Luis de Guindos: Investment, technological transformation and
skills
Speech by Mr Luis de Guindos, Vice-President of the European Central Bank, at the joint
EIBECB conference on investment, technological transformation and skills, Luxembourg, 28
November 2018.
* * *
Introduction
It is an honour to open this joint conference on "Investment, technological transformation and
skills" together with EIB President Werner Hoyer.
The euro area economy is continuing to grow. We have now seen almost six consecutive years
of expansion, with growth that is broad-based across countries and sectors. During this
recovery, the countries that were most affected by the crisis have regained competitiveness
thanks to a combination of accommodative monetary policy, fiscal consolidation and structural
reforms.
But challenges remain in the form of low trend growth compared with other advanced
economies, and persistently high public and private debt levels in a number of euro area
countries. Further efforts are therefore needed to strengthen productivity growth and boost
productive investments to lift long-term potential growth. In turn, this higher growth will help
reduce debt burdens, create fiscal space and raise long-term equilibrium interest rates,
bolstering monetary policy's ability to support macroeconomic stabilisation.
In that context, the discussions taking place at this conference are both timely and relevant for
policymakers. In the rest of my opening remarks, I want to highlight the potential productivity
benefits - and also the challenges - arising from digitalisation. I will also briefly comment on a
few areas where policy changes are needed to promote the greater diffusion of technology.
Digitalisation and its implications for productivity
The global economy is transforming fast, with an ever-increasing share of technological and
digital content. The proportion of total investment accounted for by intangible assets, reported as
intellectual property products in the national accounts, has almost doubled over the last two
decades. And not all intangible assets are fully captured in national accounts and corporate
1
balance sheets under current reporting standards. Other measures, such as connectivity and
2
digital public services, also show a steady rise.
3
A recent ECB survey of large companies finds that digitalisation is viewed as something that
increases productivity, thanks to knowledge-sharing and more efficient production processes.
But the impact of digitalisation extends beyond productivity; it also affects potential output,
4
competition, employment and economic welfare.
Let me give some examples. Automation and the increasing use of robots and artificial
intelligence are changing the relative prices of labour and capital, and the allocation of resources
between them. The internet, social media, cloud computing and big data analysis are affecting
competition by altering relative prices and market shares between, for example, small and large
firms.
But the overall impact of digitalisation on productivity and potential growth does not depend solely
on innovation and the creation of new technology. For new technology to truly achieve its full
effect, it has to spread from its creator to other businesses in the economy.
Yet at present, firm-level productivity appears to be becoming more dispersed, as firms rich in
intangible assets are scaling up investment much more than firms that are lagging behind. This
divergence seems to be related to inefficiencies in the reallocation of resources from the least to
the most productive firms within each sector, rather than inefficient allocation between sectors.
5
Factors that drive such capital misallocation appear to be partly related to market rigidities, poor
policy reactions and banks' reluctance to address their non-performing loans.
There are three main avenues for policymakers to harness the benefits of technological progress
and drive an improvement in living standards. The first is to encourage education policies that
mitigate the impact of technology on some workers. The second is to bolster competition to
provide businesses with incentives to invest in technology. And the third is to ensure we have a
financial sector that is capable of supporting innovation and growth.
Digitalisation and demand for skills
Introducing new technologies appears to reduce the demand for low and medium-skilled
6
workers. At the same time, it creates new jobs which require highly skilled workers and provides
7
opportunities for further. These changes already appear to be having repercussions for wage
distribution and working conditions.
These challenges come at a time when labour's relative contribution to potential growth is
diminishing in the context of an ageing population. All else being equal, unfavourable
demographics increase the relative importance of capital deepening for underpinning potential
8
growth.
Education and infrastructure policies promoting entrepreneurship could smooth the transition and
mitigate adverse effects on low-skilled workers. These include retraining and lifelong learning
opportunities. We have witnessed a sharp increase in the participation rate of older workers
during the past decade. Continuing this trend by providing opportunities for this part of the
population to reskill and remain connected to the labour market would help mitigate the impact of
ageing on growth.
Policies to support competitiveness
Policies to boost competitiveness and attract investment in Europe are an important step in
promoting the diffusion of technology, and are rightly a recurrent theme of this conference.
Research has revealed a number of factors that can inhibit competitiveness and impede
9
investment decisions. Beyond cyclical and financial factors, such as weak demand, uncertainty
10
and excessive corporate debt levels, structural factors, such as weak economic institutions
and rigid product and labour markets, can also play a negative role.
To encourage the effective diffusion of technology, structural and macro conditions favouring the
market entry and expansion of productive firms, as well as the exit of persistently unproductive
firms, need to be in place. To ensure a level playing field for firms in the area of new technology,
policies are also needed to settle issues of ownership, tax treatment, property rights, competition
and product regulation associated with intellectual assets. Reforming insolvency regimes would
break the vicious circle of weak banks and zombie firms having an adverse impact on
11
productivity.
Investment finance
That brings me to my last point. The widespread diffusion of technology requires financing that is
conducive to innovation and growth. Monetary policy has played a key role since the financial
crisis by helping to lower financing costs and increase access to finance. It will continue to
maintain favourable liquidity conditions and an ample degree of monetary accommodation.
But what matters most in the long term is deep and integrated financial markets. Equity funding,
in particular, is becoming increasingly important, as confirmed by the positive impact of deeper
12
stock markets on growth in high-tech and patent-intensive industries. Investment in new
13
technology and intangible assets seems to be more reliant on firms' internal funding. This
14
appears to be related to the characteristics of intangible investment, such as the low market
value and the sunk cost nature of production, making it harder to use as collateral for external
funding. So completing the capital markets union is of paramount importance.
