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Symposium 2015

Virtual Library File - The Achilles' heel of Juncker's investment plan - how will the right investment projects be selected?

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.


This analysis addresses the question of how the right investment projects will be selected in the context of the Juncker Plan. It argues that, given that the public funds are partly reallocated from those parts of the EU budget that are likely to have the highest expected social return, it is particularly difficult to identify additional investment projects with a higher expected return. Furthermore, the analysis highlights the importance of improving the framework conditions for investment to mobilize the envisaged private funds.