What Europe's economy needs is a good shove - not a gentle push
Published 07/04/2016 | 02:30
I am tapping this column out from a European Commission building in Brussels. Jean-Claude Juncker, the president of the commission, is hosting a session on his €315bn investment plan designed to snap the continent out of its economic torpor.
Europe's economy badly needs a shove, and a big one at that: its plodding recovery over the past couple of years has been very slow in making an impression on many of the problems the continent is facing - from excessive unemployment to excessive debt.
Does Juncker's plan amount to a big shove? No. It is a small shove and one that is too gentle because it is spread (necessarily, perhaps) over a long period.
While €315bn might sound like a lot of money, it isn't in the context of an EU economy which generates €14 trillion in wealth each year. It is even less to write home about when you consider that the cash is to be spread over three years, amounting to little more than half of one percent of GDP annually. For Ireland, that comes to around €1bn a year if the cash were to be divvied out among its members in proportion to the bloc's population.
The need for a growth boost is best illustrated by some stark facts. The EU economy, comprising 28 countries, is the same size today as it was when the great crash happened almost eight years ago.
The amount companies and governments invest collectively - in machines, computers, buildings, roads and electricity networks, to name but a few - is more than one-tenth lower.
Very weak growth and even weaker investment mean less demand for labour - there are almost three million fewer people at work in the EU now compared with 2008. Such a long period of slump followed by an anaemic recovery is unprecedented in living memory.
It is contributing to alienation from politics across the continent; straining relations between countries, and among the countries of the euro in particular; and making it more difficult to deal with the many other challenges that need addressing - terrorism, migration, Russia and Brexit.
But it is not only Europe where economic growth is sluggish. It has become a rich-world disease. The US, which has been the world's most advanced economy for almost a century and is still the biggest, has experienced a slowing in the rate of economic expansion over many decades. Japan, the world's third-biggest economy and the first non-western country to enjoy developed world prosperity levels, has been doing little more than stagnating for a quarter of a century.
As is frequently the case, economists can't agree on why this is happening. Robert Gordon, an American scholar, is convinced that today's new technologies have little impact on making us more productive. Because of this, we are getting better off at an ever slower rate. He is even more pessimistic about the future, foretelling the "end of growth" in a new book. There are other economists who take a diametrically different view.
The 'optimists' believe we are on the cusp of a golden age of growth thanks to the explosion in new technologies which have transformed our lives.
Nobody can predict the future with any certainty, never mind forecast the impact of yet-to-be invented technologies.
But the available information over recent decades unfortunately supports the pessimists at this juncture.
Contributions yesterday in Brussels gave little cause for optimism. On occasion, the debate descended into the usual calls from those who want more public investment (now a biggish majority) and those who say it can't be afforded (mostly German-sounding speakers).
Positions on this issue aren't going to change soon, and even if they did, given that public investment accounts for only around 2-3pc of economic activity (as measured by GDP), a huge increase would have only a limited impact on overall growth levels in the short term.
A substantial increase in private investment, by contrast, would have a much bigger impact, as it accounts for 15-20pc of GDP in most developed economies.
While low public investment is easily explained - weak public finances in most countries - low private investment is much harder to account for.
Profits are strong in most sectors across Europe. That provides companies with the funds to reinvest.
If the cash they have on hand is insufficient for their investment needs, they can borrow the money at very low interest rates.
Given these two factors together, private investment should be growing at a good clip, not stagnating.
Alas, there was not much yesterday by way of fresh insights into the phenomenon of low private investment in Europe. Among the most insightful speakers was a plain-speaking American businesswoman.
Giana Domanig, a venture capitalist, pulled no punches about the way things are done in Europe. Much less money goes into young, high-growth companies than in the US, she said. And when they do get access to cash, investors want profits sooner than in America, where young companies are allowed to reinvest early profits so that they can really grow in size.
Trying to raise money on stock markets was, on this side of the Atlantic, simply "pathetic", she snorted.
And her European Commission hosts may not have been filled with joy to hear her knock their proudest achievement, the European single market. There is no real single market in too many cases, Domanig believes.
Juncker himself came along to wrap the day up. He was upbeat, talking of his investment plan being a "game changer". That was more than over-egging it.
The plan can only help generate a little bit of extra growth, but it would have to be much bigger and accompanied by many other changes to have a chance of changing Europe's growth game.