Sluggish Business Investment in the Euro Area: The Roles of Small and Medium Enterprises and Debt


By John C. Bluedorn and Christian Ebeke

Small businesses could be the lifeblood of Europe’s economy, but their size and high debt are two of the factors holding back the investment recovery in the euro area. The solution partly lies in policies to help firms grow and reduce debt.

Our new study, part of the IMF’s annual economic health check of the euro area, takes a novel bottom-up look at the problem. We analyze the drivers of investment using a large dataset of over six million observations in eight euro area countries, from 2003 to 2013: Austria, Belgium, Germany, France, Finland, Italy, Portugal, and Spain. Continue reading

Reviving Credit in the Euro Area


by Jean Portier and Luca Sanfilippo

A stock in excess of €900 billion of nonperforming loans continue to clutter the European banking system, impeding economic growth. This issue remains a key challenge for policy makers. As we show in our latest Global Financial Stability Report, part of the solution to address this legacy is an upgrade in legal systems. Current inefficiencies—long foreclosure times and insolvency procedures—are a reason for the gap between the value of loans on bank balance sheets and the price investors are willing to pay. A reliable legal environment and an efficient judicial system maximize the value of nonperforming loans (NPLs), reduce the value gap and give banks greater incentive to get NPLs off the books. Our analysis, using time to foreclose as a proxy for effective insolvency regimes, shows there is a large upside for new lending capacity in the euro area (Chart 1).

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Securitization: Restore Credit Flow to Revive Europe’s Small Businesses


By Shekhar Aiyar, Bergljot Barkbu, and Andreas (Andy) Jobst

If financing is the lifeblood of European small businesses, then the effect of the financial crisis was similar to a cardiac arrest. The flow of affordable credit from banks was choked off and small and medium-sized enterprises (SMEs) were hit hardest. Today, with bank lending still recovering from that shock, smart policy actions could open up securitization as a source of financing to help small businesses start up, flourish and grow.

SMEs are vital to the European economy. They account for 99 out of every 100 businesses, two in every three employees, and 58 cents of each euro of value added of the business sector in Europe. Improving access to finance would therefore not only revive small businesses, but also support a strong and lasting recovery for Europe as a whole.

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What Advanced Economies Can Do to Rise Above the “New Mediocre”


By Era Dabla-Norris, Vikram Haksar, and Kalpana Kochhar

Global growth remains anemic more than five years after the global financial crisis. If nothing is done, the prospect of settling into a “new mediocre” will become reality, especially in advanced economies.

In many advanced economies, accommodative monetary policies, growth-friendly fiscal frameworks, and efforts to tackle private debt overhang and improve tax revenues and compliance are essential to lift economic growth in the short term.

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Investment in the Euro Area: Why Has It Been So Weak?


By Bergljot Bjørnson BarkbuS. Pelin Berkmen, and Hanni Schölermann

Investment in the euro area, and particularly private investment, has not recovered since the onset of the global financial crisis.

In fact, the decline in investment has been much more drastic than in other financial crises; and is more in line with the most severe of these crises (see Chart 1). The October 2014 World Economic Outlook showed that many governments cut investment because their finances became strained during the crisis. In addition, housing investment collapsed in some countries, reflecting a natural scaling back after an unsustainable boom. But what is holding back private non-residential investment?

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Challenges Ahead: Managing Spillovers


By Olivier Blanchard, Luc Laeven, and Esteban Vesperoni

The last five years have been a reminder of the importance of interconnections and risks in the global economy. They have triggered intense discussions on the optimal way to combine fiscal, monetary, and financial policies to deal with spillovers, and on the need and the scope for coordination of such policies.

The IMF’s 15th Jacques Polak Annual Research Conference, which took place in Washington DC on November 13 and 14, 2014, focused on Cross-Border Spillovers, and took stock of what we know and do not know.  The summary below picks and chooses some papers, and does not do justice to the full set of papers presented and discussed at the conference.  They can all be downloaded, and videos of each session are available, at www.imf.org/external/np/res/seminars/2014/arc.

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Can Japan Afford to Cut Its Corporate Tax?


By Ruud de Mooij and Ikuo Saito

(Versions in 日本語)

It is no surprise that, as part of its revised growth strategy presented in June, the Japanese government has announced it will reduce the corporate income tax rate. At more than 35 percent for most businesses, the Japanese rate is one of the highest among the industrialized countries of the Organization for Economic Cooperation and Development (see Chart 1). Moreover, at a time when Japan needs to boost economic growth, the corporate income tax rate is generally seen as the country’s most growth-distortive tax.

japan1

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