The imminent arrival of European funds raises a key question: how will domestic investment react, that is, the one that determines the economic future of the country? The equipment effort plummeted by about 9% in 2020, and although the trends have been positive so far this year, there is still a way to go to recover the pre-crisis levels, and even more to meet the transformation objectives of the production model assigned by the Next Generation EU.
The accumulation of debts in the sectors most affected by the crisis deters the effort to renew productive capital. Many businesses have become over-indebted and, while viable, cannot afford a further increase in liabilities. This could be the case of some companies in the tourism or restaurant sector, which are beginning to rise up and improve their prospects if they access credit to accelerate their digitization. However, the 7 billion direct transfers that were promised in March have not arrived, no doubt due to an inadequate design of the device. The recapitalization plan (piloted by Cofides), endowed with 1,000 million, is closer to the needs of the moment. However, by focusing on medium-sized companies, it does not cover the bulk of the business fabric.
But the most powerful driver of investment is the psychological factor, especially in the volatile environment generated by the unpredictability of the pandemic and a hypothetical return of restrictions. A large part of the industry, the agri-food sector and professional services, relatively little affected by the crisis, are already in full recovery and have sufficient liquidity to invest. The latest foreign trade data show the favorable trajectory of these sectors. Exports increased 5.3% in May, or more than 55% year-on-year, improving the German locomotive (+ 36%). All of this has served to cushion the near disappearance of tourism until recently, which explains the maintenance of a solid external surplus even in the darkest moments of the state of alarm.
Therefore, the equipment potential is colossal: companies in good health have accumulated no less than 35,000 million liquid financial assets. For the moment, these surpluses have gone to swell bank accounts instead of being invested in the real economy – a consequence of the climate of uncertainty. A change in expectations would result in the transformation of this over-saving into investment projects, generating a more powerful stimulus for the economy than is expected from European funds.
In theory, incentives should push in that direction, since the interest contributed by financial assets is almost zero, or even negative given inflation, while the average return that can be rationally expected from a productive investment is positive. The ECB does what it can on its part, rewarding banks that grant long-term loans, mostly investment-oriented (the so-called TLTROs). But companies prefer to save. All because in practice uncertainty is still omnipresent, generating cautious behavior.
The existence of a latent potential for productive investment has consequences for the management of European funds. One, managing expectations is crucial to maximizing the impact of funds. For this, the key lies in the predictability of public policies. And its coherence: it is of little use to announce large renewable energy projects, if the tax and regulatory framework does not accompany them, in order to align the market incentives with the objectives of the Recovery Plan. Two, it is convenient to prioritize the most transformative components of the Plan, due to the greater driving effect on latent investment and the economy as a whole. Undoubtedly, this entails a longer execution in time, but with a recovery already underway, the fiscal stimulus is less relevant than the long-term effects.
Raymond Torres He is the director of business at Funcas. On Twitter: @RaymondTorres_