Hello, this is FEPPS Talks, the podcast series of FEPPS, the Foundation for European Progressive Studies, which is located in Brussels. But today I'm in Berlin to meet a very good friend, Matthias Kollatz, who used to be vice president of the European Investment Bank at the same time when I was a board member of the European Bank for Reconstruction and Development. So we have an overlapping period working on multinational and international investment questions.
But subsequently he was the financial senator of the city of Berlin until a few years ago. So he is a very experienced expert about finance, investment, and especially public investment, which is a critical question of our time. Public investment is a concept that probably has changed a lot in the last 15 years, to use a new expression, which was coined by Chancellor Schwarzzeit and Wender.
I think we can say that 15 years ago there was a financial Wender because of the great financial crisis. Everybody recognized that excessive financial liberalization was at the heart of the crisis which we went through, and the model had to change. And this transition to something new was indeed about putting public financial institutions, investment banks, into the center of the policy at least more than before.
So my first question to Matthias is, to what extent this transition has been completed? Has public finance fulfilled its potential or its mandate since we experienced the crisis? It has not. The mission is not done, but a lot of progress is there. And you mentioned it already before the big financial crisis. The common talk was that regulation stops innovation in the financial sector and that there is no regulation needed.
The private banks were much in favor of what they call self-regulation, and we all have learned that this didn't work. So we have more regulation. We have also regulation as something which is partly stopping innovation, because innovation is sometimes reckless. And we have seen also that regulation is needed to stop tax evading practices in banks like we have seen them with CumEx and CumCum and others. So progress is there.
And we have seen, and this was where I had the honor to contribute to, that there is now a new wave of founding of, I would say, promotional banks. So it was a discussion rather that we don't need a big EIB, the European Investment Bank, at the moment of time when I joined the EIB. Now it's rather about could the EIB not do more? Is it not better to do more with promotional banks? A lot of countries created promotional banks or increased the volume of activities.
Also some of the new member states were honored to support a little bit when creating promotional banks. So and this is not anymore an annex of the banking sector. It's now a definitive part of the banking sector. And in countries like Germany, it's a strong part. So there we have the situation that the KFW, the National Promotional Bank, is one of the biggest banks of the whole country. And practically each of the regions has also a promotional bank example given here in Berlin.
We call it EBB Investitions Bank of Berlin. So and why this is important? Because there the idea is not going with a maximization of profits. Going for maximization of investments with certain purposes. So now maybe more climate transition than it was in the past. But also in the past it was always a lot on social housing. It is a lot also on supporting smaller medium-sized enterprises on support of innovation. Innovation is not only depending on grants.
So this is what promotional banks can do and should do. You referred to the problem of deregulation when you spoke about the pre-crisis times. Sometimes for the sake of teaching, I said that in that period there was too much innovation in the private sector and not enough innovation in the public financial sector. Would you agree with this? Agreed, yes.
And if we look ahead from the very turbulent times of the crisis, at the European Union level indeed there were some interesting innovations. They typically came in 2014 and after when the so-called Junker Commission took over. And they launched the so-called Junker Plan. A part of that was a European Fund for Strategic Investment. Was this kind of adequate or was this sufficient to address the crisis and the needs of a recovery especially? It was the right step in the right direction.
But I would not say it was sufficient. I will try to explain it. It was not coming out of the blue. Then beforehand there was a discussion about the structural funds, regional funds and others, that it does not make sense only to give them as grants. One is buying into the experience of the so-called Marshall Plan after the Second World War, that it makes sense to create revolving funds. This was called financial instruments.
An increasing share of the regional funds was also going this route. But this was the first step. Then the first program was called on European level RSFF on innovation financing via loans were established in the cooperation of the Commission and the EIB. And this was now, if you so want, really scaled up with the Junker Plan. And the idea behind the Junker Plan was, okay, the budget is already done and we want now to do more on investments.
So let's do it with financial instruments because we need to rely less on budgetary money for this. So this was the right step. And it was also scaling up these activities. The Junker Plan was going with a guarantee program. And now we have with InvestEU also a guarantee program. But if you look at the size, it is not sufficient because the European budget is altogether relatively small.
And either one increases the size of the budget at the EU level significantly or one agrees on that there has to be also has to be much activity in respect to investment in the member states. So if you so want, we have a lot of member states which are more or less round about net investment zero. And it should be much more given the challenges. We need more investment in innovation. We need more investment in climate transition.
We need more investment in things like housing and social infrastructure. And by the way, this can be done also social housing can be done always with loans because it's in the long term, it's paying back. And this is one advantage of the approach with promotional banks because they can deal with loans over 40, 50 years. And this has been proven after the Second World War successfully. You mentioned that the EU budget is relatively small.
