You are here: Home Knowledge Base A New Deal for Europe? - The Role of Investment for Prosperity in the Euro Area Solutions Elements of a New Deal for Europe
Symposium 2015

Solution for A New Deal for Europe? - The Role of Investment for Prosperity in the Euro Area

The Challenge

Five years after the Great Recession the economic recovery in the euro area remains remarkably subdued. Labor markets have started to improve, but only very gradually. Above all, investment spending h ...

Five years after the Great Recession the economic recovery in the euro area remains remarkably subdued. Labor markets have started to improve, but only very gradually. Above all, investment spending has barely reached the levels recorded ten years ago despite historically low interest rates across the euro area. Uncertainty surrounding the future direction of policies, even surrounding the composition of the currency area as a whole, has apparently led to a wait-and-see attitude of businesses when it comes to investing into future markets. The credit-fueled boom that preceded  the financial crisis left the economy with a debt overhang and severe mismatches in the production structures (i.e. a huge capital stock distortion) that makes the diagnosis of aggregate output gaps particularly difficult. Resolving these obstacles and creating a business-friendly institutional environment, thereby unleashing investment to build up a productive capital stock, is of utmost importance to put the European economies back on a sustainable growth path and to bring people back to work.

Elements of a New Deal for Europe

  1. If very low growth and very low inflation were to continue for another 5 to 10 years, the euro area would likely fall apart since the time it would take to resolve the competitiveness, debt and banking troubles in the euro area under these circumstances would likely exceed by far what would appear to be politically bearable.
  2. The ECB is making full use of the instruments at its disposal to tackle the problem. In view of the somewhat uncertain effectiveness and the problematic side effects of unconventional monetary policy, fiscal policy should do more despite the heavy debt burden in some member states.
  3. In view of the heavy debt burden in certain member states, the pervasive use of public-private partnerships with contracts with no fiscal (but clearly para-fiscal) implications is often recommended. In view of the rather high implicit financing cost, such schemes should be treated with great caution.
  4. In fact, the heavy reliance on leverage via funds not counted towards public debt would appear to be one of the major shortcomings of EFSI. Instead, EFSI should receive more public funding and at the same time a more targeted mandate to foster investment at the zero lower bound since, in normal periods with decent growth rates and a target inflation rate, European investment projects ought to be funded via the European budget which needs to become more future oriented anyway.
  5. Productivity enhancing reforms should complement such a much larger European plan along the lines proposed already by Mateusz Szczurek, the Polish minister of finance well over a year ago.
  6. Such a targeted European plan needs to be supplemented by more investment oriented policies in financially stable member states which are currently able to borrow at extremely low real interest rates even in a twenty year time horizon.

    Related Solutions

    Solution
    Symposium 2015

    The “Juncker Plan”: Involving Stakeholders

    The “Juncker Plan”: Involving Stakeholders

    The “Juncker Plan”: Involving Stakeholders