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Lacklustre investment in the Eurozone: The policy response

Buti, M. (2014) “Lacklustre investment in the Eurozone: The policy response“, VoxEU Organisation, 22 December.

 

Weak investment is a key macroeconomic problem in the Eurozone, and the new European Commission has proposed an ‘Investment Plan’ to complement existing policy initiatives. In this column, the Commission’s Chief Economist explains the key rationale behind the Investment Plan.

Weak investment has been the main source of weakness in the Eurozone recovery (European Commission 2014a, Claeys et al. 2014a). While private consumption in the Eurozone in 2014 was at roughly the same level as it was in 2007, total investment was about 15% below its pre-crisis peak (see Figure 1).

Figure 1 Developments in real gross fixed capital and private consumption
(index 2007 = 100)

buti_fig1_0

Note: Investment is measured as real gross fixed capital formation. The group of stressed countries consists of Cyprus, Greece, Ireland, Italy, Portugal and Spain.

Source: European Commission.

The weakness in investment is not confined to the construction and real estate sectors of countries that are grappling with imploding real estate bubbles. It is broad-based and affects the vast majority of the Eurozone economies and most of their sectors, with corporations withholding investment spending more than households or governments. The macroeconomic costs are high: not only does investment weakness affect the short-term outlook via its impact on aggregate demand, it also reduces the economy’s potential. The European Commission’s estimates show that a 5 percentage point reduction in the investment rate leads to a reduction in potential growth of nearly 0.5%.

 

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