European Commission urges public investment boost

21 Dec 16

Eurozone governments should start plugging a “wide and deep” gap in public investment gap by taking advantage of low interest rates, the European Commission has suggested.

In this year’s annual report on the bloc’s public finances, the EU executive emphasised the need for fiscal expansion in the eurozone and recommended the governments step up investment.

The call reflects the commission’s move away from advocating austerity, highlighted in November when it ended years of support for spending cuts and tax increases in the wake of the financial crisis and said governments should leverage fiscal tools to stimulate the economy.

The report pointed to evidence of a “wide and deep government investment gap”, which exceeds that of other advanced economies.

“At the same time, there are signs that the quality of existing infrastructure stocks is at risk,” it warned. “The contraction in physical capital investment is also coupled with a reduction in the accumulation of human capital by the government sector.”

Weak government investment is “worrying”, it continued, given that it is associated with fragile recoveries in the short term and can have “long-term economic consequences” through lower potential output.

The report called on member states to capitalise on historically low interest rates to expand investment and stimulate the economy. At the same time, they should reform pension, health care and welfare systems, it said.

It added that well-designed strategies for efficient investment and the careful selection of projects that can be financed by the government and implemented rapidly would help achieve the “double dividend” investment offers – short-term stimulus and long-term potential.

Additional spending through increased public investment would give a boost to the stubbornly fragile recovery from the economic crisis, it stressed.

Euro area GDP growth is expected to slow to 1.7% this year after hitting 2% in 2015. It will decline again next year, to 1.5%, according to the commission’s forecasts.

The eurozone’s aggregate deficit however will continue falling “slowly”, by 0.3 percentage points this year, to 1.8% of GDP. The report said this is mainly due to “cyclical conditions” and low interest rates.

It noted that a number of member states have been removed from the excessive deficit procedure – a corrective mechanism that member states are subject to when their deficit surpasses a ‘safe’ level of 3% of GDP.

Cyprus, Ireland and Slovenia all left the programme this year.

However after years of calling for austerity policies to bring down the sharp increase in public debt in the eurozone triggered by the crisis in 2008, debt levels remain “very high”, the commission said.

They have only receded “slightly” from a peak of 94.4% of euro area GDP in 2014, and while debt levels are expected to continue declining in 2017, the commission forecasts this will happen at a slower pace than in recent years. 

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