Savings may not be Europe's super weapon in economic battle

[March 26, 2024]  By Francesco Canepa

FRANKFURT (Reuters) - As Europe seeks to hold its ground against economic rivals, politicians think they have a secret weapon: the untapped savings of its citizens.

From Italy selling government bonds to households, to French talk of a pan-European savings product or Britain offering tax breaks for investment in UK shares, governments across Europe are seeking ways to mobilise household wealth.

All these plans share an underlying thinking: Europe is sitting on plenty of cash that could be channelled towards its goals, from the green transition to beefing up militaries.

Politicians hope private money, invested in local stocks or government debt, can help close a growth and productivity gap with the United States and China, which have been doling out massive subsidies to their industries.

But critics say such schemes risk disappointing savers while failing to address deep-rooted shortcomings in the European economic model that they see as dissuading investment.

"It's a way of inventing an easy solution to problems that are very complicated," said Daniela Gabor, a professor at the University of the West of England.

IDLE MONEY?

Europeans have long saved more than their U.S. counterparts and the gap has widened recently, possibly due to uncertainties such as the war in Ukraine.

Politicians like French finance minister Bruno Le Maire are now eyeing this nest egg, which includes 8.4 trillion euros of euro zone bank deposits.

Le Maire, who has spoken of money "sleeping" in accounts instead of contributing to prosperity, wants a pan-European savings product. French lawmakers have meanwhile suggested savings could be channelled towards domestic defence companies via state-guaranteed deposits.

Outside the European Union, the UK government has proposed a new type of account that would allow Britons to invest up to 5,000 pounds ($6,301.50) in domestic companies tax-free.

Such schemes have a chequered past.

Italians who bought into government-sponsored funds investing in local small-to-medium sized enterprises would have underperformed global stocks by around 35 percentage points in the past five years on average, according to data from consultancy firm Analysis.

Many economists dismiss the very idea of dormant money, noting that deposits are a vital source of funding for banks.

"The notion of money that is 'sleeping' because it is in a bank account is honestly quite ludicrous, because there's nothing that prevents a bank from making a new loan when it has an opportunity," said Benjamin Braun, a political economist at the Max Planck Institute for the Study of Society.

Indeed, European companies have consistently put funding as the least of their problems for nearly a decade and generate enough revenues to finance all their investments, data from the European Commission and the ECB show.

France's Minister of Economy and Finance Bruno Le Maire reacts, as he attends a meeting between the French government and senior government officials, in Paris, France March 12, 2024. Ludovic Marin/Pool via REUTERS/File Photo

Instead, Braun and others argue that low investment in Europe reflects meagre growth prospects compared to the United States. Multinational corporations investing abroad mean the euro zone is even exporting capital, they say.

"They have a solution looking for a problem," Dirk Schumacher, head of European macro research at Natixis, said.

"I don't think corporate investment spending is held back by tight funding conditions, but by a lack of demand and lots of structural changes."

He mentioned competition from China, high energy prices and a lack of skilled labour among other factors.

Former European Central Bank chief Mario Draghi is due to report to EU leaders this summer on the issues that are holding Europe back.

PUBLIC DEBT

Some governments are themselves borrowing directly from citizens.

Italian households were the biggest buyers of the country's public debt last year, with a recent bond pitched as a shortcut to a cruise holiday. Britain has announced new savings bonds, joining Belgium and Greece.

The main advantage of tapping retail investors is that they are less fickle than professionals and more likely to hold the bonds until they mature because they don't have to worry about their quarterly performance.

"There is a great savings product that has worked pretty well throughout history that allows the state to direct public money into areas of priority, and that is the sovereign bond," Braun said.

He and other economists said more investment by the state, which doesn't need to make an immediate financial return, had to be part of the solution to long-term challenges for Europe such as building a greener economy.

But by giving governments which have mostly been running large deficits since the COVID-19 outbreak access to a pool of patient capital, these retail-targeted bonds risk undermining efforts to get public spending under control.

Households might also regret concentrating too many of their assets in their home country, where they are already likely to have their main income and home.

"It's a double sin: you give up on diversification and give your government the wrong incentive," said Massimo Famularo, a Milan-based investment consultant.

($1 = 0.7935 pounds)

(Reporting By Francesco Canepa; editing by Mark John and Catherine Evans)

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