To wrap up this year’s Capital Markets Seminar, I’ll focus on the lessons learnt here – and I will do so through the lens of a central banker. But allow me also to make use of my past as a corporate finance professor, a board member of a European CSD, and as the Chairperson of a biomass company that went through an IPO in Lisbon in 2021 (a very rare event) to grow into a diversified renewable energy company with activity in many countries.
Over the last two days, we have discussed how Europe can establish and finance strategic priorities, ranging from sustainability to digital technology. We have heard from European institutions, investors, such as pension funds, financial intermediaries, market infrastructures and even the energy and space sectors.
These discussions have reflected the breadth of Europe’s financing needs. But they have also pointed towards one fundamental question:
How can Europe mobilise the investment it needs, at a time of exceptionally high uncertainty?
The answer points to Europe prioritizing investments whose value remains high across a wide range of possible futures.
Uncertainty should make us more rigorous in the way we select, design and finance investment. It should lead us to test assumptions, examine alternative scenarios and distinguish carefully between different projects. But it should not become an excuse for delays.
Today, I would like to develop this argument in four steps.
First, I will summarize why it is that uncertainty has an economic cost, but also why waiting also has a cost.
Second, I will consider Europe’s investment challenge, the (respective) roles of public and private investment, and how resilient banks together with more developed capital markets that make equity sizeable can span a wider range of risk-return combinations that deliver growth and cohesion.
Third, I will highlight three areas in which investment can deliver value across different states of the world: climate and energy resilience; defence and strategic capabilities; and innovation and efficiency. All areas covered in our seminar.
Finally, I will reflect on the contribution that central banks can make.
Uncertainty has an economic cost. Waiting does too.
The world has become more uncertain in recent years.
Geopolitical tensions have intensified. Trade restrictions have expanded. The international security environment has deteriorated. In parallel, Technology is evolving rapidly. And Climate-related risks are becoming more evident. The economic consequences of many of these developments remain difficult to grasp.
All these developments are visible in indicators of global uncertainty, economic-policy uncertainty and trade-policy uncertainty. And even if financial-market volatility is not always moving in tandem with these developments, uncertainty is visible in the volatility of energy prices, and also in sovereign yields.
This uncertainty affects economic decisions.
Households may save more. Investors may demand higher risk premia. Companies may postpone investment. Governments may also wait for greater clarity before committing resources to long-term projects.
Economic theory helps us understand this behaviour.
There is an option value in waiting. When an investment is costly or difficult to reverse, waiting can have value. By postponing the decision, an investor may acquire additional information. A project that has not yet begun can still be modified or abandoned. Once an investment has been undertaken, its costs may not be fully recoverable.
Recent analysis by the European Central Bank illustrates precisely this mechanism. An unexpected increase in uncertainty is estimated to reduce euro-area business investment significantly more than either output or private consumption. Investment is the component most affected by the incentive to wait.
But the option value of waiting is only part of the story. Waiting also has a cost.
When investment is postponed, productive capacity is not created. Infrastructure is not built. Technology is not adopted. Knowledge is not accumulated. And existing vulnerabilities remain unaddressed. These costs become more significant when postponing becomes an entrenched behaviour.
There is also a collective dimension. A decision to wait may appear rational for an individual firm or investor. But if companies, households and governments all postpone investment at the same time, the aggregate outcome may be weaker demand, slower innovation and ultimately lower potential growth.
So, the appropriate response to uncertainty is not to disregard it. Nor is it simply to wait for it to disappear. It is to identify investments whose value remains high under a wide range of future scenarios.
We may not agree on the precise shape of the future. But it is difficult to imagine a plausible future in which Europe does not need more secure energy, stronger digital infrastructure, greater technological capability, better cybersecurity, a skilled workforce, and resilient financial and physical infrastructures.
Europe’s investment challenge
Europe has considerable strengths. It is a “superpower”, as we heard here yesterday. Yet it continues to face difficulties in transforming these strengths into investment at scale, productivity growth and sizable globally competitive firms.
These difficulties are particularly visible in research and development, digital technologies, intangible capital and the scaling-up of innovative companies.
In that sense, Europe’s competitiveness challenge is, to a significant degree, an investment and financing challenge. But this should not be interpreted simply as a call for more public expenditure.
European governments already face substantial and competing spending pressures. These include ageing populations, pensions, healthcare, climate change adaptation and mitigation, and defence. But fiscal space is not unlimited. And we must not forget that geopolitical tensions have been a main source of instability recently, putting extra pressure on sovereigns, as capital markets well know.
