In an attempt to bridge the gap with the United States and China Politicians are now looking at the huge deposits held by euro zone banks with the European Central Bank, amounting to 8.4 trillion euros. As Europe seeks to maintain its position against economic rivals, politicians believe they have a secret weapon: the untapped savings of its citizens. From Italy selling government bonds to households, to French talk of a comprehensive European savings product, or Britain offering tax breaks for investing in British stocks, governments across Europe are seeking ways to mobilize household wealth, according to Reuters.
All of these plans share a basic thinking: “Europe has a large amount of cash that can be directed towards its goals, from the green transition to enhancing military capabilities.” Politicians hope that private money, invested in domestic stocks or government debt, will help close the gap in growth and productivity with the United States and China, which provide huge subsidies to their industries. But critics say such schemes risk disappointing savers, while failing to address fundamental flaws in the European economic model, which they see as discouraging investment.
“It’s a way to invent an easy solution to very complex problems,” said Daniela Gabor, a professor at the University of the West of England. * Idle money Europeans have long saved more than their American counterparts, and the gap has widened recently, perhaps due to uncertainties such as the war in Ukraine. Politicians are now looking at the huge deposits held by banks in the euro zone with the European Central Bank, which amount to 8.4 trillion euros, such as French Finance Minister Bruno Le Maire.
Le Maire, who spoke of money “sleeping” in accounts instead of contributing to prosperity, wants a comprehensive European savings product. Meanwhile, French lawmakers have suggested that savings could be directed towards local defense companies through state-guaranteed deposits. Outside the European Union, the UK government has proposed a new type of account that allows Britons to invest up to 5,000 pounds ($6,301.50) in local companies tax-free. But such schemes have a checkered history.
According to data from consulting firm Analysys, Italians who bought into government-backed funds that invest in local SMEs underperformed global stocks by about 35 percentage points on average over the past five years. Many economists reject the very idea of idle money, pointing out that deposits are a vital source of funding for banks. “The concept of money lying dormant because it is in a bank account is frankly ridiculous, because there is nothing preventing a bank from making a new loan when it has the opportunity,” said Harvard University political economist Benjamin Brown.
In fact, data from the European Commission and the European Central Bank show that European companies have consistently put finance at the top of their bottom line for nearly a decade, and that they generate enough revenue to finance all their investments. Brown and others argue instead that lower investment in Europe reflects poor growth prospects compared to the United States. They say multinationals investing abroad mean the eurozone is also exporting capital.
“They have a solution looking for a problem,” said Dirk Schumacher, head of European macroeconomic research at Natixis. “I don’t think corporate investment spending is being held back by tight financing conditions, but rather by a lack of demand and a lot of structural changes.” He cited competition from China, rising energy prices, and a shortage of skilled workers among other factors. Former European Central Bank President Mario Draghi is scheduled to report to EU leaders this summer on the issues holding Europe back.
* Public debt Some governments borrow directly from citizens. Italian households were the largest buyers of the country’s public debt last year, with recent bonds being introduced as shorthand for a cruise vacation (this phrase is used to promote government savings bonds, by linking their purchase to fulfilling the dream of a pleasant cruise vacation). Britain announced new savings bonds, joining Belgium and Greece. The main advantage of utilizing individual investors is their stability compared to professional investors. In other words, they are less likely to buy and sell bonds frequently based on short-term market changes.
“There is a great savings product that has worked well throughout history, and it allows the state to direct public funds to priority areas, which is sovereign bonds,” Brown said. He and other economists said increased investment by the state, which does not need to generate an immediate financial return, should be part of the solution to long-term challenges facing Europe such as building a greener economy.
But by giving governments that have often been running large deficits since the outbreak of the Corona virus, access to a pool of patient capital (investment strategies that provide social and environmental returns in addition to financial returns with an emphasis on long-term returns), these bonds Targeting retail risks undermining efforts to control public spending.