SUERF - The European Money and Finance Forum, Vienna
The economic development of the European Union is hampered by insufficient private and public long-term investments. This weakness is seen as a rationale for state intervention, and numerous projects are discussed and implemented to find new ways to mobilize private capital for long-term investments. Examples are the Investment Plan for Europe, the EU Project Bond Initiative, the Capital Markets Union, or, on a national level, the investment plan of a commission appointed by the German Federal Minister of Economic Affairs. For an economic evaluation of this policy approach, the following paper concentrates on the proposal of a targeted European savings account in the European Commission’s Green Paper “Long term financing of the European economy” from March 2013. The first result is that the rationale for state intervention stands on a weaker basis than it seems: We fail to establish a dependable link between the ongoing depression of long-term investments in some European countries and a market failure in the market for the financing of such investments. Investment capital is abundant. Public long-term investments are restrained due to political priorities in favor of short-term consumption, and private long-term investment suffers from the weakness of the real economy and an adverse political environment. Secondly, the state can only imperfectly perform the tasks of a financial intermediary, i.e., delegated monitoring, liquidity provision and delegated contracting. In particular, it cannot enter into the specific long-term relationships that are important for the financing of SMEs at least in some European countries. Thus, functioning and valuable credit relationships might get crowded out by a statesponsored credit business of inferior economic value. Both the costs of the subsidy and the potential losses from increased credit risk would have to be covered by the tax payers. The fact that the targeted European savings account and similar approaches like the “citizens’ fund” as a component of the German investment plan intend to mobilize retail investors’ money creates special concerns. Such subsidized accounts would crowd out the common bank deposits and thereby weaken the stability of the refinancing base of retail banks. Risk discipline is reduced, and the likelihood of panic runs increases. Overall, this could lead to a significant increase of systemic risk.