We also need more ambitious policies aimed at increasing the supply of private equity, and
15
especially of early-stage venture capital. The development of fintech has the potential to
16
expand access to credit and other financial services, in particular for small businesses.
More broadly, to ensure an attractive investment environment in the euro area we should seek to
complete the banking union, ensure adherence to fiscal rules and fully implement structural
reforms.
Conclusion
Let me conclude.
Boosting productivity growth and ensuring the wide diffusion of technology is crucial to achieving
a long-term increase in living standards in Europe. There are many facets to this challenge, as
the broad and ambitious agenda for this conference shows. I look forward to the discussions.
1
Human capital, knowledge in databases, organisational capital and brands are examples of assets not covered
in the national accounts. See also European Central Bank (2018), "Investment in intangible assets in the euro
area", Economic Bulletin, Issue 7, November; and European Commission (2017), "Unlocking investment in
intangible assets in Europe", Quarterly Report on the Euro Area, Vol. 16, No 1, pp. 23-35. However, in Ahmad,
N., Ribarsky, J. and Reinsdorf, M. (2017), "Can potential mismeasurement of the digital economy explain the
post-crisis slowdown in GDP and productivity growth?", Statistics Working Papers, OECD, the authors conclude
that, while mismeasurement may occur, its magnitude cannot alone explain the slowdown in measured GDP
growth or multi-factor productivity growth after the crisis.
2
See the box entitled "The role of digitalisation in shaping developments in potential output and the output gap in
the euro area", in European Central Bank (2018), "Potential output in the post-crisis period", Economic Bulletin,
Issue 7, November.
3
See European Central Bank (2018), "Digitalisation and its impact on the economy: insights from a survey of
large companies", Economic Bulletin, Issue 7, November.
4
See the box entitled "The role of digitalisation in shaping developments in potential output and the output gap in
the euro area", in European Central Bank (2018), "Potential output in the post-crisis period", Economic Bulletin,
Issue 7, November.
5
See Gamberoni, E., Giordano, C. and Lopez-Garcia, P. (2016), "Capital and labour (mis)allocation in the
euroarea: some stylized facts and possible determinants", Working Paper Series, No 1981, ECB, November.
6
See International Monetary Fund (2018), "Capitalizing on Knowledge-Based Capital", Euro Area Policies - Staff
Report for the 2018 Article IV Consultation with Member Countries, June, p. 18.
7
There is substantial uncertainty surrounding estimates of the net impact of new technologies on employment.
For instance, the World Economic Forum article on "Understanding the impact of digitalization on society" states
that "current estimates of global job losses due to digitalization range from 2 million to 2 billion by 2030". At the
same time, it also states that "digitalisation could create up to 6 million jobs worldwide between 2016 and 2025
in the logistics and electricity industries".
8
Meanwhile, presumably higher depreciation rates - related to the rising share of intangible assets - require
higher rates of investment to maintain the capital stock.
9
See, for instance, Consolo, A., Langiulli, M. and Sondermann, D. (2018), "Business investment in euro area
countries: the role of institutions and debt overhang", Applied Economics Letters, July.
10
See Barbiero, F., Popov, A. and Wolski, M. (2018), "Debt overhang and investment efficiency", Working Paper
Series, ECB, forthcoming; Kalemli-Ozcan, S., Laeven, L. and Moreno, D. N. (2018), "Debt Overhang, Rollover
Risk, and Corporate Investment: Evidence from the European Crisis", NBER Working Paper 24555; Gebauer,
Setzer, Westphal (2018), Journal of International Money and Finance.
11
See Storz, M., Koetter, M., Setzer, R. and Westphal, A. (2017), " Do we want these two to tango? On zombie firms
and stressed banks in Europe", Working Paper Series, No 2104, ECB EWP; IWH Discussion Papers 13/2017
and Andrews and Petroulakis (2017), "Breaking the shackles: zombie firms, weak banks, insolvency
frameworks and implications for productivity", OECD Working Papers, No 1433, OECD, November.
12
See Kremer, M. and Popov, A. (2018), "Financial development, financial structure, and growth: evidence from
Europe" in ECB, Financial Integration in Europe, May, pp. 65-97.
13
See Falato, A., Kadyrzhanova, D. and Sim, J.W. (2013), "Rising Intangible Capital, Shrinking Debt Capacity, and
the US Corporate Savings Glut", FEDS Working Paper Series, No 2013-67, Federal Reserve System,
September.
14
For more details, see Haskel, J. and Westlake, S. (2017), Capitalism without Capital - The Rise of the
Intangible Economy, Princeton University Press. See also the appendix entitled "Characteristics of intangibles
per asset type" in European Commission (2017), "Investment in the EU Member States: An Analysis of Drivers
and Barriers", European Economy Institutional Papers, No 062, October, p. 80.
15
See Popov, A. and Roosenboom, P. (2012), "Venture capital and patented innovation: evidence from Europe,"
Economic Policy, Vol. 27(71), July, pp. 447-482.
16
See "The Opportunities and Challenges of Fintech", speech by Governor Lael Brainard, Federal Reserve Board
of Governors, at the Conference on Financial Innovation at the Board of Governors of the Federal Reserve
System, Washington, D.C., 2 December 2016; and "The Promise of FinTech - Something New Under the Sun?",
speech by Mark Carney, Governor of the Bank of England, at the Deutsche Bundesbank G20 conference on
Digitising finance, financial inclusion and financial literacy, Wiesbaden, 25 January 2017