Blog Post

The European Investment Bank should invest more, not less

The EIB has played to some extent a counter-cyclical stabilising role by increasing its investment in 2009 and in 2013 and by investing more in harder-hit countries.

By: Date: September 26, 2014 Topic: Macroeconomic policy

There is a growing recognition among policymakers, not least thanks to the Jackson Hole speech of ECB President Mario Draghi, that Europe faces the problem of demand shortage, in addition to various structural problems which can be resolved only with suitable supply-side reforms. A good way to stimulate more demand is to increase the investment of the European Investment Bank (EIB); see the promotion of this idea in our memo to the new ECFIN Commissioner Pierre Moscovici.

In fact, the EIB has played to some extent a counter-cyclical stabilising role by increasing its investment in 2009 and in 2013 and by investing more in harder-hit countries.

In the height of the crisis, the EIB has increased its investments from € 47.5 billion (0.38 percent of EU GDP) in 2007 to € 78.8 billion (0.67 percent of EU GDP) in 2009 (see Figure). The increased investment, about 0.3 percent of EU GDP, was non-negligible, but modest compared to fiscal stimulus in other advanced countries such as the United States and Japan. Unfortunately, there was a decline in EIB investment in 2010-12, at a time when the cyclical situation of the European economy deteriorated and most EU countries embarked on a significant fiscal consolidation path. Facing a relapsed economic situation, in 2012 EU leaders agreed to provide €10 billion of new capital to the EIB (which leads to much more investment, because the EIB leverages up its capital) and encouraged the EIB to invest more, which is reflected in the increase in EIB investments in 2013 to € 71.7 billion (0.55 percent of EU GDP).

Figure 1: Annual investment by the European Investment Bank (EIB) according to main sectors in 2000-2013 and the targets for 2014-16 (€ billions)

Source: European Investment Bank.

Note: the sectors are ordered according to their share in total investment (largest in bottom, smallest in top).

Unfortunately, now when there is a growing recognition that more public investment would be desirable, the EIB plans to reduce investment to €67 billion in 2014 and 2015, while the middle of the targeted range for 2016 is €58.5 billion (see the EIB’s three-year Corporate Operational Plan). Instead of cutting investment, the EIB should significantly increase its investment, which would require a clear call from national leaders of EU countries and further new capital to the EIB beyond the €10 billion agreed in 2012.The country composition of EIB investments suggests that, quite rightly, the EIB tends to invest more in countries (a) hard-hit by the crisis and (b) which are less developed. See a simple regression analysis supporting this hypothesis at the end of this post.

Annex: regression analysis

In order to assess the possible motives behind the allocation of EIB investments across EU countries, we run a very simple regression using data for 27 EU countries:

EIB investment share – GDP share = alpha*unemployment rate + beta*initial GDP per capita + error

That is, we calculated the share of countries in total EIB investments in EU27 (e.g. Italy’s share was 14.8% in 2009-2013), we calculated the share of countries in EU27 GDP (which was 12.4% for Italy) and regressed their difference (which was 2.4%-point for Italy) on the average unemployment rate during the same period and on the GDP per capita at purchasing power standards a year before (i.e. the 2008 value when analysing investments during 2009-13). We run this very simple linear regression both on a pre-crisis sample (2005-2007) and on the sample during the crisis (2009-2013) using data of 27 EU countries.

The following table shows that both before and during the crisis, initial GDP per capita is somewhat related to EIB investment (as the t-statistics are larger than 1 in absolute terms, though well below 2). The negative estimated parameter suggests that more developed countries tend to receive less EIB investment.  Unemployment does not correlate with EIB investments before the crisis, but significantly correlates during the crisis. The positive estimated parameter suggests that harder-hit countries tended to benefit more from EIB investments than countries with lower unemployment rates.

Table 1: Regression results

2005-2007 2009-2013
initial GDP/capita Parameter -0.026 -0.024
t-statistics -1.36 -1.14
Unemployment rate Parameter 0.12 0.32
t-statistics 0.47 2.33
R2 0.13 0.27

 

 

 

 

Note: the dependent variable is the difference between the share of countries in EIB investment and the share of countries in EU GDP. The number of observations is 27 (Luxembourg is not included due to its very large GDP/capita figure, which is the result of the special characteristics of the Luxembourg economy.) The explanatory variables were transformed to have zero means. R2 is the coefficient of determination, which measures the goodness of fit of the regression. There may be an endogeneity issue with the regressions (whereby EIB investment is having an impact on unemployment), but in our view this should be a minor issue.

