Helsinki,8/09/2006
To be checked against delivery
At a recent meeting with Eero Heinäluoma, I was asked by the Finnish Presidency to address today the questions of boosting Europe's investment in R&D and innovation.
Finland has a good record, but outside a small number of countries and / or sectors, pre-eminently, pharmaceuticals, investment levels are worryingly low.
The mainstream EU approach, as reflected in the documents for this meeting, say that a lack of availability of risk and venture capital in the EU is a major source of weakness and is due not least to poor returns; that the problem is not lack of capital per se but an underdeveloped financial sector compared to the USA; and that corporate managements are too well insulated from shareholders.
In fact, Europe's trade unions are coming to believe that the opposite to the mainstream belief is true - that an exaggerated concentration on shareholder value encourages ever - shorter short-termism; and that in a low inflation environment, the demands of shareholder ‘institutions' for high returns - which admittedly they may need to pay pensions - is endangering investment in R&D, innovation and skills.
Companies doing innovative, high risk, leading edge activities are not being given the necessary opportunities to raise capital on terms which allow them to prosper. The pressure is all the other way - to generate double digit annual returns on capital quickly, through squeezing costs and eliminating risks. The UK and Ireland stand out as good performers in some respects but on investment in productivity and R&D, this is definitively not the case. The relatively good record of the USA is linked to public, especially Pentagon spending. The predominance of financial over “real” activities appear to be linked to a negative shift in income distribution with negative economic and social effects. All these point to considerable problems with the mainstream view.
This is not just a trade union view. There are many in boardrooms who share it but often feel too vulnerable to criticise publicly the short-termist pressures of hedge funds, the venture capitalists and the like.
Herr Münterfering famously described the activities of these - and other financial institutions - as “locusts”. I agree. Commissioner McCreevy recently lauded hedge funds, saying that they played a crucial role in putting “the fear of God” into company boards. That is the trouble. They are making directors risk averse, cautious, and safe players. As one senior British banker said, anonymously, “You can talk to any FTSE-100 company and they live in fear of the hedge funds”. He went on “if they borrow your shares for a period, betting that they will go down and then aim to buy them back more cheaply, you are xxxxxx.”(a six letter word beginning with “f”)
Of course, there have been speculative bubbles from time immemorial - searching for El Dorado, trading in tulips, New York 1929 being among the most notorious.
And the hedge funds with a big offshore (ie tax avoidance) component are largely beyond the grip of the regulatory authorities. The authorities, conversely, have some grip on less rapacious institutions who are more sympathetic to the real economy, longer-termism and organic growth but these may be at a competitive disadvantage to the hedge funds. It is also an odd fact that currently the US seems more likely to regulate than Europe-not the usual story.
My appeal to Ecofin today is that you recognise
- that the activities of these hedge funds and the like maybe having a seriously retarding effect on R&D and innovation;
- that we know too little about them and are too nervous of their mobility between countries and their power to play one against the other. We lack the confidence to do anything effective;
- that they may also pose big macroeconomic risks, for example, as followed the collapse of Long-Term Capital Management in New York showed.
Therefore I ask you, the Commission and the Bank to reconsider the current laissez-faire approach and to initiate a serious study - not one this time dominated by the financial services industry - into the effects of these institutions on Europe's investment prospects in innovation and R&D.
My penultimate point is that I can well understand the reluctance of individual countries to act independently. You have to do it together. The case for a concerted approach by the EU is compelling with the USA involved as well. Otherwise democracy will be a powerless and neutered instrument unable to exert influence over a vast area of the life of its citizens. A single market and free trade is one thing. A world where tax avoiding speculators have almost total freedom is another.
Finally, there is a macroeconomic dimension I wish to mention. Globalisation is putting many workers under great pressure as competitive advantage switches to low cost countries or low cost immigrant workers. Any acceleration of wages is seen as a threat (unless it is for high paid executives) even when the recent record in the eurozone is of very modest wage growth. And figures from the Bank of International Settlements show that the share of wages in GDP has been falling as well as inequality rising.
We believe that reasonable wage growth can boost investment as well as inject some much needed consumer spending and greater equality into the economies of the eurozone. In contrast, aggressive investment fund strategies encouraged by financial liberalisation is a potentially mortal threat to Social Europe and we need a better response from Ecofin, the Commission and the ECB than has so far been the case.