Multilateral organizations and Southern Europe can do more to cooperate to restore these countries’ global competitiveness
One of the lessons learned from the past few years is that economic development processes are reversible. The once-bright southern Europe economies are languishing today, wrapped in a slow and painful process of adjustment aimed at restructuring their productive sectors and enter once and for all into the 21st century economy.
It’s clear that these countries’ recovery will not be achieved simply with reforming their administrative and regulatory frameworks. Perhaps one of the most complex issues that Italy, Portugal, and Spain are currently dealing with is the interruption of credit flows to the real economy. This interruption is doing considerable harm to the countries of southern Europe; the credit shortage is affecting their competitiveness and jeopardizing any possible hint of improvement, putting the overall global economic recovery at risk.
For example, looking at the Spanish export industry, we see that TECNIBERIA, one of the biggest industrial associations that brings together the major engineering companies of the country, has recently warned about a downward spiral that may make an entire productive sector vanish. The combination of three factors is at fault: a drastic reduction in domestic demand as the economy still falters, deficient credit for projects and tenders abroad, and expansion of the sovereign debt crisis to the few Spanish financial institutions, both public and private, that have sufficient capacity and willingness to support companies abroad. So while the Spanish export industry has realized that it must go beyond its Iberoamerican comfort zone to look for new markets if it wants to survive, its chances to succeed are severely hindered. The fact that Spain’s tradition of banking in the international corporate finance sector lags among its peers makes the situation worse. We can see only two major national Spanish banks among the top 15 companies measured by volume of financial advisory services in 2012— the rest of the ranking is occupied by the subsidiaries of foreign entities. The stigmatization of the southern European brand by international entities has made the credit crunch even more serious.
Here we see how Southern European countries must recognize the need to form new alliances to face the great new challenges that are awaiting them on their roads to recovery.
At this juncture, multilateral agencies involved in the development of the private sector, particularly MIGA and IFC as members of the World Bank Group, can and should play an important role.
IFC and MIGA can actively target strong investors with good track records in Southern Europe to ensure that they are informed about their products. IFC can help bridge the funding gap that these companies need to grow through direct lending, and also help to strengthen the national banking system in the field of international corporate finance by co-financing projects. MIGA, as a political risk insurer, can help reduce the risk profile of cross-border investments. In addition, MIGA’s insurance can facilitate private-sector financing, as many lenders are more willing to take on projects insured by MIGA—and on more favorable terms. This could, in turn, support the national banking system in the field of international corporate finance.
There is a dual challenge here: on the one hand, it is imperative that multilateral institutions like the World Bank Group recognize that, absent the ability to provide direct support to national governments in Southern Europe (as these countries are developed countries and therefore not eligible), there are still many ways they can support these governments’ businesses. By reaching out to these countries, multilateral institutions can alleviate the sufferings of these economies while indirectly increasing development around the world by restoring confidence and global growth expectations.
On the other hand, as former MIGA General Counsel, Luis Dodero, pointed out recently in a Conference in Madrid (here’s a link to the article in Spanish), the governments of these countries should redouble their efforts to seek partnership and synergies with multilateral institutions on behalf of their national private sectors. The governments are World Bank Group shareholders and are best-placed to understand the tools available to their nationals and promote them back home.
Nowadays it is unquestionable that promoting economic growth in Southern Europe is essential in order to recover the global economic stability, restore confidence, and global growth expectations.
Read or pass along this blog in Spanish here.