 Under his leadership, the Commission has agreed to apply 2.5 billion euro of its Horizon 2020 R&D program to support innovation, and has recently launched the European Innovation Council to lay the foundation for how Europe will support breakthrough innovation projects and start-ups. He is truly at the frontier of translating knowledge and theory into practice. With his MBA from Harvard, Commissioner Moedis can call both sides of the Atlantic his home. His background, experience and perspectives make him the perfect speaker to add insight today. Please join me in welcoming Commissioner Moedis. Good afternoon. Thank you so much to all of you and first of all to Mr. Peter Pratt here, board member of the ECB and chief economist, of course to President Draghi and Vice President Constancio. Also to Professor Martin Schmidt, thank you so much. I went to the other side of the river, but I still like very, very much the MIT. And to congratulate you for this great afternoon. It's very rare that I have the time to sit down and to listen to different presentations, and they all have been so interesting and so inspiring. So it's a pleasure to be here, but I'm here in a different role. I'm not an academic. I'm a politician. And so what I thought of doing today with you would be this exercise the other way around is how a politician thinks about these things and these matters and how a politician like me thinks about the productivity paradox. And so what I'm going to do is basically to divide my presentation in two parts. And in the first part, I'll give you what I think for me as a politician. What are really the reasons for these productivity paradox in an empiric way? And I'll give you three tentative explanatory causes. And then I'll be into something that politicians sometimes avoid, which is to give some solutions. What am I doing? So if I think about it, what are the actions? What is the commission doing? But first let me just say that the European Central Bank has done an amazing job for Europe. And that is a job that will stay in the history books for the contribution of the ECB for the growth of Europe. But President Draghi says himself that what the ECB does, it's not enough. It's not enough to create sustainable and robust economic growth. It's not enough to provide the increase in prosperity that the eurozone needs. And there's only so much that the monetary policy can do. And to be honest with you, it's telling that this year at Davos, the stronger voice for globalization, was President Xi Jinping from China. And is also telling that that same president, not a European, not an American, said last year at 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 our way of life. In the past decade, we've really seen an amazing change. We started with the internet, the internet of things, and now we're going to the internet of the intelligent things, artificial intelligence. But then all these innovations promise so much large gains in productivity. And they can change our lives. They actually change our lives every day. But they are not delivering, they are not delivering these productivity. That was a promise. And then people get upset and Europeans and Americans get upset because they don't see in their pockets that productivity. They see it as a consumer, but they don't see it as a voter. Because as a consumer you feel it, but then you don't feel it as someone that votes for someone in power. Because your life has no purpose. Because you find that you have all these innovations, but then what's your life about? If you're jobless, you don't feel like that. So some economies call to these the productivity paradox, and I think that we have as politicians to reflect about it. To reflect about the working daily in these subjects, and what do you do to change it? But let me start by the explanations. And I was very happy that actually my first explanation was in the speech of President Draghi. And President Draghi described very well this idea that innovation is about new ideas, but is also about diffusion of those ideas. And when you look at those charts of the OECD and you see that the productivity of those frontier firms in the last 15 years in terms of manufacturing has been growing by 3.5% for the very good ones. And in the services sectors has been growing by 5% a year in the very top frontier firms. And then the average firm is stagnated. Then you think, what changed? Why is that? And of course you as economists, you go into the models, and I was very impressed by Diego Comín and the models of looking at the total factor of productivity. But as a politician, what do I see? What have I seen in these two years? And I think that one of part of this lack of diffusion in between the top and the average is because everything changed, the game changed in a matrix. The physical and the digital are merging and the sectors are also merging. And so if you are at the frontier, you have the assets, you have the capability to deal with it. But if you are at the average small enterprise, you don't have the assets, you don't have the money and you can't do it and you don't feel comfortable to it. You know, probably one of the most mind-blowing visitors I did in these two years was when I decided to see where are the best minds of Europe. And they are what we call the European Research Council grantees. And I asked, where are most of them? Where are they located? And someone came to me and said, they're located at the Weizmann Institute in Israel. I said, so how many do they have? They have 100 in one institute. So I want to go there. And so when I went to the Weizmann Institute, you saw exactly this difference in between and in the frontier and the average is that everybody is looking and working in between the disciplines. So I met this man who basically spent his life studying chlorophyll. He's a biologist. But because he's obliged in the Weizmann Institute to go through other departments, he discovered the cure for one type of prostate cancer by spending his life looking at chlorophyll. And I think that the difference in between those top frontier firms is that they are able to have the talent, the assets, and the ability to be today at those intersections in between the physical and the digital in between the different disciplines because there's nothing more at the core. The core is just a necessary condition you have to be at the edges of your disciplines. The second explanation pertains to the very fact that digitalization and we all are here in this beautiful room and you think that digitalization is all over and it comes a little bit also to a point that was made earlier by President Draghi. Digitalization is not everywhere. Danny Roderick at Harvard, he looks at it and he says most of the digitalization is in ICT and media. That's 10% of the economy. But we as people we spend most of our income in health, education, energy, government, and the digital is not there. So we have to understand somehow what changed and I think that there's three points I wanted to give you a little bit of my experience of this change in innovation in the digital world. The first one is actually it has for more than 20 years that a very good friend at MIT called Eric von Hippel has been studying it is that innovation is not