And that's one of the reasons why these types of innovations to scale up and to foster public and private funding cooperation is somehow necessary. I think this goes back to the times when the EU started to launch this family of Jessica, Jesper's and various other beautiful instruments.
Do you think this is a kind of kindergarten which then should enter the school engage and develop something much greater or we would need to solve differently the investment needs of the current European Union, either by the adults like EIB, EBRD, or going for a complete revamping of fiscal rules and giving some kind of privileged treatment of investments, various types of investments when it comes to the accounting of public spending? Maybe there is not a good golden bullet everywhere.
So it makes sense to go for an appropriate mix. I try to make clear that there is space for going with long term loans and other financial instruments with promotional banks on a higher level than it's done now. But it's also clear that the fiscal rules are not so supportive. In Germany we have the Schuldenbremse.
In other countries we have different but sometimes similar things and at the EU level we have this what is called Sixpack which has now, there was some reform but it was quite clear and it was also said by the member states very clearly by the council that there will be no exceptions from the Sixpack for the investment needs of climate change.
And just to make it clear for climate neutral Germany one would need until 2045 or 2050 needs investments about 5000 billion and with the normal budgets we can make maybe something like 3100 billion with the promotional banks as they are we can do maybe another 8 or 900 billion but there still is something to do which adds only for one country like Germany up to another 1000 billion over the next two decades. And for this one has to find instruments.
This could come with new rules and this is I think what you're in with your questions and for the moment I don't see the political majorities for this maybe it will come but for the moment it's not there but if it's not there then it makes sense to look what is possible in the given framework and there certainly everything which goes with financial instruments has not these strict limitations as if you so want grant programs or classical
budget behavior and this would open a window to address at least most of this investment gap. But what is quite clear we need a higher level of investment to cope with the climate change.
What is good is that financial instruments are useful and adequate for this because these investments more or less will pay off in the long run so they are not profitable in the year one and so that's why one needs very low interest rates or maybe also a component of grant in combination but in the long run most of the investments we are talking about will pay off so making housing less CO2 emissions or creating kind of a new gas grid for H2
this all makes sense but it also makes in the long run economically sense.
And so this is where we have a lack of instruments and certainly the fiscal rules also at the EU level are not very helpful because they basically exclude the climate change investments which are the bulk of what we need but if you look at the member states you also see we have in many member states we have housing issues in many member states we have issues on social infrastructure where I mean in one hand schools and universities and in kindergartens but also hospitals and other things.
But also this is something which has to be dealt with and we could be better equipped.
So if you are looking for an agenda in the next MFF or the next European Parliament, it would be good to move in this direction and so maybe one could use the experience now collected with FC and InvestEU, but one should certainly develop it because what I hear is that all those stakeholders who are working with InvestEU say that notably everything which goes on investments and innovation and also social purposes, there will be much more
demand than there is a possibility to finance with a European programme as it is. About five, six years ago there was a debate about the need for a green bank of Europe. Do you think this was settled or there was a missed opportunity because I'm sure in the next one here very few people will advocate a green bank for Europe? I would not have gone for a green bank for Europe because this might be a little bit surprising for you,
it makes the topic smaller than it is. One has to go with full arms on it. So if you have big promotional banks and the name of KFW is coming from Kreditanstalt für Wiederaufbau, which means the topic was a whole reconstruction after the Second World War and what we have now ahead of us is in this, it's not something little which has to be added, it's in the area of a full societal step forward.
Germany has had such a challenge when there was a reunification and it was quite clear that you don't need a small bank for reunification purposes, you need it full arms, full gear, whatever you have.
And that's why I think, but what makes sense is that this is kind of a general approach of all institutions and but what I would suggest something separate to make clear that climate investments can be made only with additional investments also to underpin this additional investment path to make a kind of we would call it Klimasondervermögen which is a little bit separate from the normal budget to underpin that is an additional effort for an additional goal. Is it legal in Germany?
It can be made legal if you go in the direction of loans, if you go and also if you make kind of equity programs and then it has to be economically viable. So it is legal if not the taxpayers have to pay it, but if those who are the beneficiaries have to pay back either what you have with loans or if it was with equity then they have to pay via whatever dividends or sales. In crisis we are always able to do so in the Corona crisis.
Maybe you remember that the German state practically took over Lufthansa and after the crisis was over the German state then sold again his shares on Lufthansa and this is what it's now about.
So I'm not very much in favor of saying we should go in a race with the US who can throw more grants on the big companies with the so-called inflation reduction pack but I think it's better to give them lots of money but to expect also a payback after a certain period of time because this all makes sense when it is going on in the long term economically viable projects.
Understood. I think in Germany a lot of people know but outside Germany there is also a lot of awareness of let's say the constraints of investment inside Germany. I think outside let's be honest some people refer to underdeveloped broadband, the trains which might be often late and various other manifestations of not having enough investment in the Federal Republic as a whole.
