Every morning I record a podcast in French (see here) on a specific topic. The text below is the translation of this morning podcast.
Economic growth in the Europe has a low profile since the first quarter of 2011. It’s necessary to find a way to create a breakage in order to converge to a higher trajectory.
Investment is probably the good tool for that. It can accelerate rapidly as it has been seen in the past and so can rapidly change the profile of the economy. Moreover it can incorporate innovations and technical progress in order to improve potential growth.
For the Euro Area it would be a good idea to focus on investment for the breakage on the upside but also because investment momentum has been poor since 2008 and mainly since 2011. There is a need to catch up.
Due to these reasons there were great expectations on Juncker plan on investment. It could create an impulse that could change the economic trajectory in Europe.
In this plan, Eur 21bn from the European Commission and from the European Investment Bank will be earmarked as guarantees for a fund that will be able to get Eur 63bn. This fund will act as a guarantee for the financing of private investments. The impact is expected to be Eur 315bn on a 3 year period. The fund will select investment projects.
We can be critical on this plan
1 – If on average there are difficulties to finance investment in Europe, this is not necessarily the case for Germany or for France. These two countries do not suffer from financial fragmentation. But in these two countries, investment momentum is clearly not strong. So this plan can help countries that have constrained credit conditions and that suffer from financial fragmentation. We can think here at Spain and at Italy
2 – The second question we can have is to know if this financing plan will not be a substitute to the current way to finance investment. In other words, will this plan add new investment compared to what was already planned or will it only be another way to finance what was planned? If this is the case, the new framework will not boost growth
3 – On the macroeconomic side, investment is expected as an impulse that could change the growth trajectory. Currently demand addressed to companies is low and that’s a good reason for them to have limited investment. To change the picture we need to have an impulse and a large number of economists think that public investment could do the job. This plan is not an answer to this expectation
For me, this plan is mainly a way to substitute a financing by another one but I need to be convinced that it will create new flows of investment that could change the European growth profile.
That could be positive for countries that suffer from financial fragmentation but I am not sure that this will dramatically change the picture. I am not sure that France and Germany’s momentum will change after this plan as their current financial conditions are accommodative.
The renewal of growth is still to come