At the end of March, the European Commission presented a roadmap of measures to further develop the European finance and investment market. This brings the advent of the Savings and Investment Union (SIU) a step closer. To chief economist Thijs Knaap of APG, this is good news. Although in the conversation we have with him about this for the column A Quick Call With... he also indicates that there are still some hurdles to be taken.
The EU wants to improve its competitive position in relation to the United States, among others. The reform of the European finance and investment market is an important focal point in this. After all, this will make it easier for European savings and private investment to find their way to European companies. “How does that work now? In an open economy, there are savings and investments, and the two don't have to be in balance. So, in theory, we can also take our savings abroad and vice versa, bring foreign money into Europe. But practice tells us that Europe has a current account surplus, and we bring it mostly to the United States. And we are not alone; as much as $1,100 billion a year goes there from all over the world.”
Why are we doing this?
“The main reason is obvious; you can make a tremendous amount of money. Returns in the United States, especially in recent years, have been remarkably higher than elsewhere in the world. This has to do with the fact that America operates in sectors that are growing tremendously fast, such as the tech sector. In addition, it is also the country where the most innovation takes place, because of the venture capital system, among other things. Billionaires easily provide loans to innovative start-ups. This does not always go well, but there only has to be one Amazon among them, or so the thinking goes. By the way, it is not only Americans who launch start-ups, but also Europeans who work in the US. The large, homogeneous market attracts them. You have immediate access to 340 million consumers. Moreover, America is well developed, and there are good institutions. Still, they are not unique in this. The fact that we invest massively there is therefore not necessarily due to the Americans themselves, but more to the conditions there. That is something Europe still needs to work on.”
How?
“That is where the SIU comes in. We have all kinds of ambitions: we want to stop climate change, we want to move to a green economy, we want to keep our own social system in place where there is prosperity for all, and we want to keep control of our territory ourselves. After all, we don’t want the Russians to invade here. But this requires significant investment. According to Mario Draghi - former president of the European Central Bank - we are talking about an additional need of 750 to 800 billion euros a year by 2030. An amount further increased by rising defense spending. By developing integrated capital markets, the SIU can link savings, which we now export to America, to investment needs. Moreover, if this plan is properly implemented, non-EU investors will also think, this is an interesting market. So, we won’t have to cough up the 800 billion euros by ourselves.”
And is it a good plan?
“It is. We really have to become more productive in Europe, due to, for example, the aging population, to achieve economic growth. Because that is not going very fast now. This is the way to do it. Furthermore, with all the dynamics in America, this opportunity is now presenting itself. The rule of law is under pressure, scientists are not allowed to do research on issues that the government does not like, and all sorts of states are imposing restrictions that are causing the large homogeneous market to crumble. Conversely, in Europe, we still have quite a bit to gain. Take that homogeneous market. We could harmonize laws and regulations and you could launch a system for start-ups. Now is the momentum, this is a shot into an open goal.”
What do investors think of this?
“They like anything that will give them higher returns. The danger, however, is that there is often a fairness principle in these kinds of projects. So, all countries should get something proportionate. But that is always a very bad recipe for investments. You just have to finance good companies, even if they are all in Luxembourg. Practice will have to show how exactly this takes shape.”
And will the Dutch citizen with a lot of savings benefit from the advent of a single European finance and investment market?
“The Dutch citizen has a split personality. The Dutch capital owners want the highest return on their money. They will therefore agree wholeheartedly with this plan. On the other hand, Dutch people do not like taking risks. This is a risky project. We are investing in a region that has not always done well. The Dutch, with the euro crisis still fresh in their minds, also do not like sharing risks with other countries in Europe. Yet that deserves another look; we also have an interest in growth in France, Germany, Italy and Spain. We are a trading country, and we make money when those countries do well. So, people need to be convinced of that. Just as much as they need to be convinced of the importance of reforming laws and regulations. In doing so, countries are giving away some of their own autonomy, and giving away autonomy is politically unpopular at the moment. This applies not only to the Netherlands, but also to other European countries. I would therefore say, start with the nice things. For example, arrange a better investment climate through the SIU. That stimulates innovation and immediately creates economic growth. That’s how you set a flywheel in motion.”