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

While the long term decline in gross public investment in core EU countries is generally in line with developments in other advanced countries, recent

Publishing date
13 February 2014
Authors
Zsolt Darvas

See Policy contribution 'In sickness and in health: protecting and supporting public investment in Europe'

Tomorrow, Francesca Barbiero and I will publish our latest Bruegel Policy Contribution on public investment in Europe, in which we make some quite interesting observations and a new proposal to amend the EU fiscal framework. 

While the long term decline in gross public investment in core EU countries is generally in line with developments in other advanced countries, recent developments markedly differ: in Canada, Japan and the United States gross public investment increased during the crisis, while in Europe it declined and even collapsed by more than one-half in the most vulnerable countries.

All kinds of public investments were cut: transport-related investments (which accounts for only about one-third of public investments in vulnerable euro-area members), education, health, social protection, environment protection, and so on. The recent literature suggests that the negative impacts of public investment cuts are particularly strong during a recession (i.e. the fiscal multiplier is large); slashing public investments has aggravated the fall in output and employment, as well as undermined the long-term growth potential.

The EU fiscal framework provisions to support public investment are very weak.  To foster an improvement, in October 2013 the European Parliament suggested to exclude, permanently and unconditionally, all national co-funding of EU-supported investments from the fiscal indicators considered in the Stability and Growth Pact. But this call was neglected; instead, a largely powerless ‘investment clause’ was put in place, which might allow a temporary deviation from fiscal targets for EU funding-related investments if an economy is in a deep recession, and the three percent of GDP deficit rule and the debt reduction rule are both respected.

Something more decisive has to be done. We propose an amendment to the EU fiscal framework with an asymmetric golden rule to protect public investment in bad times, while limiting adverse incentives with public investment in good times.

Also, during an economic downturn, a massive European investment programme would be needed. Since the development of a specific fiscal instrument to smooth economic cycles is not on the horizon, the European Investment Bank seems to be the most suitable candidate for this job. To this end, much more capital should be provided to the EIB beyond the €10 billion agreed in 2012 and the internal procedures of the EIB should be revived to allow for faster investments.

The European Semester should encourage member states with healthy public finances and low public investment rates to invest more, which has not been the case so far. Finally, major reforms and harmonisation is needed in budgeting, accounting, transparency and project assessment to improve the quality of public investment.

The policy contribution 'In sickness and in health: protecting and supporting public investment in Europe' was released on Friday, 7 February 2014

About the authors

  • Zsolt Darvas

    Zsolt Darvas, a Hungarian citizen, joined Bruegel as a Visiting Fellow in September 2008 and continued his work at Bruegel as a Research Fellow from January 2009, before being appointed Senior Fellow from September 2013. He is also a Senior Research Fellow at the Corvinus University of Budapest.

    From 2005 to 2008, he was the Research Advisor of the Argenta Financial Research Group in Budapest. Before that, he worked at the research unit of the Central Bank of Hungary (1994-2005) where he served as Deputy Head.

    Zsolt holds a Ph.D. in Economics from Corvinus University of Budapest where he teaches courses in Econometrics but also at other institutions since 1994. His research interests include macroeconomics, international economics, central banking and time series analysis.

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