Is there any plan or even a master plan to overcome these bottlenecks which maybe just perceived but so many people perceive it that there must be some reality behind. Weather is very much smoke there sometimes also some fire and so yes from the political point of view German governments for now relatively long time underestimated the need of investments in the future.
So but the society is never out of investment and this was also the picture some had in the background which is what we call Schuldenbremse, debt break and this is not very helpful. But it's on the other hand it's now the third time in my in my long life that it's all the declarations outside are that Germany is a sick man of Europe and I didn't say that after. No you did not say it but after a while then things seem to change or at least they seem to change in the past.
So it's an effort is necessary and the core of the effort is really an increase in investment Germany was too for too long period of time content with net investment zero. And this is this is not helpful. And so I see now that also with the railways there is a set up of a big investment program but we have not yet.
The definition of this what I would call this climate on a family or like a Marshall plan on being on loans but we need something for 2025 years on climate change and we need something also on on innovation in the in the manner I have described it and we are not yet there. I hope we will see a development in this direction. I would like to have a final question, which would be to zoom on a very sensitive question which is housing.
And I think Berlin is a city where there is an enormous experience with, you know, trying to solve housing shortages in various ways, trying to tackle housing prices, rents in various ways. And you already addressed this question a little bit from the side of sustainability and basically to change the energy consumption and emission aspect. But I think it's also a matter of quantity.
So I wonder if you could share with us in a nutshell a few points which concerns, let's say the financial side, what it means to the city, but also perhaps above that the federal government. And for the households. So how can you bring together the interest of of of these three with some kind of smarter financial solutions? Nobody will believe it when I started to work as a European investment bank. The prices for flats in Luxembourg were twice as high as in Frankfurt online.
And these were twice as high as in Berlin. So we are not anymore in this situation, but this shows a little bit where the city is coming from. There were a lot of plans after the reunification that Berlin would become a five city with five million inhabitants and there were a lot of tax deductions to support housing in the environment of Berlin, the so-called Speckgörtel. And Berlin was basically a shrinking city.
So when we had the situation that we had in the in the in the eastern part of the city, we had only half of the kids going to school then before the reunification. So this is always showing that this picture was completely different. And until 2009, houses were demolished also with state subsidies. So just to reduce the number of of flats. So this is now very much different.
I think we have now a long term plan that people are going to the cities that also people are going to Berlin and Berlin has also developed has made a lot of economic progress. So it's a capital of Germany. This helps a lot, but it has also developed its economy on on own grounds. And it's now for the first time since ages, it is over the average in Germany. So the GDP per capita over the over the average since since four years. So and so we have now an urgent need on on housing.
And what we are lacking most is the consensus in the city that it is like this because a lot of people still think we are in the shrinking face. And why also these people all these people coming to Berlin are bothering us. So but we need and this has started. We need programs for for for new housing. And what the market is not providing by its own forces is unfortunately housing for let's say a very much affordable rents.
And I think if we are successful, then Berlin at the end has to go away, which is somehow different from London or maybe Paris. That we with a with an average salary, maybe you will not should not be able to rent a palace, but you should be able to rent a small flat. So and and this is what we are now now trying to do. But giving the financial instruments, it's there is at least we have a consensus that all this is basically done with loans. Because housing is is is earning money over time.
So and our our goal is that we do 20,000 new new apartments per year. This we don't achieve for the moment, but we try to come closer to it and 5000 from this should be social housing. And this social housing is for Berlin much cheaper than it is in other cities. Let's say let's say Paris idea is that it is around seven euros and maybe we will go ahead also a little bit with inflation. But it's significantly so the idea for for the for the lower half of the society, if you so want.
And and if he can do this, then this could be also also helpful for the for for other regions and also for other cities. Because what I think all big cities have to face is a secular trend that people are moving to the cities. And I think in your in your home country, Hungary, it's the same. Lots of similarities. Well, thank you so much also for mentioning Hungary at the end. Indeed, it would open a new chapter for our conversation.
But I think what you shared is indeed a lot of food for thought about the state of public finance and the capacities of investment in Germany, but also in the European context. If I need to draw some kind of interesting conclusion, I would highlight the point that the name of the game is not to scale back the green agenda, but to find the financial solutions and the financial means to deliver the necessary investment.
And when it comes to housing, also the point is to maintain the ambition to solve burning social questions and indeed organize the financial basis, the financial background accordingly, so that society can indeed appreciate a progressive path of economic and social development in Germany. But let's say this is also something the rest of Europe should also appreciate and work together to share the best examples which we have. Thank you so much, dear Matthias.
And let's also be in touch to follow up on the implementation of some of these policies in the next cycle. Thank you very much. [Music] [BLANK_AUDIO]