Short-termism in the long run

With its long history of constitutional democracy, its traditions of intellectual curiosity and its experience of open markets, Europe should be a model for liberals the world over. Notwithstanding the hopes placed in the new American administration, many people throughout the world look to European leadership in fields such as human rights, democracy and environmental protection.

And yet in these turbulent times, Europe is increasingly characterised by fear, polarisation and lack of vision. Populist political parties speak to public anxieties over immigration, international trade and national security while governments struggle to articulate their message. For the first time in generations, today's young European parents are not convinced that their children will be better off than they are.  

If Europe is to fulfil its global responsibilities, it first needs to get its own house in order. One of the foremost challenges it faces is the decline in its global competitiveness and the slow but steady erosion of its industrial base. This is one of the forces driving public scepticism towards globalisation. But the issue should not be whether globalisation is good or bad, but rather how best to take advantage of the opportunities offered by technical advances and the internationalisation of global markets.

When we look at the overall outcome of globalisation processes, the growing distrust among ordinary citizens is perhaps easier to understand. After all, recent years have seen an intensive redistribution of production resources between the global east and the west - meaning factory closures and job losses in the west - and a focus on short-term returns among a small cadre of investors. In the eagerness to bring about reduce costs, production has in many cases been transferred without sufficient focus on the retention of vital knowledge. Short-term benefits have accrued to the few, while long-term benefits are not at all apparent.

The offshoring of production has freed up business minds in Europe to focus on the intangibles: strategic development, brand building and communication. But in many cases this has been short-sighted. In ten or 15 years, who will have the greatest knowledge of production technology, new materials and processes, and from where is it most likely that the new innovations will come? The answer is unlikely to be found in those places that long ago decided that the grubby business of making things was not for them.

The short-term thinking that has driven these processes is the result of a historical anomaly in the financial markets. Capital markets over the last few decades have experienced extremely low interest rates and enormous liquidity. Almost all capital under institutional management circulated in secondary markets in the pursuit of rapid return. Profit and liquidity targets were assessed quarterly or even monthly, and incentive systems for money managers followed a similar pattern.

The question today is: how do we create a capital market that can replace the old industrial base with a new strong one? How do we construct a capital market with sufficiently long time horizons to incentivise investment in strategic research and product development initiatives? How do we encourage not only the exploitation of old innovations but the creation of new ones?

One paradox is that a large proportion of the funds in our capital markets are pension funds that carry commitments of 20, 30 or even 40 years. Yet this capital is often characterised by the same incentive models and liquidity preferences as the short-term capital described above.

I am 38, and my pension savings will have to mature for at least another 30 years. I would very much prefer to see a proportion of this capital being invested in structures that contribute to the building of a sustainable and competitive industrial base in Europe and thereby to long-term prosperity. I want this capital to be managed with a long-term perspective that grants it the time and means to succeed. This could of course come at the expense of short-term returns. But if you do not believe, as I do not, that present developments are sustainable, this approach is ultimately the only game in town.

This is not a question of altruism, but rather of economic reality. It is not that we who are active in the capital markets should give up opportunities for returns but rather that in order to ensure long-term gains, we need to shift our focus from a perspective of between three and 24 months to between three and 24 years. And where better to start than with our pensions?

We are in a time of severe structural crisis. Many of the things we value and take for granted are threatened - our environment, our democracy, our welfare and our prosperity. This moment offers both the threat of destructive conservatism and, at the same time, an opportunity for radical change. Fear may lead us to regress into the false safety of what was before, that which is most familiar and close to us; or it may lead us to take the opportunity that turbulence offers to fundamentally rethink our models and systems and embrace difference and alternative thinking. This is the time to revise our ideals and start anew - to build a new society.