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

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 impact on 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 2007 (actual) 2012 (actual)2014201520162017201820192020 South EurozoneBusiness as usual 21.714.5 12.412.1 12.212.312.5 South EurozoneInvestment-led14.014.414.915.516.016.416.7 North EurozoneBusiness as usual 17.716.4 15.115.015.215.315.515.615.8 North EurozoneInvestment-led15.916.216.316.416.516.616.7 United KingdomBusiness as usual 15.911.0 10.610.710.911.111.311.511.8 United KingdomInvestment-led11.211.411.812.212.713.113.5

12. Total employment (millions of persons) 2000200820122014201620182020 South Eurozone Historical47.755.852.8 Business as usual 51.451.3 51.4 investment-led 52.153.053.754.3 difference 0.71.62.42.9 North Eurozone Historical79.185.686.3 Business as usual 86.186.887.387.4 investment-led 86.787.888.388.5 difference 0.61.01.1 United Kingdom Historical27.329.228.9 Business as usual 28.628.7 28.6 investment-led 28.829.129.329.4 difference 0.20.50.60.8

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 Banks very 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