There is scope for a large European investment plan of 100 bn. euro per year
Summary A threefold crisis has struck Europe. Growth is low, underinvestment is a problem, and Europe’s productivity is losing momentum. If Europe is to recover, its heads of state and government leaders must now search their toolboxes for new instruments. Speed is of the essence, because there is a growing risk of long-term stagnation and deflation in Europe.
In this new memo, Think Tank EUROPA offers a number of suggestions for a new offensive growth plan ahead of the summit in December. The growth plan should help bring Europe out of the slump. At the latest summit on 23 and 24 October, EU’s heads of state and government leaders discussed the economic crisis and a possible increase in investments. Even the German Chancellor Angela Markel acknowledges that more needs to be done than we have seen up until now.
An offensive growth plan for the whole of Europe is urgent. The capital stock is gradually eroding, but investments are now so low in countries such as Germany, Spain and Italy that there is a risk that their economies will actually decay. This could throw Europe into a deep and prolonged crisis. Therefore, it is necessary to adopt a more offensive tactic.
Think Tank EUROPA’s calculations show that there is a fiscal scope of about 100 billion euro in 2015 in the EU countries. This should be utilised. This financial scope, in combination with better incentives for private investment, could give the economy a boost. Thus, countries such as Germany should focus on production-boosting investments and countries like France and Italy should take steps to speed up the recovery. The EU should take a pragmatic approach towards the fact that these countries have larger public debts than the stability pact allows. A condition for this pragmatic stance could be that these countries commit themselves to implementing structural reforms in 2015/2016. This way, the resulting growth can be used to reduce the debt in the medium to long term.
Studies from both the OECD and the IMF show that coordinated economic policy has a more stimulating effect than independent national policy. Europe should therefore collaborate instead of each member state implementing their own economic policy. Part of the solution lies in a coordinated and expansive financial policy at a European level. This would make room for more investments in new infrastructure and continued structural reforms – that way we will simply achieve more growth per invested euro.
- Europe is in deep crisis and there is a real risk that the crisis will take a more permanent hold.
- A coordinated financial policy would have a much greater effect than national policies. Europe should stick together.
- Think Tank EUROPA estimates that there is currently a fiscal scope of around 100 billion euro – and that amount should be spent wisely on investments that boost productivity and promote private investments.
- Underinvestment is a problem. In countries such as Germany, Spain and Italy the net investments are outright negative, which leads to the decomposition of the capital stock. This erosion threatens long-term growth.
- There is a great need for investments in transport infrastructure, digital fibre optic networks, and transitions to green economy and new technologies. There is a current underinvestment of 2 percent of GDP.
- Since 2012, bank lending has been reduced by 740 billion euro to the detriment of company investments and societal activity.
- Over the next couple of years, Europe must adopt a more pragmatic view of public debt. In return, the EU could demand that national structural reforms are announced and carried out in 2015/2016. The resulting growth can help reduce the debt in the medium to long term.