anymore on the producer side. Schumpeter was somehow wrong is that the user I think was our friend from HSBC was telling us about these innovations that actually come from the user and not the producer. And the digital world changed that. And so when you look at digitalizing the economy you have to think that is not going to be about the companies what will be about the users. The second is about this fact that in a digital world the small players are enabled to dominate markets very quickly. I spent the other day time with big European companies of aerospace the ones that launched satellites and they were telling me about the story that to launch a satellite cost a lot of money and so they have been doing it for a long time they're really good it costs like 100 million euros to put the satellite up there. And there's specialists they spend all their lives doing it and suddenly Jeff Bezos from Amazon.com a man who sells books or at least he started like that he creates a company that is able to do the same thing but with small satellites at 10% the price. But he was not from the industry he didn't know anything about the industry and I think that we have to understand that in this paradigm these small players that are able to enter and dominate markets are part of the explanation for what's going on. But then you have the digital economy as the source to create these innovations that Clayton Christensen called the market creating innovation and here I think that that's the difference you know sometimes I talk to people in very small towns in the south of Portugal and people don't understand what's innovation and for them innovation is about taking jobs away. And so we have to talk about market creating innovation we have to tell people that the innovation that creates jobs is the one that creates markets and that's what we've seen so many times in history from the fixed phone to the mobile phone to so many steps that have made jobs possible I'm a techno optimist I talk to people I talk to specialists and I say look until we have problems we need solutions and we will have jobs we will have new jobs but we have to prove that we have to tell people that we believe that other jobs will be created probably less repetitive than the ones that we have today but better jobs and jobs that will people will feel better about it so this digital economy is an opportunity for this market creating innovation and then you see the companies in Europe and you look at and Reinilder was probably my friend Reinilder was a little bit not negative but you know Reinilder I see so many examples of amazing companies that started here but then they leave I mean booking.com is European Spotify is European yes I was with an amazing German man who created this company CureVac that will change the way you look at cancer and is now one billionaire company starts in Germany so I think that if we work on the scale up and I'll talk about it in the solutions I think we can do a lot about it but the third explanation the third explanation comes a little bit to what you do here at the ECB is that in the current governments the ministers of finance call the shots with the ECB people and so you have to have more people of the ECB and the finance ministries to talk about innovation because when you go around the table in every country with the science ministers and the innovation ministers they understand innovation but then how do you sell that in a government where the leading people in the government are the finance minister and the prime minister and probably rightly so but we have to change that because the third point here is that we have not invested enough in science and innovation and you saw it during the crisis you saw it that the countries that did really better were the ones that invested more in the financial crisis the economies in Europe that did better they were the ones that normally invest more in science and innovation but then you have the capital markets and I think Vitor Constancio referred to it when you look at the size of the venture capital in Europe and I normally say that it's quite amazing because you look at Europe as a place where you just have bilateral loans 80% of the market is about bilateral loans so you don't have venture capital in the US two, three years ago they raised more than 26 billion in Europe we raised 5 billion I would be interested to know the number in Israel it's quite high and I probably would be amazed by it but I think that we have to do something about it and it's about the capital markets union how do you have a market that has less bilateral loans and a more diversified sources of capital but second I want to just have a word also with you about the liquidity that exists today and there's a lot of liquidity in the market but then what you see open the financial times and you see that companies are spending it in share buy bags you know yes that could be good reasons because I was also in some point in my life a banker for companies to do a share buy bag but when those share buy bags come at the expense of innovation in short term gains in shareholder wells that could harm long term productivity and I think that this balance in between the short term and the long term is the key Clayton Christon always says that if you want innovation you need patient capital because you have to wait because things don't happen from one day to another so we have these three problems the lack of diffusion or diffusion of the productivity the lack of digitalization of our core economy sectors and a virtual stagnant investment in R&D so what are the solutions what are we doing and what can we do I thought because you are economies we could go into these into two different groups first let's look at the demand side and second to the supply side for me when I think about demand side as a politician is about measures where you deploy public money directly towards digitalization of our core economic sectors and that's the core is how horizontally in our programs where we have the 80 billion years in 7 years to invest in science and innovation how can I convince my colleagues that everything is digital there's not a digital economy everything is digital so how do I put in health, in water, in energy in food in all these programs how do I embed digital everywhere and why because I think we have in Europe a fantastic opportunity Steve Case says that we have these three waves of the internet the first one was about building the infrastructure in the internet and so that was the United States then we had the second wave to build the apps, to build the applications on top of the internet but now we have an amazing opportunity for Europe because the third wave and that if you want the internet to go into your lives you're getting into the regulated sectors so the very good entrepreneurs of the past the ones that made it on the second wave by the way if you look at most of them they don't even want to talk to government it's something alien to them, they don't like it but on the third wave you'll have a different type of entrepreneurs how to these regulated sectors work and you will have people that understand that if you want to get into health, into energy and to food, into education you have to do it in a different