Learning from Europe; the case for a National Investment Bank

Published date
19 Feb 2018
Pay figures out this Wednesday are set to confirm the UK’s dismal wage performance, with real wages falling for the 10th month in a row.

One reason for that is because British businesses aren’t investing. If they don’t invest, they don’t grow, and won’t pay their workers more. It’s a long-term British problem – but other European countries have shown that national investment banks can help.

February’s inflation report from the Bank of England set out a gloomy prognosis for the UK economy, suggesting that the engines of growth are faltering. In their words “the potential growth rate of the economy has remained subdued due to persistent weakness in productivity growth….productivity growth has been so weak since the financial crisis that the level of productivity is barely above its pre-crisis peak.”

That low productivity growth, they say, feeds through into lower wages. And the blame for that lies – at least in part – with the fact that British businesses aren’t investing. The Bank says that “half of the weakness since 2010 has been associated with slow growth in the amount of capital — the resources and equipment available to produce output — per hour worked …In turn, that reflects subdued business investment over much of that period.”

British business’ unwillingness to spend on the equipment they need to boost their future growth has several roots. Uncertainty about the strength of the economy going forwards, exacerbated by austerity policies, shareholder short-termism, and the uncertainty around Brexit are undoubtedly all playing a part. But the structure of Britain’s banking system should also be held accountable. Despite having one of the largest financial sectors in the world, we’ve failed to learn from our neighbours how national investment banks can boost growth and innovation. In 2016 the only OECD countries investing less than the UK were Greece and Portugal.

Total gross fixed capital formation, % GDP

Germany’s KFW bank is perhaps the most famous example of how national investment banks can provide the patient finance business needs to grow. As Laurie McFarlane and Marianna Mazzucato set out in a recent (excellent) paper, it’s been vital to supporting the growth of the country’s green energy sector, as well as supporting innovation, exports and construction.

But investment banks have been growing across Europe, with the balance sheets of European national investment banks tripling between 1980 and 2015. And since the financial crisis, new national investment banks have been set up in Portugal and Latvia.

So there’s no excuse for hiding behind European State Aid rules to prevent the development of a National Investment Bank for the U.K. As MacFarlane and Mazzacato make clear, “setting up a new SIB should not encounter difficulties with state aid compliance so long as it aims to complement rather than compete with commercial banks by providing additionality: i.e. doing what is not already being done by the private sector. This does not have to be limited to fixing market failures – it also includes mission-oriented investments focused on creating and shaping new markets, technologies and firms that otherwise would not arise.”

That’s exactly the approach taken by those advising Labour on their welcome commitment to setting up a National Investment Bank for the UK, who argue that the new U.K. Investment Bank should concentrate on ‘on-lending’ via other financial institutions, mirroring the experience of the small scale British Business Bank, which has already been cleared by state aid rules.

A National Investment Bank can’t solve Britain’s wages crisis on its own. For that we need government itself to be investing in infrastructure, an end to the insecure work that is holding back productivity, and better rights for trade unions to support workers to negotiate their fair share. But it’s a vital part in the jigsaw of the new approach we need to Britain’s economy. There should be no more excuses.