The last decade was characterised by an uncertain economic and financial climate. The economies of most EU member states slowed down and only recently started to recover. Some are still burdened by excessive debt, liquidity constraints and lack of market confidence.
Europe is facing many challenges, particularly with the eurozone, access to energy and migration. Yet there are three underlying factors that can have a positive impact on the rest: jobs, growth and investment.
These three factors are, in fact, the priority of the new European Commission. I go as far as saying that it is investment that is the key to create jobs and growth. For this reason, the Juncker Commission should be commended for making the EU Investment Plan one of the first initiatives. It showed it was able to read the signs of the times and act promptly to give a positive reaction to the markets.
Economic theory states that investment contributes towards job creation and accelerates productivity growth. Yet, the challenge is how to go about facilitating the climate for investment, particularly for the private sector, when lenders take a step back from the credit market and the lack of market confidence reduces the risk appetite of businesses to partake in new projects.
The European Commission’s drive to reverse this trend through its landmark initiatives, the EU Investment Plan and the Capital Markets Union, are a step in the right direction.
The EU Investment Plan is expected to mobilise €315 billion in the real economy, €75 billion of which will be projects undertaken by SMEs. This will be achieved by removing obstacles to investment through the European Fund for Strategic Investment, by providing visibility and technical assistance to investment through the European Investment Advisory Hub and by offering a transparent portal showcasing viable projects for investors through the European Investment Project portal.
The CMU, which is a key element of the EU Investment Plan, is an equally important initiative for SMEs to diversify financing opportunities and avoid them having to rely solely on traditional creditors and financial instruments. Through the CMU, the EU will finally have more integrated, efficient and effective financial markets, which will strengthen cross-border capital flows and improve access to finance for SMEs.
Since 2004, private sector investment has mostly been below the EU average
To focus more closely on its objectives, the EU Investment Plan foresees direct investment in, among others, infrastructure, broadband networks, transportation, education, renewable energy and energy efficiency. Its success will, however, necessitate an important public sector investment.
In view of the current economic climate, public investment is naturally encouraged. From a business perspective, there is no doubt that public sector investment is seen as able to create favourable conditions for private sector operations and, in our case, this will improve Malta’s competitiveness.
For instance, upgrades in road and transport networks, as well as other infrastructures, will result in increased productivity of the private sector. In this sense, public investment may have a crowding-in effect on private investment. Public sector projects, for example, require private sector uptake of related tenders, which create jobs and wealth for the private sector and the economy in general.
Nevertheless, we strongly believe that investment by the private sector yields higher rates of economic growth. It may be the case that public sector investment may result in consumption effects that do not necessarily last in the medium-to-long term.
In contrast, boosting private investment when the economy is in recession or in recovery is likely to have a significant and permanent positive impact on the country’s potential growth.
Taking a closer look at Malta’s context since 2004, private sector investment has mostly been below the EU average. The uncertainty that surrounded and is still surrounding the euro area and the European economy has certainly contributed to this.
We are hopeful initiatives such as the EU Investment Plan will provide the boost that the local private sector needs to increase its confidence and bring back its investment to pre-crisis levels while overturning this negative trend.
Recently, a high-level debate was co-organised by the Malta Business Bureau and European Commission Representation in collaboration with the Enterprise Europe Network on the subject.
Local business stakeholders had the opportunity to exchange views on how relevant it is to boost private sector investment for sustainable economic recovery with European Commission vice president Jyrki Katainen, responsible for jobs, growth, investment and competitiveness, and Environment, Maritime Affairs and Fisheries Commissioner Karmenu Vella.
president@mbb.org.mt
Mario Spiteri is president of the Malta Business Bureau.