Long-term investment: public banks at the center of the game

In developed countries, particularly in Europe, investment has been sluggish since the 2008 crisis. And yet, money is abundant and there are many needs, especially in regard to long-term, growth-enhancing investments. But private investors are paralyzed. Is there any way out of this down-beat economic environment? Institutional investors are at the center of the game. Among them, public banks and deposits funds can play a significant role. How have these secular institutions returned in the spotlight?

Even though on a global level, the world is flush with liquidity, investment dynamics are very different depending on geographical areas. As observed during the past fifteen years, there is a marked contrast between developed and emerging economies. Investment reaches 33% of GDP in India and 49% in China, against 20% in the US and 17% in the UK (2013 figures).

This trend is expected to continue during two or three decades: it reflects an economic catching up characterized both by an investment effort and the hope of better returns – a phase of expansion, similar to the one experienced by Western Europe after 1945. But this explanation isn’t enough. The 2008 crisis further increased the gap, causing a real failure of investment in a number of developed countries.

This is especially true in Europe. According to Eurostat, between 2008 and 2013, investment decreased by 11% in the 28 member states of European Union and by 12% in the eurozone. European countries most affected by the crisis have suffered a violent contraction in gross fixed capital formation: Italy (–25%), Portugal (–36%), Spain (–38%), Ireland (–39%), Greece (–64%). Against this bleak backdrop, France is an exception, with a stable and relatively high investment rate (22% of GDP). As for Germany, which stood out in the early 2000s by a low rate of investment, it is one of the few European countries where investment has increased since the crisis (+7% in value, 2% in volume).

This weak investment severely undermines economic growth, both in the short and long term. In the short term, less investment translates into less demand addressed to firms. In the long term, it accelerates the aging of infrastructure and production facilities, i.e. the production potential fading out, and thus erodes competitiveness. Economic uncertainties always slow down private investment and public investment is stopped in most countries, because of the focus on reducing deficits and reorganizing public spending.

And yet, there still are many investment needs. Major transitions are at work in many fields – energy, demography, the economy – and call for new investments: energy efficiency and environmental protection, adaptation of living spaces (including housing for an aging population), but also investments in the human capital, R&D and innovation. In the United States and Germany, economists regularly point out the investment shortfall in public infrastructure. Elsewhere, other projects suffer from a lack of capital. When the Juncker investment plan was adopted on December 18, 2014 at the European Council, over 2,000 projects awaiting 1,300 billion euros of funding were identified.

Where and how will the necessary resources to fund these investments be found? How can savings be transformed into long-term investment when savers’ profitability requirements are increasingly short-sighted and when the evolution of prudential regulations has led some long-term investors, such as insurance companies, to withdraw from markets such as real estate? How can investments be made for future growth when everyone, households, businesses, governments, think first about resolving their immediate challenges?

The model offered by deposit funds and national public banks offers an answer to these questions. For their mission is to invest by serving economic growth in the long term.

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