The question is therefore not merely how much governments can spend. It is how Europe can mobilise all available resources, public and private, and allocate them as efficiently as possible.
Governments have an important role in providing essential infrastructure and public goods. Public intervention can also be justified where markets do not capture the full social value of an investment, or where coordination problems prevent otherwise socially beneficial projects from proceeding.
But public finances alone cannot meet Europe’s investment needs. Nor should public funding unnecessarily replace private capital.
Public resources should be used strategically. They can reallocate risks, provide initial support, address market failures and help crowd in private investment. (The European Investment Bank has presented valuable examples along these lines.)
But, at the same time, Europe needs to mobilise its private savings more effectively.
This makes deeper and more integrated European capital markets especially important. More effective cross-border risk sharing would allow savings to reach productive projects across the EU. It would also give innovative companies access to a wider range of financing options throughout their development. European citizens should be able to choose how to allocate their wealth into a portfolio of instruments with different levels of risk and return – consumer protection is not eliminating risk, it is providing literacy.
The relevant question is therefore not simply whether Europe invests more.
It is whether Europe can combine public and private resources effectively and direct them towards projects with strong economic fundamentals, high social returns and the capacity to strengthen long-term growth.
Europe has well capitalized and competitive banks, one of its strengths, should swiftly complete the banking union to benefit from better risk-sharing with a European scale, and focus its efforts on the development of other types of financing that are complementary to banking and better tailored to promote innovation and investment in intangibles, with exit strategies that lead investors to more ownership.
Investments that are valuable across different states of the world
So let’s consider the investments that appear valuable across different states of the world. I will highlight three of the areas discussed in the seminar.
Sustainable finance, climate and energy resilience
The first is sustainable finance, climate and energy resilience.
The climate economic cost argument is well established. Within the European Union, cumulative losses associated with weather and climate-related events reached approximately 738 billion euros between 1980 and 2023. More than 160 billion euros of these losses occurred in just the last few years. Scenario analysis by the NGFS (network for greening the financial system) suggests that a disorderly transition could reduce GDP by around 1–1.5% by 2030—more than double the cost of an orderly transition.
But there is increasingly also a compelling competitiveness and resilience argument. Indeed, recent experience has demonstrated the economic consequences of fossil fuel energy dependence and energy-price volatility. High and unstable energy costs affect households, weaken industrial competitiveness and increase uncertainty for firms considering long-term investments.
Investments in renewable energy, electricity networks, storage, energy efficiency and climate adaptation can therefore produce several benefits.
They can contribute to lower emissions. They can reinforce energy security. They can reduce exposure to external shocks. And they can protect households, infrastructure and productive capacity.
These benefits remain relevant under a wide range of scenarios.
An orderly and timely transition can also reduce the risk that economic agents and financial institutions are confronted with an abrupt adjustment at a later stage. Analysis by the Bank of Portugal, for instance, indicates that a faster transition towards net zero is associated with lower credit risk for banks operating in the country in comparison to a delayed or disorderly adjustment.
The scale of the investment required is considerable.
And sustainable finance can help mobilise private capital by improving the information on which decisions are based. Reliable data, meaningful disclosures and credible transition plans can help investors assess risks and opportunities more effectively. They can also reduce uncertainty about the characteristics and expected performance of sustainable investments.
The ultimate objective is not to direct capital through labels alone. It is to enable better-informed investment decisions and support a transition that is economically sound, financially sustainable and socially credible
Defence and strategic capabilities
The second area of investment is defence and strategic capabilities.
Europe’s security environment has changed profoundly. Khaki in one more shade of green in our palette; Many European countries are now increasing expenditure. But, here too, the composition of investment matters.
Recent ECB analysis suggests that defence spending focused on capital investment may contribute more to productive capacity and long-term economic growth than expenditure directed primarily towards personnel costs. This distinction matters because investment in research and development can generate significant productivity gains and innovation spillovers over time, whereas spending on imported equipment may limit the domestic economic benefits, and expenditure concentrated on personnel may place upward pressure on inflation.
This means that the economic effects of higher defence spending will depend on how that spending is designed, where production takes place, how fragmented procurement remains and whether investment generates technological spillovers.
Europe should therefore seek greater scale, reduce unnecessary duplication and strengthen cooperation where it improves effectiveness.
