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Ladies and gentlemen,

Good afternoon!

Thank you very much President Draghi and Professor Martin Schmidt for the opportunity to speak here today.

The ECB is to be congratulated for organising a conference on such a crucial topic.

It is a great pleasure to be among so many prominent economists that devote so much brain power to the issues that gather us today.

Coming not as an academic but as a policy-maker dealing with science and innovation, I thought I would use this opportunity to present my perspective on the so-called "productivity paradox".

Based on my experience in this position, in the first part of this speech I will offer three tentative explanatory causes for this apparent broken link between innovation and productivity growth. And in the second part I will tell you what kind of policies we are proposing to resolve this paradox. (And at the end you can tell me if I'm wrong!)

First let me say this. The European Central Bank has a done an outstanding job in fighting the economic downturn. Without a doubt, this has contributed to the return of growth to the Euro area.

But as President Draghi says himself, this is not enough.

It is not enough to create sustainable and robust economic growth.

It is not enough to provide the increase in prosperity that the Eurozone needs.

There is only so much that monetary policy can do.

It is telling that earlier this year, at Davos, the stronger voice for globalization was the President of China.

And it is also telling that it was that same President - not a European or an American leader – that said, in last year's G20, and I quote:

"Innovation holds the key to fundamentally unleashing the growth potential. The combination of the virtual economy and the real economy will bring revolutionary changes to our way of work and way of life."

In the past decade we have seen the rise of a new set of technologies. The Internet of Things, Big Data, Artificial Intelligence, Robotics. All of these innovations hold the promise of large gains in productivity.

They can make production and delivery more efficient.

They can create new high value added products and services.

Most importantly, they can allow us to do things that we couldn't even imagine a decade ago.

But the problem is that these technologies are failing to deliver on their promise of gains in productivity. Somehow, the R&I-Productivity relationship that flourished before is now damaged.

Some economists call it the productivity paradox.

We still seem to live in Solow's world where we "see the computer age everywhere except in the productivity statistics"…..

Working daily with policy makers in Member States, with scientists and entrepreneurs, with international organisations and academics, I tentatively offer three possible explanations:

The first explanation I find persuading comes from very interesting recent work by the OECD. As you know, this line of work states that the slowdown in productivity is not universal. It states that the 'diffusion mechanism is broken'.

In the last 20 years the frontier firms grew their productivity between 3-5% a year. But the average company stagnated. Those gains are not trickling down to the wider economy. And not spreading across key sectors of society. This means a growing divergence of the frontier firms from the average firm, with serious consequences, both economic and social. We have to understand why this is happening and push for specific policies to address it.

The second explanation pertains to the very slow digitalisation of our European Economy. But in a sense Europe woke up too late for this party. We are catching up – we will catch up – but in the meantime I believe we are really not reaping the full potential of the digital revolution.

We have to understand that innovation has dramatically changed with the digital revolution:

First, it puts the user in the driving seat. This means that more and more individuals will feel not only empowered, but able to innovate by themselves.

Second, small players are enabled to enter and dominate in markets and scale up quickly where they could never before.

The Swedish company Spotify if a perfect example of this. In a few years, this went from an unknown player to dominating the music industry. All because of the digital characteristic of their business model.

And third, the digital economy can create entirely new markets.

Think of the platform companies and the sharing economy or of the numerous applications of Artificial Intelligence to enable economic opportunities that would simply be impossible in the old paradigm. This is what I mean when I say that digital technologies create new markets.

The third possible explanation is the almost stagnant growth of investment in R&D in Europe.  

Today, in Europe, we have a stagnation - and in some countries decline - of investment in R&D in Europe. The Europe 2020 targets of R&D spending jointly agreed by Member States, are 3% of GDP. 2% Private and 1% Public.

But most Member States are falling far short of these targets. We know the financial and economic crisis and budgetary restrictions played a big part. But there are other factors at stake:

(1) Capital Markets:

Look at the situation of Venture Capital in Europe as a case in point. In 2014, venture capital investment across the EU was around €5 billion. In the U.S. €26 billion. The average size of a venture capital fund in Europe was €60 million. In the U.S. €120 million. And of this minute VC, around 30% has a public origin and most of it is going to consumer web, not to deep tech projects.

Something is wrong here.

(2) Never before has so much liquidity existed, yet companies are not using it for research and development.

So the onus should not only be on Member States. Companies need to commit themselves to R&D investment.

Instead they are sitting on piles of cash. Or they are spending it in share repurchases at a far faster pace than they are investing in long-term growth through R&D and other forms of capital spending.

Of course in some cases, buybacks are warranted and can make sense from a business perspective.

But if those buybacks come at the expense of innovation, short-term gains in shareholder wealth could harm long-term productivity. 

So we have a problem of translating innovation into productivity. And three possible and certainly not exclusive explanations: 1) lack of diffusion of productivity gains from frontier firms to average firms, 2) lack of digitalization of our core economic sectors and 3) virtually stagnant investment in R&D.

Let's look at what we are doing at the European Commission to address this problem.

