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Measuring Europe’s investment problem

Under the leadership of Vice President Katainen, the Commission has designed a plan which will be announced this week. The announcement of the investm

Publishing date
25 November 2014

The President of the European Commission is worried about the investment situation in Europe and has taken the initiative to propose a €300 billion investment plan to the December European Council meeting.

Under the leadership of Vice President Katainen, the Commission has designed a plan which will be announced this week. The announcement of the investment plan is scheduled to coincide with the announcement by the Commission of its assessment of national budgetary plans for 2015. The hope is that the investment package will be significant enough to boost growth and make it possible for EU countries to comply with EU fiscal rules in the years to come. As we argued some time ago “without growth, it will become impossible to respect the spirit of the fiscal rules”.

Before evaluating whether the investment plan is sufficient to boost growth, there is a need to evaluate the extent of Europe’s investment problem, which is what this blog post does.

Our starting point is a long-term view of investment growth in Europe. Chart 1 shows the development of investment measured in 2014 prices in the “old” EU15 (for which data is available for a much longer period that for the current EU28) from 1970 to 2014. We compute a simple linear trend from 1970 to 2005, in order to take out the years of the construction boom that affected some EU countries in 2006 and 2007 and document the deviation of investment from this trend. A linear trend captures the overall development of investment quite well as the graph shows. Investment is currently €260 billion below this trend suggesting that the EU suffers indeed from a substantial shortfall in investment.

Chart 2 shows the comparable graph for investment excluding construction (i.e. dwellings, non-residential construction and civil engineering projects). The investment gap for non-construction investment is still substantial at €160 billion.

Source: AMECO

RTEmagicC_141124_Chart1_02.jpg
RTEmagicC_141124_Chart2.jpg

Turning to the Member states that have joined the EU since 2004, the data is only available since 1995 therefore we compute a linear trend for the shorter period of 1995-2005. Obviously, one can hardly compare the EU15 with these countries since the latter grouping experienced significant catching-up growth and very substantial capital inflows from Western Europe even before they joined the EU. As shown in Charts 3 and 4, the gap is €20 billion for total investment and €10 billion for non-construction investment.

Source: AMECO

RTEmagicC_141124_Chart3.jpg
RTEmagicC_141124_Chart4.jpg

Another important question is to what extent public investment has played a role in mitigating the fall in total investment.

Chart 5 shows the development of public investment during 1970-2014 and the deviation from trend. We find that in the EA12, public investment rose substantially above the 1970-2005 trend in 2009 but then fell sharply, giving rise to current shortage of €25 billion. There is currently no shortfall for the EU15 but a similar sharp decline in public investment occurred after the 2009 stimulus. Obviously simply being on the same trend as during the relatively mild 1970-2005 implies that public investment is not playing its role in mitigating Europe’s investment problem.

Source: AMECO

RTEmagicC_141124_chart5.jpg

We next turn to the five largest EU countries, Germany, France, UK, Italy and Spain and zoom in on how investment developed in construction and non-construction during the crisis period from 2007 to 2014. A number of substantial differences emerge in the 5 countries with trends in some of them being particularly worrisome. Chart 6 shows indeed different patterns across the five countries:

The total investment free fall observed in Spain since the beginning of the crisis has been mainly driven by the correction of overinvestment and misallocation of capital in the construction sector that characterized the pre-crisis period. A look at the non-construction investment reveals however that it has rebounded strongly since the low point of 2009.

The decline in investment in France has been relatively modest initially and has recovered relatively quickly from the 2009 recession, but has been basically stagnating ever since and is now around the level of 2010.

Germany exhibited a stronger drop in investment in 2009 and a quicker recovery in 2010, followed by an overall modest growth (which was fueled, in contrast to the other countries, by strong growth in the construction sector).

Investment in the UK has been sluggish since it reached a low point of 2009-10 and has stayed around this level thanks to investment in construction.

Finally, Italy offers the most worrying picture with a continuous and broad-based decline in investment since the beginning of the crisis.

Source: AMECO

RTEmagicC_141124_chart6.jpg

In this post, we have documented a substantial decline in investment, both private and public as well as construction and non-construction throughout the EU.

The numbers show that the EU is substantially below long-term trends. Given the central importance of investment for growth in the short but also in the long term, this is a very worrying development.

We urge the European Commission to present an ambitious plan to re-invigorate growth and jobs in the EU. Failure to do so would result in continued stagnation of the EU economy in the years to come.


