Public investment efficiency crucial amid European fiscal constraints
Public investment has declined in several European countries since the crisis, despite calls for stimulus in a low interest rate environment. This article analyzes how additional public investment can best stimulate economic growth and its impact on public finances.
Investment decline meets fiscal pressure
Public investment in Europe has fallen in recent years, particularly in countries that faced significant market pressure and underwent fiscal adjustment.
This decline, if prolonged, risks deteriorating public capital and diminishing long-term output.
The current low interest rate environment has prompted calls to stimulate public investment to boost short-term demand and raise potential output.
This debate led to the adoption of the Investment Plan for Europe in 2015.
However, many EU countries still face precarious fiscal positions, with the Stability and Growth Pact calling for further consolidation.
The article uses a model-based analysis to consider the optimal circumstances for public investment to stimulate growth while managing its impact on public finances, comparing developments in Europe with the United States and Japan.
The Juncker Plan's three pillars
The Investment Plan for Europe, also known as the Juncker Plan, aims to unlock at least €315 billion in public and private investment between 2015 and 2017.
Its first pillar established the European Fund for Strategic Investment (EFSI), designed to mobilize private funding by leveraging an initial €21 billion public guarantee from the EU budget and the European Investment Bank.
EFSI operations target projects that cannot secure market funding due to high risk or company size, aiming for 'additional' investment.
The second pillar focuses on improving efficiency by matching projects with financing through the European Investment Advisory Hub and Project Portal.
The third pillar seeks to improve framework conditions for investment via structural reforms at both European and national levels, integrated into the 2016 European Semester process.
Despite favorable treatment under the Stability and Growth Pact, Member States have primarily pledged co-financing for individual projects rather than direct contributions to EFSI capital, highlighting difficulties in overcoming the 'juste retour' principle.
A necessary but challenging path
While the Juncker Plan provides a crucial framework, its success hinges on overcoming persistent national fiscal constraints and the 'juste retour' principle.
The reliance on leveraging private funds and the slow pace of direct member state contributions underscore the deep-seated challenges in mobilizing collective European investment.
Ultimately, the plan's long-term impact will depend less on initial funding and more on sustained structural reforms that genuinely improve the investment climate across the Union.