Growth and competitiveness in the euro area
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Panel contribution by Luis de Guindos, Vice-President of the ECB, at The European House-
Ambrosetti Forum, Cernobbio, 7 September 2019
 Growth, investment and competitiveness are topics of utmost relevance for monetary policy.
Investment trends and productivity growth are key determinants of the potential growth rate of the
economy. Measurement challenges aside, the resulting output gap - the deviation of actual economic
activity from its potential - is a key driver of inflation over the short and medium term.
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Today I will focus on the factors behind weak investment and productivity, on the remaining barriers to
competition and on the importance of deepening Economic and Monetary Union (EMU) and
completing the capital markets union (CMU) to enhance the attractiveness of the euro area.
Let me start by looking at why investment has been so weak in Europe in recent years, despite
historically low levels of financing costs.

Anaemic business investment dynamics[1] have been observed in many advanced economies, but
especially in the euro area, Italy being a case in point.

Investment has been exposed to a number of adverse shocks, which slowed its return to pre-crisis
levels.[2] The crisis was followed by a protracted adjustment of capital overhangs and high corporate
indebtedness,[3] related to unsustainable investment and credit patterns before the crisis. The
subsequent economic recovery, starting around 2013 and driven by cyclical accelerator effects, was
particularly labour-intensive and firms appear to have invested relatively less in equipment. Global
trade, which is particularly tilted towards investment goods in many euro area countries, has slowed
markedly since the end of 2017, on the back of increasing trade barriers and broad trade policy
uncertainty.
 At the same time, firms' profits, which are the main financing source of investment, have weakened
over the past year in the euro area. High corporate taxation relative to other economic areas has also
weighed on firms' profits and caused investment to shift abroad.[4] While bank lending has become
easier, thanks to the lower financing costs and easier access to finance induced by monetary policy,
equity finance is lagging behind in Europe. Economic policy uncertainty has also played a part in
driving up hurdle rates[5] of investments as well as firms' cash holdings, making them net lenders.

Longer-term structural factors are also at play. With increasing digitalisation,[6] a growing share of
investment is gradually being directed towards intangible assets.[7] This might not be fully accounted
for in national and firms' accounts. Firms tend to invest less in a declining and ageing economy, unless
labour could be replaced by capital. Finally, production in advanced economies is gradually shifting
from manufacturing to services,[8] where equipment matters less.
Weak investment since the crisis has been accompanied by slow productivity growth across
virtually all advanced economies.
Labour productivity growth had already begun slowing well before the crisis. Since 1995 it has

averaged 0.3% per year in Italy, compared with 1% in the euro area as a whole and 2% in the United
States.[9]

There are many underlying reasons for this decline in productivity growth, so let me focus on two: the
role of technology and population ageing.
 Evidence suggests that the failure of firms to adapt to the ICT revolution has played a central role. This
may be why a relatively large number of very small firms are not growing,[10] and the resulting resource
misallocation may contribute to the productivity gap across countries.
 Some see the decline in the rate of radical innovation as a key factor in the global decline of
productivity growth, simply because new ideas are becoming harder to find.[11] Others claim that the
current lull can mostly be attributed to the depth of the Great Recession,[12] or to the fact that
innovation comes in waves, and the economy has only recently begun to commercialise discoveries
from fields such as nanotechnology, genetic engineering and quantum computing.[13]

In any case, innovation is changing the nature of production and employment, with digitalisation having
already transformed how we do business. Automation, in particular, is replacing labour in certain jobs,
particularly in manufacturing, but it has also raised demand for highly skilled professionals in other
areas.[14] Both of these processes are likely to contribute to higher productivity growth, but also to
higher income inequality in the future. A more troubling scenario is one in which artificial intelligence
focuses exclusively on automation. If it provides small productivity improvements over human activity it
may destroy more jobs than it creates - take automated call centres as an example.[15] While past
historical episodes of technological change have always seemed to deliver as many new jobs as they
replace, it is important to remember that automation, by definition, always destroys tasks. The question
is just whether it creates enough new tasks in the process.