Read more on public investment

Infrastructure investment is a no-brainer

In sickness and in health: protecting and supporting public investment in Europe

About the authors

  • André Sapir

    André Sapir, a Belgian citizen, is Senior Fellow at Bruegel. He is also University Professor at the Université libre de Bruxelles (ULB) and Research Fellow of the London-based Centre for Economic Policy Research.

    Between 1990 and 2004, he worked for the European Commission, first as Economic Advisor to the Director-General for Economic and Financial Affairs, and then as Principal Economic Advisor to President Prodi, also heading his Economic Advisory Group. In 2004, he published 'An Agenda for a Growing Europe', a report to the president of the Commission by a group of independent experts that is known as the Sapir report. After leaving the Commission, he first served as External Member of President Barroso’s Economic Advisory Group and then as Member of the General Board (and Chair of the Advisory Scientific Committee) of the European Systemic Risk Board based at the European Central Bank in Frankfurt.

    André has written extensively on European integration, international trade, and globalisation. He holds a PhD in economics from the Johns Hopkins University in Baltimore, where he worked under the supervision of Béla Balassa. He was elected Member of the Academia Europaea and of the Royal Academy of Belgium for Science and the Arts.

  • Guntram B. Wolff

    Guntram Wolff was the Director of Bruegel. Over his career, he has contributed to research on European political economy and governance, fiscal, monetary and financial policy, climate change and geoeconomics. Under his leadership, Bruegel has been regularly ranked among the top global think tanks and has grown in influence and impact with a team of now almost 40 recognized scholars and around 65 total staff. Bruegel is also recognized for its outstanding transparency.

    A recognized thought leader and academic, he regularly testifies at the European Finance Ministers' ECOFIN meeting, the European Parliament, the German Parliament (Bundestag) and the French Parliament (Assemblée Nationale). From 2012-16, he was a member of the French prime minister's Conseil d'Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed to the G20 high level independent panel on pandemic prevention, preparedness and response. He is also a professor (part-time) at the Solvay Brussels School of Université Libre de Bruxelles, where he teaches economics of European integration.

    He joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he was coordinating the research team on fiscal policy at Deutsche Bundesbank. He also worked as an external adviser to the International Monetary Fund.

    He holds a PhD in economics from the University of Bonn and studied in Bonn, Toulouse, Pittsburgh and Passau. He taught economics at the University of Pittsburgh and at Université libre de Bruxelles. He has published numerous papers in leading academic journals. His columns and policy work are published and cited in leading international media and policy outlets. Guntram is fluent in German, English, French and has good notions of Bulgarian and Spanish.

  • Grégory Claeys

    Grégory Claeys, a French and Spanish citizen, joined Bruegel as a research fellow in February 2014, before being appointed senior fellow in April 2020.

    Grégory’s research interests include international macroeconomics and finance, central banking and European governance. From 2006 to 2009 Grégory worked as a macroeconomist in the Economic Research Department of the French bank Crédit Agricole. Prior to joining Bruegel he also conducted research in several capacities, including as a visiting researcher in the Financial Research Department of the Central Bank of Chile in Santiago, and in the Economic Department of the French Embassy in Chicago. Grégory is also an Associate Professor at the Conservatoire National des Arts et Métiers in Paris where he is teaching macroeconomics in the Master of Finance. He previously taught undergraduate macroeconomics at Sciences Po in Paris.

    He holds a PhD in Economics from the European University Institute (Florence), an MSc in economics from Paris X University and an MSc in management from HEC (Paris).

    Grégory is fluent in English, French and Spanish.

     

  • Pia Hüttl

    Pia Hüttl is an Austrian citizen and joined Bruegel as an Affiliate Fellow in 2015. Her research interests include macroeconomics, financial economics and monetary policy as well as European political economy.

    Prior to this, Pia worked as Research Assistant for Bruegel, and as a Trainee in the Monetary Policy Division of the European Central Bank. Also, she worked as a Blue Book Stagiaire in the Monetary policy, Exchange rate policy of the euro area, ERM II and Euro adoption Unit in DG Ecfin of the European Commission.

    She holds a Bachelor's degree in European Economics and a Master's degree in International Economics from the University of Rome Tor Vergata. She also obtained a Master's degree in European Political Economy from the London School of Economics, with a thesis on Current Account imbalances in the Euro area and the role of financial integration.

    Pia is currently pursuing a PhD in Economics at the Humboldt University in Berlin.

    She is fluent in German, Italian and English, and has good notions of French.

    Declaration of interests 2015

    Declaration of interests 2016

    Declaration of interests 2017

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