Europe’s Bargain

MILAN – In July, the European Commission published its sixth report on economic, social, and territorial cohesion (a term that can be roughly translated as equality and inclusiveness). The report lays out a plan for substantial investment – €450 billion ($583 billion) from three European Union funds – from 2014 to 2020. Given today’s difficult economic and fiscal conditions, where public-sector investment is likely to be crowded out in national budgets, this program represents a major commitment to growth-oriented public sector investment.

The EU’s cohesion strategy is admirable and smart. Whereas such investment in the past was heavily tilted toward physical infrastructure – particularly transport – the agenda has shifted to a more balanced set of targets, including human capital, employment, the economy’s knowledge and technology base, information technology, low-carbon growth, and governance.

That said, one can ask what the economic and social returns on these investments will be. True, sustaining high growth rates requires sustaining high levels of public investment, which increases the return to (and hence the levels of) private investment, in turn elevating output and employment. But public investment is only one component of successful growth strategies. It will do some good in all scenarios, but its impact will be much larger beyond the short term if other binding constraints are removed.

Three complementary issues seem crucial. One, mainly the province of the European Central Bank, involves price stability and the value of the euro. The second is fiscal, and the third is structural.