Unlike an individual borrowing money, government borrowing can be rolled over and increased over such an extended period that repayment becomes a problem for the next generation not the present one. Sadly, this kind of behaviour is rather common and widespread. It is hard to imagine a reasonable person wanting to maintain a good lifestyle now by borrowing huge amounts of money which can only be repaid by his or her children or grandchildren. In other words, allowing or asking governments to spend beyond their means for an extended period of time is tantamount to society mortgaging the income and livelihood of our future generations. Such action is irrational and irresponsible, but it’s happening all over the world. No wonder some people have  2  BIS central bankers’ speeches  posed the question – if this is the kind of world we’re living in, is it really worth saving? Can central banks save the world? “Yes and no” 9. Rather than trying to answer this metaphysical and provocative question, let me quickly return to the subject of my remarks today: can central banks save the world? The short answer is “yes and no”. 10. When a financial crisis occurs and the financial system is facing imminent meltdown, as happened in the wake of the collapse of Lehman Brothers in 2008, shockwaves in the form of a severe credit crunch normally follow as banks and other financial firms lose confidence in each other and hold on to whatever liquidity they can.
Banque de France researchiii based on a panel of 22 advanced economies shows that over the 1996-2014 period it has been the main determinant of the slowdown in business investment (negative contribution of 80%). The second lever is confidence or, in other words, the level of uncertainty (17%). Concretely, rules have to become simpler and more stable for entrepreneurs. In France and Spain, we are still far from the best performers in the latest World Bank ‘Doing Business’ ranking: we came in 29th and 32nd respectivelyiv. But alongside the economic levers, financial levers play a role too (slide 9). As Europe’s economy is close to the “technological frontier”, businesses need to innovate more. As such, they need to be able to take more risks, which means more equity financing, rather than debt financing. But Europe is lagging behind: equity capital amounts to only 52% of GDP in the euro area, compared with 121% in the United States. In addition, (slide 10) the cost of equity (CoE) has remained astonishingly high on both sides of the Atlantic – more than 9% for large listed companies in the euro area according to Banque de France calculations – despite the sharp fall in interest rates over the last two decades. This means that the risk premia have increased. The high CoE could prompt companies to give priority to dividends and share buybacks over investment – we have seen this situation occurring in the United-States. So, in practice, what is the way forward?