Report
In these times of hardship, Europe’s financing channels – even with the full strength of capital markets – would only match a third of the EU’s essential investment needs. Finance Watch’s new report urges the EU Commission to evaluate the coming investment crisis: this could create the conditions for a new discussion on the financial architecture of the EU.
Unescapable investments
Faced with environmental and geopolitical turmoil, Europe’s survival hangs on its capacity to invest massively in the green and digital transitions, social infrastructure and in its strategic autonomy. Climate change alone will require the EU to invest between 5% and 10% of its GDP each year for the coming decades. Avoiding these investments is not an option: it would risk future social and economic disruption at a cost several times greater than the investments above.
A self-inflicted “public finance gap”
Regrettably, Europe’s public finance architecture won’t allow for the required investments. While any increase in EU common debt or budget are political non-starters, the rules governing Member-States’ public spending almost completely disregard the future benefits of an investment, even one with exceptional returns. This essentially prevents Member-States’ budgets from contributing at the scale required.
Capital markets to the rescue
To square this circle, top EU voices rely explicitly on capital markets to provide for these financing needs: the late Capital Markets Union project, now dubbed Savings and Investments Union, has recently been resurrected by EU’s political leaders and should become a top priority of the next EU Commission.
An inconvenient finding
This can work partly: a better integration of EU’s financial markets would give citizens’ savings more chances to contribute positively. But after estimating the EU’s total investment needs and assessing what proportion of it can be funded in capital markets – given the mechanisms that govern the allocation of private capital – the report finds that even with extremely optimistic hypotheses, capital markets can only cover a third of the EU’s essential financing needs.
Call for an official evaluation
This risk is existential. As its main recommendation, the report urges the EU Commission’s economic services to assess the reality of this investment crisis. If such a study confirms these fears, it could create the conditions for a serene and pragmatic examination of the EU’s financing architecture and the options available to policymakers for its reform – in the short and long term.
