Mario Draghi is a socialist (sort of)
OK, as an effort at click-bait this headline may not the most convincing, but now that I’ve got your attention, let me update you on this week’s Brussels Economic Forum (which definitely ain’t a click-bait term!), where investment was a recurring theme.
The boss of the European Central Bank was able to step away from the usual lines about cross checks and five-year inflation expectations to look at some of the wider issues confronting the European Economy.
In particular things that politicians ought to be doing to make the economy grow faster in the short term, and lock in that growth for the longer term – and the consequences of not doing so.
Which is where this corny headline comes in – because he devoted a goodly chunk of his keynote speech to unemployment, particularly youth unemployment, and the long-term scarring effects it has (lower lifetime earnings, social disengagement, lower economic output, less social mobility).
Not the stuff we usually associate with the ECB, but Draghi was trying to link the dry old world of monetary policy to the real world of real lives that are being wasted by the ongoing lack of a big political response to the economic crisis that has consumed almost a decade of life in Europe.
His pitch was simple – the ECB has done what it can to restore growth with zero interest rates and a wall of cash.
Growth has returned to the eurozone area, but it’s too low, and is only growing very slowly – far too slowly – and is well below potential output.
The danger is that a long period of growth below output will mean a lack of confidence that growth will ever pick up, leading to a lack of investment, which will guarantee that growth does not pick up to potential – thus permanently damaging potential output, so that it fails to meet the very modest actual growth. The human consequences of this are that too many people will stay unemployed for too long, damaging both themselves and their economies.
And there is the problem of the ageing population – what Draghi called the “speed limit” on growth in Europe.
It’s not something we in Ireland have thought much about, because our growing population has been growing at the young end of the age curve.
But that is changing right now, as we have reached the demographic tipping point where the proportion of older people in the population starts to outgrow the proportion of young, working-age people.
Draghi is among those who think there is a way out of the demographic issue, which is to raise productivity among the workforce.
This is not the same as forcing people to work harder or longer, rather it is a measure of the use of new technologies and knowledge-based skills in the economy, and the diffusion of those technologies and skills.
The problem here is the gap between the “frontier” firms, which are pushing the knowledge and technology envelope very far, and the run-of-the-mill businesses which are not.
The good frontier businesses in Europe are as good as those anywhere, but the productivity gap between them and the poor performers is growing.
This has had an effect on the relative performance of Europe and the US, according to Draghi, who says tackling the productivity challenge cannot be delayed.
Whether it is “within-firm” growth by the diffusion of innovation and better management techniques, or “across firm” movement of resources from the least productive to the most productive firms, Europe is lagging behind.
Even though we buy plenty of computers and software here in Europe, we don’t seem to use it as well as US firms have done, and Draghi claims most of the relative weakness of the European private sector since the 1990s is due to this.
And the trend is exacerbated by the shift from manufacturing to services in the advanced economies.
The good news is that there is plenty of scope for improvement in Europe, and of bringing more firms to the productivity frontier.
And he says the US debate about the diminishing productivity gains from ICT investment that are starting to manifest is less relevant to Europe, where the gains have yet to be realised.
Still, that’s all in the realm of “easier said than done” – so how to get from here to the promised land of higher productivity and higher employment and wage levels (which Draghi said would flow from higher productivity)?.
The structural barriers to knowledge based investment should be the target of political fire, according to the ECB chief.
A quick win from political action would, he says, be the completion of a European single market in services, which would speed up the transmission of best practices in management and innovation from the frontier firms to the laggards.
Or else the laggards would fail.
And letting them fail also seems to be a key part of Draghi’s message to politicians (which is where my headline completely falls flat).
He said the best firms need to be able to expand quickly and get resources – and that means having policies that prevent resources becoming trapped in inefficient companies, and having capital markets that transmit money quickly to the best firms.
But hang on, I hear you say – isn’t Draghi the boss of the ECB, the same ECB that insisted governments prop up failed banks, thus trapping vast quantities of money and leaving the financial landscape populated with more zombies than any given edition of the “Walking Dead”?
Yup, that’s them. But that was then, and this is now.
The creation of a single bank supervisor, a resolution mechanism (but not yet a proper deposit insurance scheme) should make zombie-slaying a bit less disruptive, but it’s clear that Draghi thinks it is in the normal world of “real” businesses that the red tooth and claw of capitalism should be seen more often.
But he says this can’t be perceived as a threat by workers – so states will need proper social safety nets, particularly ones that ease the skills mismatch and channel the right workers to the right jobs.
And ones that provide opportunities for training and skilling for younger and older workers.
The development of human capital by the right kind of social investment is, he says, crucial, and the EU’s role should be to promote the spreading of best practice among member states.
Of course it’s easy to preach, and Draghi acknowledged there are many political reasons to delay reforms.
But he was adamant there are no good economic reasons to put it off any longer.
So where do that leave us in Ireland in terms of this reform agenda?
Some of the figures suggest a pretty extreme range between the best and worst aspects.
The frontier firms in Ireland are definitely at the frontier, with lots of really well run, knowledge based, technology using businesses.
And they are helping to drive the emergence of a capital market that isn’t dependent on the banks.
There is an extremely high level of progression to third-level education among school leavers, and the overhaul of Atate training services started years ago.
So the good stuff is good.
But there is bad stuff too, and unfortunately it’s pretty bad. The participation rate – the percentage of the population that regards itself as part of the workforce – is very low in Ireland (about 59% versus 74% in the UK).
Indeed Draghi noted that the gap between best and worst performers on this score was about 15 percentage points.
And while our third-level output is impressive, we also have an extremely high level of NEETs – young people not in employment, education or training.
And this is not a recent phenomenon either – even during the height of the economic boom of the Tiger years, Ireland had one of the highest NEET rates in the EU.
This is a deep-seated socio-economic problem for Ireland, one whose costs include not just an inability to supply the raw material for economic growth, but more importantly cover the damage wrought on the very society the economy is supposed to serve.
This includes the third generation of workless households and the multiplicity of social and human costs that that entails.
The figures do indeed suggest a need for concerted investment in social development, to raise the speed limits on economic growth.
Now that a banker from Frankfurt is saying so, maybe the political system (and the chattering class that feeds off it) will pay more attention.
Especially as said banker has created the financial conditions in which concerted government action is both possible and necessary.
Which includes investment. More on this anon…
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