04. 12. 2023 16th cinco dias business innovation awards ceremony, 2023 * madrid pablo hernandez de cos go verno r * english translatio n fro m the o riginal in spanish good morning everyone. it is an honour to take part in the cinco dias business innovation awards ceremony and to be able to congratulate all the award winners for their contribution to business innovation. as leading economists such as paul romer, robert lucas, philippe aghion and peter howitt underlined in their pioneering work, innovation is the main driver of economic growth. in a standard macroeconomic model, growth is often limited by diminishing returns on productive capital accumulation, but innovation, which faces no such constraints, is an inexhaustible source of growth. spain ’ s negative investment gap in research and development and innovation ( r & d & i ) relative to the euro area as a whole has adversely affected the dynamics of our productivity and gdp per capita. in particular, between 2000 and 2021, the ratio of r & d & i expenditure to gdp stood at 1. 2 % in spain, 0. 8 percentage points ( pp ) below the figure for the euro area overall. 1 both public and, especially, private sector r & d & i investment contributed to this gap. at the same time, productivity ( measured by gdp per hour worked ) and gdp per capita in spain in 2022 stood at 14 % and 17 %, respectively, below the euro area average. this lack of innovative dynamism points to structural weaknesses in d ifferent aspects, especially including the corporate funding structure, business demographics, the level of competition, human capital and the role of general government. i would like to briefly address each of these now. 1 funding structure in terms of funding, despite significant improvements in recent years, 2 spanish firms – in comparison with others in the euro area – continue to be heavily reliant on bank loans and have relatively limited access to venture capital. this funding structure has a negative impact on their ability to implement innovation projects, which by their very nature have a relatively high risk profile. 3 this structure can also contribute to a misallocation of resources between firms, reducing aggregate productivity. this o utco me also holds true if measured by investment in intangibles, which, in addition to r & d & i investment, also includes so ftware, databases, design, advertising and o rganisational

of a common euro - based safe asset would be particularly important in times of stress, as it could mitigate the possibility of monetary policy transmission being hampered in a context of fragmented bond markets. the effectiveness of monetary policy should be independent of the existence of country risk in the euro area. similarly, a sufficient supply of safe assets would also facilitate the transmission of non - conventional monetary policy, by expanding the assets available in the event of a large asset purchase programme. it would allow monetary policy to expand the ecb ’ s balance sheet without squeezing liquidity in national sovereign markets. more generally, the literature has shown that a shortage of safe assets leads to a lower economic growth environment when monetary policy is constrained by the effective lower bound on interest rates. this is so because the scarcity of safe assets pushes the natural rate downwards. if central banks are constrained in their ability to lower nominal rates, a disequilibrium emerges in asset markets, giving rise to a “ safety trap ”. in this case, households, faced with deflationary pressures and ( relatively ) high real rates, have an incentive to save and postpone consumption, and firms, faced with low demand and high risk premia, to postpone investment. the result is a recession or a period of sluggish growth, which, in turn, reduces the wealth of savers and their demand for safe assets. 7 do we have alternative ways of escaping this trap? we require, following my earlier metaphor, an update to our electricity grid. on first thoughts, two ways to expand the set of safe euro - denominated assets spring to mind. on the one hand, euro area countries with a sovereign bond that is not considered sufficiently safe should focus on reducing their idiosyncratic sovereign risk, in particular by implementing credible medium - term fiscal caballero, farhi and gourinchas ( 2017 ), “ the safe asset shortage conundrum ”, journal of economic perspectives, 31 ( 3 ). 6 / 8 plans, in order to jump on the safety bandwagon. on the other hand, increases in the amount of current safe instruments could mitigate the safety trap. however, this strategy may not be enough to ensure a sufficiently stable and ample supply of safe assets. first, its success depends on the capacity of the less safe countries to become safe. the sovereign debt crisis has shown that it is not sufficient to start from a low level of debt and a budget surplus, as was the