Simultaneously, the euro area is undergoing a profound demographic change. Fertility rates have
declined, life expectancy has risen and sizeable cohorts are reaching retirement age.[16]

Ageing societies tend to imply lower labour market participation and lower contribution to potential
growth. Currently, this is only partly counterbalanced by the rising participation rate among older
cohorts, partly as a result of pension reforms, and from movements of workers across borders.
This all points to a need for national economic structures to become more conducive to growth
and competitiveness.

The country-specific recommendations, proposed annually by the European Commission and
endorsed by the European Council, tend to include, for example, dedicated reform recommendations
for product, labour and financial markets in EU Member States.
 Further reducing barriers in product and services markets could help to improve firm entry, exit and
growth.[17] Efficient insolvency frameworks would free up resources by enabling the restructuring or
resolution of persistently unproductive and barely viable firms.[18]
 Labour market regulations and policies could support the uptake of rapid technological change and
improve its distributional impact. Investment in human capital is key in this regard, and reforms that
increase labour mobility could reduce labour market mismatches, support the diffusion of technology
and mitigate the adverse effects of demographics.
The European Single Market has been a powerful tool for stimulating growth and competitiveness,
but its functioning could be further improved.[19]
 The euro area services sector accounts for around two-thirds of gross value added and an even larger
share of employment. Yet the Services Directive, which aims to reduce barriers to trade in services,
has only been partially implemented and does not cover several key sectors.[20] Reinvigorating the
Single Market for services therefore remains a challenge that European leaders will need to tackle
jointly.
 In the same vein, the fragmentation of national corporate tax systems creates market distortions and
impairs the functioning of the Single Market. Therefore, the long-debated Common Consolidated
Corporate Tax Base would be a huge step forwards in deepening the Single Market. It would lower the
administrative costs that firms face and mitigate competitive distortions created by diverse and often
conflicting tax systems.
Deepening EMU and an ambitious CMU would facilitate investment, notably across borders.
 Fostering deep and diversified capital markets that provide a wide source of financing options to
European companies and individuals is one of the CMU's primary objectives. This is key to enhancing
innovation and growth and to strengthening the cross-border dimension of investments in the EU,
thereby promoting deeper integration and development of markets.
 Better-integrated capital markets can also help to enhance the resilience of the euro area and
complement the banking union by facilitating financial risk-sharing. Cross-border financial integration
has not yet exhausted the potential for bringing cross-border private risk-sharing up to the level we
would like to see in EMU. Compared with the United States, where 60% of shocks to GDP growth can
be mitigated through diversification via capital markets, only 20% of shocks to GDP growth are
mitigated in the euro area.[21]
European capital markets are currently small and fragmented. Policies that foster innovation and

market size and that remove cross-border barriers will help develop more vibrant European financial
markets and intermediaries that are able to compete internationally.
 Let me point out here that the creation of a single rulebook for calculating taxable profits throughout
the EU also offers a welcome opportunity for removing the debt bias in corporate taxation.[22] Most tax
systems currently favour debt financing due to the deductibility of interest rate payments from the tax
base, while other forms of financing instruments are not considered. This is an obstacle to a larger
equity base for firms and is therefore a significant impediment to the creation of a CMU.
 Finally, fiscal policy can play a greater countercyclical and stabilising role. Fiscal space should be used
wisely in countries where it exists, while all countries should work towards a more growth-friendly
composition of public finances. Furthermore, a fiscal capacity at euro area level would be a great
achievement that would complement national stabilisers.
Let me conclude.
 It is vital to continue implementing reforms to address the structural challenges facing the euro area.
Reducing barriers to trade in services and disparities in national corporate tax systems could provide a
new impetus to the European Single Market and stimulate investment. Deepening European
integration requires us to pursue an ambitious agenda for the financial system, to push for European
responses within the CMU and banking union agendas and to go beyond tendencies to retrench
behind national borders. Deep European capital markets are crucial to enhancing innovation and
growth and to strengthening the cross-border dimension of investments in the EU.
[1]

Banjerjee, R., Kearns, J. and Lombardi, M. (2015), " (Why) Is investment weak?", Quarterly Review, Bank for International
Settlements, March.
[2]
Working Group on Econometric Modelling (2018), "Business investment in EU countries", Occasional Paper Series, No 215, ECB,
October.
[3]