way so we have a lot of untapped potential here and I think that these amazing things and the chart from Reinhardt shows that about how good we are in Europe in the physical side and how good the US is on the digital world and so the run is how do you go from the digital to the physical and how do you go from the physical to the digital the US is coming from the digital to the physical and we have to go from the physical to the digital I think that having the expertise, having the knowledge of the physical I think that's something that we have really to grasp but now let's go to the other side, to the supply side and on the supply side I think there's just three points I wanted to get across tonight the first one is the number of regulation and the ecosystem and how regulation is and should be the second about lowering the investment barriers and the third about impact and I think it was Martin Schmid who said MIT for him innovation is about moving ideas to impact and I want to have a word on that so first, regulation if you see this world where the regulated sectors are the ones that will get us to the age of the internet of everything then we have to stop thinking that politicians will make it alone and so our idea of the commission is that we have to regulate with a stakeholder approach and we started a very interesting experience called innovation deals and that experience is about saying that if you want to regulate properly you have to sit down the regulators the politicians the people that do the companies all together and the national and the European authorities and so these innovation deals comes from an experience that was done in the Netherlands called the green deals so that's what Europe should be about so we copied that from the Dutch and we're deploying it to Europe and one of the very interesting things that comes from that experience of the Dutch is that when you put people around the table and say why aren't you doing this product what's your problem, tell me in detail what's the problem the conclusion is that in 70% of the cases, 7-0 you didn't need to change the regulation you didn't change anything you didn't change the interpretation of the regulation and so I think that that's a lesson that sometimes because you live in these two separate worlds of the business and the politicians you don't talk and sometimes there's businesses that are there you don't do it because you think it's not possible because you have an interpretation yourself, an image, a negative perception of the regulation and then if you need to change what we'll do in the future the second point I wanted to go was about the obstacles and the barriers for investment in R&D one of the things that we've decided to go ahead is to say that if you want to attract more private capital you need to do something about it and so today in Europe most of this venture capital or has been increasing as public money we have to get more private money because we spend around roughly 2% of GDP in terms of science and innovation 1% public, 1% private and we have to change that so we've decided to do something different create a fund of funds that will focus on patient capital and that will be with a minority of private capital so we have just received 17 private general partners that want to do it for us in the process of selection and they will be obliged to raise private capital so we will have venture capital from the EIB from the EIF, but this is different this will be about leveraging 1.6 billion euros in total so the European Commission will put 400 million and that will be relevant to 1.6 billion to have this private capital coming into the game so if we get that right then we can change the game because we can be ahead in terms of patient capital we can be ahead in terms of getting the private investors into the game dealing with them helping them out to understand how regulation works in creating these dynamics and the third point I wanted just to go through quickly is about impact and the lack of this disruptive market creating innovation in Europe so we decided to go on with this different idea of creating these European Innovation Council and this is about what this is about the fact that we have been very good at fundamental science I mean there is no doubt about it in Europe we have created Nobel Prizes that have invented great things we have been quite good at incremental innovation in some sectors but we have not been good at disruptive innovation so why is that? Exactly because our programs are too top down they are based on telling people where to innovate like innovate on batteries or innovate on this particular sector of energy or health and what we want is to change it the other way around and create a place where people can come with their ideas wherever they come because that's what changes from these intersections and so we want to create that environment and so we went ahead and we are on this first phase of changing rules of making it more flexible so people don't have to go through so much bureaucracy in one way but they don't have to be in the boxes they have to come from outside of those boxes that's the kind of innovation that does not fit neatly into existing sectors just a quick story, last year I met Bert Rampicar he's an amazing man he created this airplane called the Solar Impulse and he went around the world and that interested him very much because the first one who did it was Magellan, a Portuguese a long time ago, 500 years ago and Bert Rampicar is a fascinating man and I asked him so you invented this plane that goes on solar and what have you done and he said, you know the funny thing is that I went to all the airplane constructors and I said, look I want to create a plane, basically no gas, no fuel, just a solar plane and all the airplane constructors came to him and said Bert Ramp, that's impossible and so he went around and he found a company that designed boats and they made it and so I asked what's the takeaway and he said, you know they made it because they didn't know it was impossible and I think it's such an amazing story of this Swiss guy and for me I think that is because they didn't know but also because they were at the intersection in between all these fields and so they could do a plane that was actually a boat and I think this is one of the most important stories that I could share with you but so ladies and gentlemen, just to finish I came here today to talk to you about why fostering innovation is crucial to avoid stagnation and the ECB is really to be commended for taking 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's not broken, I hope it's not yet lost, we have the potential to avoid stagnation we have powerful tools at the European and national levels we have new ideas to reap the great potential of digital technologies we need to implement solutions from both the demand and the supply side so that innovation can flourish so that it can be truly everywhere including the productivity statistics most importantly pushing beyond the projectivity paradox we'll have to engage all of us and as President Drager himself once said and I quote it would be a tragic illusion to think that solutions might come from the outside they are up to us so thank you very much