Gros, D. (2014) “Investment as the key to recovery in the euro area?“, Economic Policy, CEPS Policy Briefs Νο. 34, 18 November.
Investment has declined in the euro area since the start of the economic and financial crisis, but this does not mean that there is necessarily an ‘investment gap’, explains Daniel Gros in this CEPS Policy Brief. Investment was probably above a sustainable level due to the credit boom before 2007. Moreover, the fall in the euro area’s potential growth − due to a combination of a sharp demographic slowdown and lower total factor productivity (TFP) growth − should also lead to a permanently lower investment rate. Increasing the investment rate might thus be the wrong target for economic policy.
The author advises that the aim of economic policy should be to increase consumption, rather than investment overall. Increasing infrastructure investment might be justified in some member countries, but it is not a ‘free lunch’ when efficiency levels are low, which seems to be the case in some of the financially stressed euro area countries.
Relevant posts:
- Pisani-Ferry, J. (2014) “Getting Investment in Europe Right“, Project Syndicate, 31 October.
- Hancké, Β. (2014) “German austerity is not only damaging the Eurozone, but is also starving the country of its own much needed investment“, LSE EUROPP, 03 November.
- De Grauwe, P. (2014) “Stop Structural Reforms and Start Public Investment in Europe“, Social Europe Journal, 17 September.