Unfortunately there is no "one size fits all" pill!

As we are among economists, let me frame our policies in two brackets: those on the “demand” and those on the "supply side”.

For me, demand-side innovation policies in the 21st Century are the ones that deploy public money directly toward the digitalization of our core economic sectors. It is attuning public procurement or public grants directly towards the goal of accelerating digital uptake in the highly central but also highly regulated sectors of health, transport, energy and others. In a very good article on innovation, Danni Rodrik also focused on the demand side on the digitalization of these traditional sectors. He quotes an important Mckinsey analysis that estimates that around 90% of our economy is yet to reap the productivity benefits arising from digitalization and ICT. 

It is essential to encourage the digitalisation of sectors that are largely "untouched" by the digital revolution. Areas like energy, healthcare, transport. We need to make this uptake as smooth as possible.

We need to catch the "third wave" of the internet, in the terminology of American entrepreneur Steve Case, because Europe certainly was not first mover in the first and second waves.

Let me tell you what I mean by this: the first wave was when we built the infrastructure of the web.

The second was when we built the applications on top of that infrastructure (think of apps, or social media).

And now the third emerging wave is when we take the web out of its infrastructure and into the core of our traditional regulated sectors of health, energy, transport and education.

By doing this, we can push our economy to a new level of innovation and growth.

There is a lot of untapped potential and a lot we can do. In the upcoming work programme of Horizon 2020, for 2018, 19 and 20, we have around €30Bn to invest in Research and Innovation. I defined as a key priority the financing of projects at the intersection of the digital and the physical economies. I am confident that this will give a significant push to this Third Wave in Europe.

But what about the supply-side?

There are three things we need to address in order to mend the R&I-Productivity relationship in Europe: regulation, investment and impact.

So first of all, a reform of our regulatory environment is needed.

An example: last year we launched the Innovation Deals scheme. The idea is to help innovators overcome regulatory barriers throughout Europe.

This is about sitting around the table with national authorities, European authorities and regulators to help us identify and address legislative barriers more quickly. It provides a much needed sense of clarity. But it also helps us identify solutions in existing legislation.

A second supply-side policy is lowering the obstacles for investment in R&D. This can be done with public financial instruments that lower the risk of private investment in important but high-risk projects, thus addressing a market failure.

Together with the European Investment Fund, we're currently setting up a Venture Capital Fund of Funds. But contrary to what was done in the past, we are deliberately setting up this Fund in a way that hopefully will make it more attractive to the large European institutional investors. Investors that today are not investing in this asset class and therefore not contributing to investment in R&D.

We opened a competition to select a private manager of this fund, with clear responsibilities of fund raising from private institutional investors. And the Fund will only go through if the public side is a minority shareholder. 

We believe this Fund can bring a new momentum to the European venture capital market.

The third device to help reconnect the innovation-productivity machine is impact.

We lack disruptive market-creating innovation in Europe that is required to turn our best ideas into new opportunities, new businesses and new jobs.

This is why I came up with the idea of a European Innovation Council.

It will listen, harness and add value to the ideas of Europe's entrepreneurs and innovators.

And it will complement the great support we already offer in Horizon 2020.

A new landscape will be created where the innovator is the one telling us what to do. And not the other way around.

The kind of innovation that does not fit neatly into existing sectors. The kind where a multidisciplinary approach is celebrated.

The EIC will – I hope – be a central piece in creating this ideal ecosystem I am speaking of.

Last year I met Bertrand Picard who told me that when he was trying to create his fuel-free solar impulse plane he went to every airplane constructor and they all told him that building a plane like that was impossible. Finally he ended up to a company that designed boats. And they made it.

Two takeaways: The boat company made it because they didn't know was impossible and second they looked at it from an angle that would no fit on the traditional way of thinking for a specialist in the field.

That's the type of innovation that we trying to grasp. The one that comes from unexpected places.

Ladies and gentlemen,

I came here today to talk to you about why fostering innovation is crucial to avoid stagnation.  

And the ECB is to be commended for taking a leadership in this topic.

The answer is really quite simple.

Innovation is key to fostering productivity in the Eurozone.

It is true that the current relationship between the two is damaged. But it is not broken.

Hope is not yet lost.

We have the potential to avoid stagnation.

We have powerful tools at the European and national level, and we have new ideas to reap the great potential of digital technologies.

We need to implement solutions from both the demand and supply side so that innovation can flourish. So that it can be truly everywhere, including in the productivity statistics.

Most importantly, pushing beyond the productivity paradox will have to engage all of us. And as President Draghi himself once said:

"It would be a tragic illusion to think that solutions might come from the outside. They are up to us."

Thank you. 


Carlos Moedas - Keynote speech - 13 Mar 2017

My speech at the Joint Conference organsied by European Central Bank and the MIT Lab for Innovation Science and Policy: "Why fostering innovation is crucial to avert secular stagnation and why it is particularly urgent for the euro area" Frankfurt, 13 March 2017



Franfurt am Main, 13 March 2017