Regional vs Local Stability in Investment

Note: This post is a continuation of the ideas presented in Horatiu Ferchiu's "Investment as localized panacea or growth opportunity?" article.

We learn from basic economic theory, often taught in first-year university students, that stability is a good thing. Without a stable political regime, a country cannot progress as people will be reluctant to invest if they believe that they might lose their money. What this theory does not directly tell us is that an investment opportunity can never be safer than the country it is in, if one has a look at the three ratings agencies. For example, the ECB (and the EFSM/ESM funds) now enjoys a AAA rating by Moody's Analytics. If this rating falls to AA then no country in the Eurozone should have a greater rating than that. 

What does this has to do with investing? Basically, it has everything to do as it encompasses both the regional and the local element. This can be viewed more clearly if one has a look at the United States: will an investor feel the same if he puts his money in bonds issued by the federal government than if he puts it in bonds issued by one of the states comprising it? The answer would be a definite no. How about if one was to choose between investing in New York and Kansas? Definitely not the same feeling is it? The same line of reasoning can be used to explain why Greece suffers from lack of investments and the Northern countries do not. 

The question of whether the EU can do something about this is ambiguous. As stated in Horatiu's article, the issue becomes whether the EU can (or should) interfere with the internal politics of each Member-State. Many may claim that this already occurs since EU laws have supra-national power. Yet, this is totally different. What makes a country stable is not the availability or passing of laws but their actual enforcement. At another level, corruption, ease of doing business and availability of funds and potential customers are also very important. The above all can be summarized in one word: mentality.

It is not that the people in Germany, Finland and Austria think that much differently than the people of Italy, Spain and Romania. They all think about their job, money, education, love affairs, food and so on. What makes the difference between a Dutch and a Cypriot though is the expectations they have on the conduct of business in their country. If the latter believes that finding cash, resources or potential customers is extremely difficult then this will be visible to any foreigner who wishes to invest in his/her country. Now the big question is: can we change this?

The answer is unfortunately not simple. What is more not all regions are equal even if all the aforementioned barriers have been overcome. For example, an area in Germany can be much less developed than another (the former East Germany comes to mind). Yet, this does not mean that things cannot be improved. It just means that inequalities will always exist between regions are they always exist between people (think about a different people's abilities in sports, arts or other subjects for example). Any effort for changing the current state of affairs will, as always, face the resistance of those who are unwilling to change. People do not change as fast as other factors of production.

The only chance to promote additional investment to under-performing areas is to make the returns to these investments more lucrative than elsewhere. To do that we have to make sure that investors know about this and do not see a chance that their money will be permanently lost; at the same time we should not forget that one investment usually brings more in. An increase in the projects funded by the European Investment Bank could probably help, yet with an increase in these projects some are bound to turn out to be unprofitable which would render the institution less willing to fund any more. Thus, the golden mean between no investment and enough investment to initiate an investment cycle should be found.

This is obviously a non-exhaustive proposal of possible things that may be done in our region in order to boost investment. The issue of growth is not one which can be taken lightly. Yet, as we emphasize in other issues now (austerity for example) this is unfortunately left behind.