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Recovering investment ,jobs and growth in Europe IPD, FEPS, Brookings

Recovering investment ,jobs and growth in Europe IPD, FEPS, Brookings. Professor Stephany Griffith-Jones sgj2108@columbia.edu www.stephanygj.net. Roles of financial sector. Mobilize savings and keep safe

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Recovering investment ,jobs and growth in Europe IPD, FEPS, Brookings

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  1. Recovering investment ,jobs and growth in EuropeIPD, FEPS, Brookings Professor Stephany Griffith-Jones sgj2108@columbia.edu www.stephanygj.net

  2. Roles of financial sector • Mobilize savings and keep safe • Intermediate savings at low cost to efficient investment and to households for sustainable consumption, financing inclusive growth. Fund SMEs, green economy, infrastructure • Manage risks for companies and individuals • Do no harm to rest of the economy, by avoiding causing fiscally and developmentally very costly and damaging crises

  3. Radical changes needed to finance • Financial sector has done none of these functions properly; it is dysfunctional to the real economy • To finance real economy, new structure of financial sector needed, including public development banks • To avoid crises, far stronger financial regulation needed

  4. Financial regulation since crisis • Major efforts done on financial regulation since 2007/2008 crisis • Limited by pushback by financial sector. Large financial sector not just a problem in macro terms, but even more in political economy terms • Will regulatory changes be enough to avoid future crises?

  5. Needs for financial regulation • Macro-prudential regulation to compensate for pro-cyclical finance • Need for comprehensive regulation major challenge, to include shadow banking; what quacks like a duck should be regulated like a duck • Separating and/or limiting “speculative” finance. Volcker, Vickers, Likkannen • Reducing size, leverage, opaqueness and complexity financial sector(Solow, IMF, BIS, Griffith-Jones)

  6. Diversified financial system • Large and small banks, as well as low level institutions, eg credit unions/cooperatives • Private banks and public development banks • Latter can provide counter-cyclical finance, finance structural transformation and development, funding where market gaps (long term finance) and externalities exist ( renewable energy), as well as leverage public resources • Need “good”, well- run , development banks

  7. Challenges ahead for EU • Acceleration of growth. Urgent. Fall in output and demand larger than expected, multipliers bigger than expected. Even Germany not growing. IMF projecting growth less 1% in EU for 2014 • Recovery of investment urgent, also to fund structural transformation. Credit to SMEs crucial. Collaboration with institutions like EIB/others for this. • High levels of unemployment countries, like Greece, Spain, Ireland, especially among young, very negative social, economic and political effects. • Urgent action needed on sufficient scale

  8. Better space for pro-growth policies • Due to relatively calmer markets, any potential risk reduced • Greater acceptance growth reduces debt to GDP ratio, therefore stimulus policies actually more attractive to financial markets • Resistance growing to austerity • Governments in Italy, France, others pressing for growth. EP elections show very negative effect austerity on politics. Need for hope

  9. Policy tools EU level • Difficult increase EU budget in short term, though would be highly desirable • Flexibility within existing budget should be increased to investment in growth and employment enhancing activities. Also front loading of spending and investment to kick-start growth

  10. Policy tools EU level • Rapid expansion lending EIB, based on doubling of EIB paid –in capital. • Further expansion of EIB , to increase another Euro 10 billion of paid-in capital. (Cozzi and Griffith-Jones,2014 model effect)Via leverage could have major impacton job creation (up to 5 million jobs EU, of which 3 million in South EZ) also invest in innovation to enhance productivity , and green economy

  11. Private investment as % of GDP

  12. Total employment (millions of persons)

  13. Debt to GDP Ratios

  14. National level • Expansion or creation of national development banks • Exist in Germany (KfW), Austria and France; Labour planning to create one, British Investment Bank. • Greece and Ireland beginning create one, and Spain should expand existing one

  15. National policies • Increase wages in surplus countries; introduce minimum wage in Germany positive • In countries with deficits, slow down pace of fiscal consolidation, to allow more space for growth. Avoid further cuts in investment, key social services • Reduce debt or postpone debt service payments for the latter countries, if necessary

  16. Policy Proposals • Further 10 Billion Euro increase in EIB capital would allow additional lending up to 160 B Euros • More funding via National Development Banksvery valuable • German experience cd be precedent • Speed and sufficient scale crucial to deal with challenge of funding and encouraging private investment and employment ; maintain-at least- public investment. Increase real wages

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