To meet the immense investment requirements of the European economy in the decade up to 2030, and repair damage to it since the 2008 global financial crisis, a new European Investment Community should be set up alongside the European Political Community.
For over half a century, since the original European Coal and Steel Community in the 1950s, the European economy has become highly integrated in terms of production and supply. The idea behind this first Community, the brainchild of Jean Monnet, was to pool the production of coal and steel by France and Germany, and other participating countries, under a common High Authority which would make another war between them “materially impossible”, as Robert Schuman put it in his famous declaration of 9 May 1950.
The European Economic Community, launched in 1958, built on Monnet’s innovation by creating a common market for all other goods and services, merging the separate national markets of its constituent states so there were no barriers to the free movement of goods, persons, services or capital between them. The aim in both cases was to create a “powerful unity of production”: first for the heavy industries of coal and steel; and then for all other products, stimulating post-war economic activity by constructing a European market which was larger and stronger than small national economies would permit.
Today, this enormous single market has been deepened and extends to nearly all the continent of Europe – and even as far as Iceland through the European Economic Area.
However, supply does not create its own demand. This was the message of John Maynard Keynes’s pre-war General Theory of Employment, Interest and Money, written during the Depression in Europe and the US, and of relevance once more after the 2008 global financial crisis. “Effective demand” in the economy, as Keynes put it, requires two elements: consumption expenditure and investment expenditure. Of these, it is investment which is particularly volatile and unreliable, and private markets cannot be relied on to supply it sufficiently and without booms, busts and crises, as in 1929 and 2008. For that reason, Keynes concluded that the duty of ordering the current volume of investment “cannot safely be left in private hands”. By one means or another there has to be cooperation between the public and private sectors to ensure a sufficient and steady volume of investment in the economy.
It is this element of effective demand which is missing from today’s European economy, faced with shortfalls in public and private investment since the 2008 crash and immense investment needs for the future, above all in response to global climate change but also for defence and energy diversification after Russia’s invasion of Ukraine, plus in such vital areas as education and training, research, transport and business expansion. The question is how to organise the necessary cooperation between the public and private spheres to ensure there is sufficient investment, and on a European scale. That is what a European Investment Community would aim to do.
Inequality has also been on the rise in Europe in recent decades, intensifying since the 2008 global financial crisis. As noted by the OECD and the WHO, inequality harms the economy and undermines trust between people and institutions, including governments, and threatens pan-European solidarity. A European Investment Community should have an express objective of promoting equality among citizens in it, by increasing public and private investment levels and spreading that investment as widely and evenly as possible across its territory. The aim would be to ensure that the economy actually works in support of citizens’ individual democratic rights, given formal legal protection across Europe since the founding of the Council of Europe in 1949.
Keynes himself was open-minded about how the public and private sectors might best cooperate to ensure investment. A good place to start is with public investment, since experience since the war is that, rather than private investment leading the way, it is public investment which normally creates the conditions for growth. (In the United States, Bidenomics is demonstrating this once again.)
To promote public investment in Europe one of Keynes’s own ideas from before the war could be adapted, by creating not a national but rather a European board of public investment. This would have three main tasks: first, to coordinate existing public investment projects and plans at all levels in Europe – European, national and local – so that the multiplicity of public bodies for the first time have a means of knowing what each is doing; second, to build up a stock of good and necessary future plans and projects, for implementation in the future, by means of what Keynes called “acts of constructive imagination”, with the top priority being to update or renew the capital stock of the European economy in the face of climate change; and third, to surmount blockages on public investment arising from European and national fiscal rules by creating new methods of mobilising finance and using Europe’s household savings for good and necessary public investment projects. One solution is to create an attractive and simple unified European savings instrument, akin to national savings and investment bonds.
Having greater certainty of public sector projects and plans will then help and encourage the private sector to invest more, and add its own resources and expertise. To ensure that the free movement of capital constitutes the factor of production in the European economy it was supposed to be when the common market was created, and is not a speculative force of destabilisation, competition law rules could be tightened up to distinguish between commercial activity which promotes economic progress by creating new capital assets through investment; and activity distorting the economy by creating price bubbles in existing assets.
Finally, as well as mobilising household savings, professionally-managed institutional savings funds in Europe could be encouraged to invest in companies in Europe for the longer term by setting minimum standards for competition between them, so that at least a certain proportion of assets under management has to be invested on the basis of expected long-term cash flow, not expected price changes. Doing so will then help European companies themselves invest for the long term too.
Who could belong to a European Investment Community? All European democratic states who wished. In fact, the wider the membership the better, since increased investment levels would benefit all participating states and citizens individually and collectively, and the free movement of capital already extends beyond the European Union. Offering to include Ukraine within its scope, for example, would provide a powerful statement of support that it will be part of the European market economy.
Something similar could be said of the United Kingdom. The UK joined the single market in 1973 (after first applying to join in 1961) and only left in 2021. For years economists have been pointing to the UK’s low levels of investment as its fundamental economic problem. Decades of low investment, and skewed patterns of what investment there was, have left it one of the most regionally unbalanced countries in the industrialised world, with disparities greater, on many measures, than in unified Germany after the fall of Communism. Action to tackle this, in the framework of an Investment Community which expressly aims to promote equality, would make rejoining the European market economy easier.
What legal form could an Investment Community take? One precedent is the Energy Community Treaty, launched in 2006 to extend the EU energy market to countries outside it: initially countries which were parts of former Yugoslavia, and today also countries further south and east of the EU, including Ukraine. If agreeing and ratifying a formal treaty is likely to take too long, a memorandum of understanding between interested parties could lay the essential foundations. As Bidenomics has shown in the US, a public investment drive can have economic benefits relatively quickly.
The Investment Community would need to have a close relationship with the European Union, with which – if it succeeds in improving the demand side of the European economy – it might at a later stage be merged, much as the Coal and Steel Community was merged in 1967 with the European Economic Community.
It is not widely appreciated that Monnet and Keynes knew one another, and worked together on economic issues during the First and Second World Wars. Combining their practical and theoretical approaches would make a powerful intellectual force for Europe today. After the First World War Keynes proposed in 1919 that the new League of Nations should create a free trade union across Europe to rebuild its war-torn and fractured economy; and that Germany’s industrial economic recovery would be greatly assisted by a scheme for the exchange of its coal and iron ore supplies with France. Neither of these things happened. In the inter-war years Monnet worked on new ways of raising international investment finance for the rehabilitation of Austria, Poland, Romania, Yugoslavia and Bulgaria, and modernising China. It then fell to Monnet, after the Second World War, to devise the practical arrangements which would stop war in Europe repeating itself yet again, and create the basis for today’s European economic unity through the Coal and Steel Community.
An Investment Community, focused like the Coal and Steel Community on a particular point of difficulty, and aiming at a concrete achievement to create a de facto solidarity, would reinforce that economy by adapting it to the new conditions of the world of today.