Companies hoard cash, damping growth

According to Simon Tilford, chief economist at the CER, the ratio of investment to gross domestic product in Europe is at a 60-year low even as companies pile on cash. Corporate cash holdings are now €2 trillion ($2.64 trillion) across the eurozone and an extraordinary £750 billion ($1.19 trillion) in the UK. ... Mr Tilford argues that another reason is government policies. "Excessive fiscal austerity," he says, "has snuffed out Europe's tentative economic recovery and threatens a swath of the eurozone with a slump." Why invest to produce goods and services for economies that have little prospect of growing? ... This suggests, Mr Tilford argues, that policies aimed at further depressing the share of labor in national income will further undermine economic growth. He suggests increasing corporate income won't help spur investment while squeezing households by cutting wages will damp growth. ... Further depressing Greek wages "is unnecessary and potentially destructive," said one senior Greek official this week. If more cuts are imposed, "the recession in Greece will be double-digit". ... There is, Mr Tilford suggests, another factor helping to build corporate cash piles, distorted incentives for senior executives. With their remuneration linked to short-term performance, senior executives have little incentives to embark on big, long-term investment projects that won't yield benefits until after the executive has moved on. "Firms are being run for cash rather than growth, with damaging implications for economic activity," he says.