Europe’s flawed investment strategy

LAST year, former Italian prime minister Mario Draghi produced a landmark report on the future of European competitiveness, in which he recommended that the European Union increase annual investment by more than 800 billion euros (S$1.2 trillion) – the equivalent of more than 4 per cent of its gross domestic product. This report has now become the intellectual foundation for an ambitious strategy to revitalise growth in Europe. But Europe should be careful what it wishes for. As Japan has shown, investment is no panacea.

The idea that more investment is the key to economic success is a potent one in Europe. The so-called Lisbon Strategy, launched in 2000, sought to increase investment in research and development (R&D) to 3 per cent of GDP. That target has remained on the official EU agenda for a quarter-century, but has never been reached. In 2015, the European Commission added another investment goal: its Investment Plan for Europe sought to mobilise 315 billion euros in additional investment within three years, in order to increase competitiveness and long-term growth.

But investment has not saved Japan from several decades of stagnation. Since 1970, Japan’s gross fixed capital formation has averaged – and, often, significantly exceeded – 30 per cent of GDP. That is much higher than not only the EU average, but also the rate in Germany, the EU’s strongest economy, where gross fixed capital formation has hovered around 23 per cent of GDP. The four percentage point difference between the most recent values (26 per cent in Japan, and 22 per cent in both Germany and the EU) amounts to about 800 billion euros annually – exactly the amount Draghi recommends adding to total EU investment.