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Upcoming Event

Nov
4
14:00

European monetary policy: lessons from the past two decades

This event will feature the presentation of “Monetary Policy in Times of Crisis – A Tale of Two Decades of the European Central Bank."

Speakers: Petra Geraats, Wolfgang Lemke and Francesco Papadia Topic: Macroeconomic policy
Read article More by this author
 

Opinion

European governance

Can EU fiscal rules jump on the green bandwagon?

By and large, setting a new green golden rule would be a useful addition to the existing EU fiscal framework.

By: Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: October 22, 2021
Read about event More on this topic
 

Upcoming Event

Nov
9
11:00

Phasing out COVID-19 emergency support programmes: effects on productivity and financial stability

How can European countries phase out the COVID-19 support measures without having a negative impact on productivity and financial stability?

Speakers: Maria Demertzis and Laurie Mayers Topic: Macroeconomic policy
Read article
 

Blog Post

European governance

Germany’s post-pandemic current account surplus

The pandemic has increased the net lending position of the German corporate sector. By incentivising private investment, policymakers could trigger a virtuous cycle of increasing wages, decreasing corporate net lending, which would eventually lead to a reduction of the economy-wide current account surplus.

By: Lionel Guetta-Jeanrenaud and Guntram B. Wolff Topic: European governance, Macroeconomic policy Date: October 21, 2021
Read about event
 

Past Event

Past Event

Monetary policy in the time of climate change

How does climate change influence monetary policy in the eurozone? What potential monetary policy measures should be taken up to address climate risks?

Speakers: Cornelia Holthausen, Jean Pisani-Ferry and Guntram B. Wolff Topic: Green economy, Macroeconomic policy Date: October 20, 2021
Read article More by this author
 

Podcast

Podcast

Rethinking fiscal policy

A look at the past, present and future of fiscal policy in the European Union with Chief economist of the European Stability Mechanism, Rolf Strauch.

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: October 20, 2021
Read article
 

External Publication

European Parliament

Tailoring prudential policy to bank size: the application of proportionality in the US and euro area

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Alexander Lehmann and Nicolas Véron Topic: Banking and capital markets, European Parliament, Macroeconomic policy Date: October 14, 2021
Read article More by this author
 

External Publication

Global Economic Resilience: Building Forward Better

A roadmap for systemic economic reform calling for step-change in global economic governance to increase resilience and build forward better from economic shocks, prepared for the G7 Advisory Panel on Economic Resilience.

By: Thomas Wieser Topic: Global economy and trade, Macroeconomic policy Date: October 14, 2021
Read article More on this topic More by this author
 

Opinion

Letter: Declining investment may explain why rates are low

Perhaps an analysis of the causes of the declining investment rate would bring us closer to explaining why real interest rates are so low.

By: Marek Dabrowski Topic: Macroeconomic policy Date: October 1, 2021
Read article More by this author
 

Podcast

Podcast

A green fiscal pact

How can the European Union increase green public investment while consolidating budget deficits?

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: September 29, 2021
Read article More on this topic More by this author
 

Blog Post

Monetary arithmetic and inflation risk

Between 2007 and 2020, the balance sheets of the European Central Bank, the Bank of Japan, and the Fed have all increased about sevenfold. But inflation stayed low throughout the 2010s. This was possible due to decreasing money velocity and the money multiplier. However, a continuation of asset purchasing programs by central banks involves the risk of higher inflation and fiscal dominance.

By: Marek Dabrowski Topic: Macroeconomic policy Date: September 28, 2021
Read article More on this topic More by this author
 

Opinion

The pandemic’s uncertain impact on productivity

The pandemic has certainly permanently affected our way of working. Whether this is for the better remains to be seen.

By: Maria Demertzis Topic: Macroeconomic policy Date: September 28, 2021
Load more posts