Consolo, A., Langiulli, M. and Sondermann, D. (2018), " Business investment in euro area countries: the role of institutions and
debt overhang", Applied Economics Letters, Vol. 26, No 7, pp. 561-575, July.
[4]

Wamser, G. (2008), " Foreign (in)direct investment and corporate taxation", Discussion Paper Series 1: Economic Studies, No 15,
Deutsche Bundesbank.
[5]

Carney, M. (2017), Panel remarks at the ECB Forum on Central Banking, June.
[6]
De Guindos, L. (2018), "Investment, technological transformation and skills", speech at the joint EIB-ECB conference on investment,
technological transformation and skills, Luxembourg, 28 November.
[7]

Döttling, R., Gutiérrez, G. and Philippon, T. (2017), " Is there an investment gap in advanced economies? If so, why?", paper
delivered at the ECB Forum on Central Banking, Sintra.
[8]
See Busetti, F., Giordano, C. and Zevi, G. (2016), op. cit.
[9]
See the Banque de France's Long-Term Productivity database.
[10]

Criscuolo, C., N. Gal, P. and Menon, C. (2017), " Do micro start-ups fuel job creation? Cross-country evidence from the DynEmp
Express database", Small Business Economics, Vol. 48, No 2, pp. 393-412, February.
[11]

Gordon, R. (2012), " Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds", Working Paper Series,
No 18315, National Bureau for Economic Research; Bloom, N., Jones, C., van Reenen, J. and Webb, M. (2019), "Are Ideas Getting
Harder to Find?", American Economic Review, forthcoming.
[12]

Mokyr, J. (2014), " Secular stagnation? Not in your life", Geneva Report on the World Economy, VoxEU, August.
[13]
Historically, such general purpose technologies have indeed suffered from substantial implementation lags. See Brynjolfsson, E.,
Rock, D. and Syverson, C. (2019), "Artificial Intelligence and the Modern Productivity Paradox: A Clash of Expectations", in Agrawal, A.,
Gans, J. and Goldfarb, E. (eds.) The Economics of Artificial Intelligence: An Agenda, University of Chicago Press.
[14]
Autor, D. (2015), "  Why are there still so many jobs? The History and Future of Workplace Automation", Journal of Economic
Perspectives, Vol. 29, No 3, pp. 3-30.
[15]
Acemoglu, D. and Restrepo, P. (2019), "  The Wrong Kind of AI? Artificial Intelligence and the Future of Labor Demand", Working
Paper Series, No 25682, National Bureau of Economic Research, March.
[16]
ECB (2017), "Recent developments in euro area labour supply", Economic Bulletin, Issue 6; and Bodnár, K. (2018), "Labour supply
and employment growth", Economic Bulletin, Issue 1, ECB.
[17]

See Anderton, R., Jarmulska, B. and Di Lupidio, B. (2018), " Product market regulation, business churning and productivity:
Evidence from the European Union countries", Research Paper Series, Nottingham Centre for Research on Globalisation and Economic

Policy, October; and Masuch, K., Anderton, R., Setzer, R. and Benalal, N. (eds.) (2018), " Structural policies in the euro area",
Occasional Paper Series, No 210, ECB, June.
[18]

See Andrews, D. and Petroulakis, F. (2019), " Breaking the shackles: Zombie firms, weak banks and depressed restructuring in
Europe", Working Paper Series, No 2240, ECB, February.
[19]

See, among others, in 't Veld, J. (2019), " Quantifying the Economic Effects of the Single Market in a Structural Macromodel",
Discussion Papers, No 94, European Economy, February.
[20]
See Masuch et al. (2018), op. cit.
[21]
See Cimadomo, J., Hauptmeier, S., Palazzo, A. A. and Popov, A. (2018), "Risk sharing in the euro area", Economic Bulletin, Issue
3, ECB.
[22]
See also Draghi, M. (2017), "Sustaining openness in a dynamic global economy", speech at the Economic Policy Symposium of the
Federal Reserve Bank of Kansas City, Jackson Hole, 25 August and de Guindos, L. (2018), "Promoting the stability and efficiency of EU
financial markets beyond Brexit", speech at the Deutsche Bundesbank reception on the occasion of Euro Finance Week, Frankfurt, 13
November.
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