Union made up of the Single Supervisory Mechanism (SSM), the
Single Resolution Mechanism (SRM) and the Single Rulebook
•
stronger supervision and easy resolution in case of failure for banks operating in Euro area MS
Addressing the debt crisis
•
Safety nets for EU MS available conditional to a macroeconomic adjustment program
agreed with the Commission, in liaison with the European Central Bank (ECB):
•
•
•
European Financial Stabilisation Mechanism (EFSM)—financial assistance to all EU Member
States in financial difficulties
European Stability Mechanism (ESM) which replaced the former European Financial Stability
Facility (EFSF)—funds available to EA MS only (from IMF under EA MS guarantee)
Balance-of-payments programme (BOP)—assistance to non-EA MS
European Investment Bank Group
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