07 June 2018

National Bank of Denmark's Rohde: Europe - an economic powerhouse in the future?

[...]the recent growth performance in most parts of Europe is in line with that of other advanced economies. No better, no worse. The European Union is home to a diverse set of countries. They are at quite different stages of economic and institutional development. Just looking at averages is too simplistic.

Europe is tale of three stories: North, South and East.

The enlargement of the European Union towards the East has been an economic success. But it has not been without challenges. But the level of prosperity in the new member states has been converging towards that of the core. And it has supported the overall growth in Europe. There is certainly an element of catching up behind this. And moving up the value chain will become increasingly important to keep momentum. The South is the main source of Europe's dismal economic reputation. It has been a clear growth laggard over the past decade. Countries in the south have been drifting away from Germany's GDP per capita since the financial crisis. While much has been done to restore competiveness, many challenges have been left unaddressed. There is still a clear need to tackle structural imbalances, rigid labour markets and weak productivity dynamics. The North is home to the most prosperous and competitive economies in Europe. Their economic performance over the past ten years has kept abreast with the USA and other major advanced economies. While the Nordic region is in good shape, it will have to remain on the toes to stay ahead in the future. When taking stock of these three stories, it is not evident to me that Europe is underperforming. GDP growth in the European Union reached 2.4 per cent in 2017. Not since the boom period in the mid-2000s we find higher growth rates. In sum, Europe is better than its reputation. [...]

I see two key challenges to innovation in Europe. Europe faces shortage of skills. Eight out of ten innovating companies consider the lack of skilled staff a barrier to investment. Well-trained workers are essential for creating an economic powerhouse in the future. Strengthening venture capital would support creative disruption. An OECD study suggests that the US venture capital market is significantly larger than the European. Patterns are changing in investment finance. Europe is a bank-based economy.

But bank credit is not always ideal for intangible investments. These investments are riskier and harder to collateralize. Access to a broad range of financing sources provides companies with better opportunities for innovation. In this respect the Capital Markets Union Initiative has an important role to play by stimulating alternative sources of risk financing.

The decision of the United Kingdom to leave the European Union is regrettable. But Brexit has had at least one positive side effect: It has increased the awareness in the remaining 27 EU member states of the significance and benefits of the Single Market.

The Single Market provides the citizens and the companies in the EU with incredible opportunities. It provides access to purchase and offer goods and services freely in a huge market place. Via Brexit, it has become crystal clear just how big an advantage this is. It now seems to be more widely accepted, that the maintenance and continued development of this market is a key driver for economic growth in our countries. The Single Market is far from fully developed in all sectors. One example is the banking sector. There has been a tradition to see banks as companies requiring special protection – and ultimately government support in order to survive. With the Banking Union a big step has been taken in the direction of allowing banks to function on market terms – without compromising financial stability. The Single Supervisory Mechanism and the Single Resolution Mechanism go a long way in establishing a level playing field for banks.

It opens up for much wider cross border competition in financial services.

Furthermore, the common framework for recovery and resolution of banks (the BRRD) is essential for ensuring that a failing bank – as any other kind of private company – may be resolved without the use of government funds. In other words: Give banks the right to fail! The Danish government has announced that a decision on Denmark's participation in the Banking Union will be taken by the autumn of 2019. While fully acknowledging that it is a political decision, it is our view in Danmarks Nationalbank that it would make good sense for Denmark to join. Danish banks face competition in the Nordic region but in reality not on a European scale. We are making a great effort to handle the challenges arising from cross border banking in the Nordic countries through numerous arrangements and agreements between relevant authorities. The Banking Union provides a solution to these challenges on a European scale. Furthermore, the increased competition following from joining the Banking Union would be healthy for the Danish financial sector. In the Banking Union Danish banks would compete on harmonized terms in a much larger market. Increased competition is the path to more growth – and indeed to more favourable conditions for consumers and non-financial companies. If you ask the telecom industry today, they might tell you that the life was cosier before the liberalisation of their industry. We have seen this in many areas, for example in telecommunications. This is a key reason why we recommend that Denmark joins the Banking Union. 

Joining the Banking Union would mean that we fully join the Single Market for banking services. It would be to the benefit of citizens and companies, but not necessarily to the banks. [...]

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