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Can Investment Save Europe?

PARIS – Economic growth in Europe remains disappointing. Virtually all European Union members are expected to post higher output in 2014; but, according to the International Monetary Fund’s latest projections, the average growth rate in the eurozone will barely exceed 1%. And, whereas the British economy is displaying strong momentum, its GDP has only now surpassed the pre-crisis mark. In per capita terms, the EU is still poorer than it was seven years ago.

In this context, a new policy target has emerged: investment. Italian Prime Minister Matteo Renzi, who currently holds the EU’s rotating presidency, has pushed for it, and Jean-Claude Juncker, the president-elect of the European Commission, has called it his “first priority.” His goal for the next three years is to mobilize an additional €100 billion ($134 billion) per year (0.75% of GDP) for public and private investment.

Investment is certainly a politically appealing theme. It can unite Keynesians and supply-side advocates; proponents of public spending and supporters of private business can stand together. And historically low long-term interest rates undoubtedly provide an exceptionally favorable opportunity to finance new ventures.

But it does not automatically follow that governments should pour money into public infrastructure projects or foster private investment by adding further incentives amid already auspicious market conditions. At a time when private income has shrunk, public resources are scarce, and debt burdens are heavy, plans to stimulate investment should be carefully scrutinized.