Trust in people and faith in the future
The Eurozone finance ministers launched the 500 billion euro European Stability Mechanism (ESM) in Luxembourg on Monday at the ECOFIN meeting. Meanwhile, at the conference of the Long-term Investors’ Club (LTIC), Vassos Shiarly, Cyprus’ finance minister, said that Europe needs to adopt a growth strategy aimed at boosting investment and promoting competition.
The Long-Term Investors’ Club (LTIC) held its fourth international conference in Luxembourg at the European Investment Bank (EIB). LTIC has 15 members from major institutions around the world, in particular from G20 countries. The Club’s objective is to bring together worldwide institutions, sovereign wealth funds, pension funds, banks, policy makers and others to deliver the message that long-term investment is the key to ensuring financial stability and sustainable growth.
In his opening speech, Cyprus’ finance minister Vassos Shiarly underlined that this year’s LTIC conference comes at a very crucial time for the global economy as the sovereign debt crisis continues to affect many countries, especially the Eurozone states. “Four years after the beginning of the financial crisis, the world economy remains fragile, while unemployment has reached alarming levels. Growth has weakened in many countries, which has put the social and economic fabric under stress. Risks are mounting, public finances are on the edge and uncertainty has intensified. People are suffering and they are exposed to poverty. We need to create trust in people and faith in the future”.
That is why he emphasises that great courage and new initiatives are required: adopting a new growth strategy with policies aimed at boosting investment, freeing up product and labour markets, deregulating business and promoting competition are some of them. Some of these structural reforms will be politically difficult to get through, Mr Shiarly admits, and their benefits need time to become fully apparent. But setting a clear pathway will underpin public confidence in Europe’s long-term growth.
Even more pressing, the labour market is in dire straits. The crisis has left behind a vast number of unemployed people. This situation threatens the livelihood, security and dignity of millions of people across the world. “This crisis will not be over until unemployment decreases significantly. We should not expect that growth alone will create jobs but, rather, we must set job creation as priority using the whole range of policy tools and making the financial sector one that supports the real economy. We must also strengthen social cohesion so that future generations will have the same opportunities that our generation has enjoyed”.
Ulrich Schröder is Chief Executive Officer of Kreditanstalt für Wiederaufbau KWF (Reconstruction Loan Corporation) and President of the Long-term Investors’ Club. He reassured the audience by saying that despite the press reports, Germans have an interest in keeping Europe and the Euro alive and that his countrymen are prepared to do all they can to contribute to that. “We haven’t forgotten what our European and American friends have done after the Hitler period. The same can be said for our reunification period”.
The common conviction of the 15 members of the Long Term Investment Club is that long-term financing is needed. Why? Because putting Europe back on the path of sustainable growth requires massive long-term investment in sectors such as infrastructure, small and medium sized enterprises (SME’s), and climate change. Because of the crisis, many public budgets are severely constrained and the capacity to provide long-term financing has diminished.
According to Mr Schröder, he was previously introduced there are two trends that are somewhat worrying. “A lot of banks don’t have a convincing business model and a lot of them are still lacking investor confidence. That has an impact on long-term financing, because if you, as a financial institution, want to finance long-term you have to be able to fund yourself. Regulation is the second development. We see a retraction in banks’ balance sheets with deleveraging. What’s more, banks are retracting from foreign markets and focusing more on their domestic markets. This is not good news because long-term funding is mostly international”.
The LTIC’s goal is to see find out how new investor groups can be persuaded to make long-term funding happen. In order to attract insurance companies, pension funds and wealth funds, its members have to share their analysis with those who want to get involved. Mr Schröder predicts that there will be a split market, with some institutions involved in structuring projects or financing the building phase of the project, and others stepping in once the project is running.
He concluded that whichever way you look at it, new ideas are needed because the demand for long-term investment doesn’t go away. That is why a new balance between supply and demand must be found. CW