The European Commission's Investment Plan aims to mobilise at least EUR 315 billion in investments to reinvigorate growth in our economy. But with only EUR 21 billion being put on the table from the public purse, the majority of funds will need to come from private investors. They are the "secret sauce to success," as Jacques de Larosière, Chairman of Eurofi – a thinktank dedicated to financial regulation and supervision – put it at the Eurofi Financial Forum in Luxembourg from 9-11 September.
During the Forum, representatives of the financial services industry and public authorities exchanged views on this and other very relevant issues for Swiss Re, including climate change. They agreed that the Investment Plan has great potential and that the insurance sector is well-positioned to provide long-term capital.
But our industry is faced with a number of challenges which hinder us from putting our funds to work to help boost economic growth. Jerome Haegeli, Swiss Re's Head of Investment Strategy, participated in a panel entitled, "Mitigating the impacts of lasting low interest rates for the financial sector". He argued that low interest rates do more harm than good, for three key reasons: First, they create financial market distortions. Second, unorthodox central bank policies crowd long-term investors out of the market – which ultimately poses financial stability risks. Third, low interest rates act as an "opaque" tax on institutional investors. For example, in our latest update on the rising costs of financial repression, we find that in 2014 alone EU and US insurers lost an additional USD 100 billion in yield income, bringing the total to USD 500 billion since the financial crisis. (Read our brief update on the latest numbers and our original report, published in March, for a complete analysis of the potential long-term consequences of financial repression).
To mitigate the low interest rate environment, Jerome said that private capital markets intermediation must be strengthened and price signals must not be distorted. We, at Swiss Re, very much welcome the European Commission's (EC) recent efforts to move towards a Capital Markets Union.
We also look forward to the EC's actions to: Implement a tradable infrastructure asset class; Promote standardisation of bond documentation and disclosures (see the European Financial Roundtable's initiative – co-Chaired by Swiss Re); Reevaluate infrastructure debt capital charges under Solvency II, which are currently too punitive and removed from market reality; And last but not least, strengthen investor rights. It was positive to see that in his speech addressing members of the European Parliament on 9 September, Jean-Claude Junker, President of the EC, also expressed the need to put common interests ahead of national interests. "How can it be that a strategically important new Infrastructure Investment Bank is created in Asia, and European governments, instead of coordinating their efforts, engage in a race who is first to become a member?" he asked.
As a participant at the Eurofi forum, it was clear to me that the discussions between public institutions and market participants were fruitful. I hope that policymakers will go away from this with the will to put the policy actions into practice that will create more stable long-term markets.
Location: Luxembourg City, Luxembourg