McKinsey Global Institute Europe Investing Full Report Dec2012

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McKinsey Global Institute Europe Investing Full Report Dec2012

Text of McKinsey Global Institute Europe Investing Full Report Dec2012

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    McKinsey Global Institute

    Investing in growth:Europes next challenge

    December 2012

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    Copyright McKinsey & Company 2012

    The McKinsey Global Institute

    The McKinsey Global Institute (MGI), the business and economics research

    arm of McKinsey & Company, was established in 1990 to develop a deeper

    understanding of the evolving global economy. Our goal is to provide leaders

    in the commercial, public, and social sectors with the facts and insights on

    which to base management and policy decisions.

    MGI research combines the disciplines of economics and management,

    employing the analytical tools of economics with the insights of business

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    industry trends to better understand the broad macroeconomic forces

    affecting business strategy and public policy. MGIs in-depth reports have

    covered more than 20 countries and 30 industries. Current research focuses

    on six themes: productivity and growth; natural resources; labour markets;

    the evolution of global financial markets; the economic impact of technology

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    the Internet, and the future of manufacturing.

    MGI is led by three McKinsey & Company directors: Richard Dobbs, James

    Manyika, and Charles Roxburgh. Michael Chui and Susan Lund serve as

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    For further information about MGI and to download reports, please visit

    www.mckinsey.com/mgi.

    http://www.mckinsey.com/mgihttp://www.mckinsey.com/mgi
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    McKinsey Global Institute

    Investing in growth:Europes next challenge

    Charles Roxburgh

    Eric Labaye

    Fraser Thompson

    Tilman Tacke

    Duncan Kauffman

    December 2012

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    Four years into the global economic slowdown, Europes governments,

    businesses, and consumers are looking ahead to future sources of economic

    growth. Beyond the immediate challenges of the European debt crisis and

    questions over the future of the eurozone, the imperative is to revitalise economic

    growth. This report looks in detail at the evolution of private investment over the

    past five years in Europe and over the past 30 in advanced economies more

    broadly. Our aim is to provide a fact base that will help policy makers prioritise

    sectors where interventions to stimulate private investment are likely to be most

    effective. Drawing on past MGI work, we also aim to provide several principles

    that policy makers should keep in mind in order to maximise the likelihood of

    their interventions being successful. The report is a contribution to MGIs broad

    research agenda on the topic of growth and renewal.

    Charles Roxburgh, a director of MGI and McKinsey, guided this work with

    valuable advice from Eric Labaye, MGI chairman and a director of McKinsey

    based in Paris. Tilman Tacke, a consultant in McKinseys Berlin office, and

    Fraser Thompson, an MGI senior fellow based in London, led the research, with

    additional input from Jan Mischke, an MGI senior fellow based in Zurich. Duncan

    Kauffman managed the project team, which comprised Y. Arvind Eashwar,

    Franois-Alexandre Lonard, Tim McEvoy, Thomas OReilly, and Arthur Worsley.

    We are grateful for the advice and input of many McKinsey colleagues, including

    Klaus Behrenbeck, Franois Bouvard, Florian Budde, Bing Cao, Fredrik Dahlqvist,

    Ian Davis, John Dowdy, Diana Farrell, Heiner Frankemlle, Nicklas Garemo, Marc

    Goedhart, Vivian Hunt, Bin Jiang, Tim Koller, Peter Lambert, Susan Lund, Jrgen

    Meffert, Detlev Mohr, Jaana Remes, Christian Riis-Hansen, Jrgen Rugholm, Jay

    Scanlan, Paul Sheng, Ruben Verhoeven, and Antonio Volpin. The team would

    like to thank Janet Bush, MGI senior editor, for her editorial help; Rebeca Robboy

    and John Cheetham in external communications; Julie Philpot, MGIs editorial

    production manager; and Marisa Carder, visual graphics specialist.

    Many experts in academia have offered invaluable guidance and suggestions. Ourparticular thanks go to Martin Baily, a senior adviser to McKinsey and a senior

    fellow at the Brookings Institution; Richard Cooper, Maurits C. Boas Professor of

    International Economics at Harvard University; Hans-Helmut Kotz, senior fellow

    at the Center for Financial Studies, Goethe University, Frankfurt; Jean-Herv

    Lorenzi, president of the Cercle des Economistes; and Laura Tyson, S. K. and

    Angela Chan Chair in Global Management at the Universi ty of California, Berkeley.

    Preface

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    Investing in growth: Europes next challenge

    McKinsey Global Institute

    This report contributes to MGIs mission to help global leaders understand the

    forces transforming the global economy, improve company performance, and

    work for better national and international policies.

    Richard Dobbs

    Director, McKinsey Global Institute

    Seoul

    James Manyika

    Director, McKinsey Global Institute

    San Francisco

    Charles Roxburgh

    Director, McKinsey Global Institute

    London

    December 2012

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    The challenge

    fall in EU-27 private investment in200711, larger than any previousdecline in absolute terms

    350 billionThe fall in private investment was

    the decline in real GDP

    the drop in privateconsumption and

    20 times4 times

    fall in private investment in theEU-27, United States, and Japan

    combined in 200711

    $1 trillion

    EU economies had notrecovered to 2007 privateinvestment levels by 2011

    26 of 27

    of the private investment falloccurred in Greece, Ireland,Italy, Portugal, Spain, andthe United Kingdom

    75%+

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    the opportunity

    private investment inthe EU-27 vs. less than

    of government investment

    More than

    2 trillion0.3 trillion

    excess cash holdings of listedEuropean companies in 2011

    750 billion

    Closing only 10% of variationin capital stock per worker at

    subsector level in Europe couldrequire additional investment of

    360 billion+

    new investment in EU-27 fixed telecomsneeded to deliver desired data speedsover the next decade290 billion

    per year of investment in 201030

    needed to improve the energyefficiency of new and existingbuildings in Europe

    37 billion

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    Investing in growth: Europes next challenge

    McKinsey Global Institute

    Executive summary 1

    1. Behind Europes stagnant growth is a crisis in private investment 11

    2. Private investment will be vital for recoverybut could take time 22

    3. A path forward for policy makers and businesses 28

    Appendix 50

    A. Private investment by countr y 50

    B. Technical notes 84

    Bibliography 93

    Contents

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    Investing in growth: Europes next challenge

    McKinsey Global Institute

    1

    Behind Europes growth stagnation is an unprecedented weakness in private

    investment. European companies and households have been buffeted by the

    global financial and sovereign debt crises and uncertainty about the future of

    Europes economic and monetary union. The fall in private investment between

    2007 and 2011 was larger than any previous decline in absolute terms and

    four times the decrease in real GDP over the same period. History tells us that

    advanced economies take an average of five years to recover from such a drop

    in private investment. By that standard, the 27 economies that make up the

    European Union (EU-27) are, on average, running behind schedule.

    Yet Europes policy debate has focused more on how to balance public budgets

    than how to reignite growth. And when governments dodiscuss growth, the

    emphasis has tended to be on increased government investment (including on

    infrastructure) and private consumption, rather than private investment. Given the

    central role of private investment in Europes downturn, we believe that it merits

    greater attention. In parallel with continuing efforts to restore macroeconomic

    stability,