Research: Weak investment in Europe is consequence of low profitability

Europe’s anemic business investment is in a lot of ways explained by the need to develop more sophisticated credit markets that small companies could tap to fund investment.

However, a new research conducted by the Bank for International Settlements suggests that the explanation is simpler: companies aren’t investing as they don’t have all that much to invest in. 

The authors of the research made a conclusion that the developed world’s investment malaise since the 2008 financial crisis isn’t primarily the result of a faulty “transmission mechanism,” but the problem with monetary transmission is the lack of anything to transmit monetary policy to.

“Preliminary evidence suggests that perceived uncertainty about the profitability of investment opportunities is a more plausible explanation for weak investment.”

What is the impact of the QE and low-interest rates policies then?

Large firms that can issue their own bonds are the biggest beneficiaries. Due to tighter regulatory standards, banks are now reluctant to lend to the small- and medium-sized businesses that depend most heavily on bank lending. This gives a reason for the argument that Europe needs better capital markets.

However, this is not a single reason for sluggish investment, as markets and policy-makers would have already found a solution such as large companies using their cash to buy smaller firms in order to acquire their investment ideas. This isn't happening on a large scale.

While the study is not presenting any concrete list of measures, it makes you think on a number of things. Labor markets deterring hiring, high taxes and strangling red tape - all add to the costs of doing business and decrease expected future profits. And above all, the study shows that politicians cannot rely on Mario Draghi's cheap money to paper over their failures to reform.