Public investment to support long- term economic growth in the EU

Public investment in the EU has decreased since the beginning of the crisis, especially in countries which needed to undergo fiscal consolidation. The authorities at different levels often face challenges in choosing optimal investments and expenditure in times of limited means. The economic literature, although sometimes inconclusive, suggests pre-conditions that make public investment beneficial to growth, such as high quality of public expenditure. Large government size appears to be negatively correlated to growth but certain public investments (for instance in infrastructure or innovation) and productive expenditure (such as on education and health) often seem to have long-term positive impacts on the economy.

In the current context, increased investment may boost demand and stimulate the economy in the low-interest-rate environment. A focus on growth-inducing investments is communicated in the EU’s priorities and strategies, and is gaining more prominence in the European Semester process.

The areas of investment most frequently mentioned, such as innovation and infrastructure, are in line with what the theory suggests as being growth-conducive. However, it is not evident whether and how the EU identifies those with the highest potential for long-term economic growth.

Author: Marcin Szczepański