Public funding will remain indispensable for core defence capabilities and public goods. But private finance should also have a role.
Also in this area, the objective should not be just to spend more. It is to invest better.
Innovation, efficiency and the value of spillovers
The third area of investment is innovation and technological development.
Artificial intelligence, advanced computing, digitalisation and automation are transforming the global economy. Technological capabilities increasingly shape productivity, competitiveness, resilience and security.
But not all investments generate the same economic and social benefits. Some projects produce significant positive externalities, or spillovers, that extend well beyond the direct investors.
In this context, Europe's challenge is not simply to invest more, but to invest in activities that expand future opportunities and generate benefits beyond the original investor.
Research and development creates knowledge that spreads across firms and sectors. Digital infrastructure supports innovation throughout the economy. Education and skills raise productivity well beyond individual workers. Cybersecurity strengthens entire networks rather than isolated organizations.
Because these investments generate significant spillovers, their social returns often exceed their private returns. This can justify well-designed public support.
But public resources are limited. The objective should therefore be not only to increase investment, but also to improve its efficiency. Innovation and digitalisation should enhance the effectiveness of public services just as they improve productivity in the private sector.
In uncertain times, some investments are valuable because they increase our ability to adapt to whatever future emerges. Innovation is one of them.
What can central banks contribute?
But I am a central banker. So, where do central banks fit into this discussion?
Let me highlight a feature of central banks that is particularly relevant when thinking about strategic, long-term investment. Central banks are, by design, institutions with a medium-to-long-term perspective. Their mandates require them to look beyond immediate economic fluctuations and shorter-term policy cycles. Their analytical capabilities, institutional independence and forward-looking approach place them in a unique position to assess risks and challenges that unfold over many years.
Central banks’ contribution is to fulfil their mandates effectively and responsibly and to help create the stable conditions on which long-term investment depends.
The first contribution is price stability.
Long-term investment requires a reasonable degree of confidence about purchasing power, financing costs and future economic conditions. High and volatile inflation shortens investment horizons. It complicates project appraisal. It increases uncertainty about costs and returns.
By pursuing their inflation targets, central banks provide stability for savings and investment decisions in the economy.
The second contribution is financial stability.
Europe’s investment needs require a resilient financial system capable of supporting households and firms throughout the economic cycle and continuing to provide financing during periods of stress. A resilient financial system can absorb losses without turning them into broader economic disruption. It can also help ensure that viable projects continue to receive financing when conditions deteriorate.
Central banks contribute to financial stability with sound regulation and supervision.
The third contribution is analysis and risk assessment.
Central banks possess extensive analytical capabilities and access to detailed economic, financial and, sometimes, supervisory information.
One issue discussed during this seminar was the impact of rising sovereign bond yields on financing conditions, as concerns about fiscal sustainability, inflation and geopolitical developments are affecting funding markets globally.
As sovereign bond markets become more sensitive to inflation expectations, concerns about fiscal sustainability and geopolitical developments, shocks can spread more rapidly across jurisdictions and asset classes. This dynamic may be reinforced by the growing role of non-bank financial institutions, whose investment decisions can be more responsive to changes in market conditions and risk sentiment.
In this environment, one of the responsibilities of central banks is to identify vulnerabilities and highlight the channels through which stress can propagate across funding markets and the broader financial system.
Understanding vulnerabilities and transmission mechanisms therefore becomes as important as understanding the shocks themselves.
Central banks can therefore contribute not only by producing central forecasts, but by helping policymakers and economic agents think more systematically about scenarios and alternative futures.
And in times like ours, it is clear that Central banks must also keep up with new technological developments and have a role in their appropriate adoption, as was demonstrated in this Capital Markets Seminar.
Finally, central banks deliver through credibility and trust.
When the external environment becomes less predictable, the quality of institutions becomes even more important.
Independent central banks, credible public institutions, sustainable public finances and predictable regulatory frameworks can reduce avoidable uncertainty. It can lower risk premia, lengthen investment horizons and increase the willingness of households and firms to commit resources to the future.
Trust may be intangible, but its economic consequences are real.
Central banks cannot and should not make the investment decisions Europe needs.
But we can protect the stability on which investment depends. We can identify vulnerabilities and analyse interacting risks. We can contribute to secure and efficient financial infrastructures. And we can preserve trust in money and in the financial system.
The future is uncertain. That is precisely why Europe cannot afford to stand still.