1. Europe Needs More Public Investment

The first part sets the stage, providing trends on public investment in France, Germany, Italy and Spain. It is preceded by an initial chapter by Rocco Luigi Bubbico, Philipp-Bastian Brutscher and Debora Revoltella from the European Investment Bank (EIB) outlining the experience of Europe as a whole. The picture is as follows: between 2008 and 2016 public investment in the EU declined from 3.4% of GDP to 2.7%. Despite a slight rebound in 2017 and 2018, public investment still stands at only 2.9% of GDP, 15% below its pre-crisis levels. Fiscal consolidation pressure was at the core of such decline in public investment especially in countries that experienced a strong pressure to tighten their budgets. The negative effect of fiscal consolidation was in many cases amplified by a re-prioritization of public outlays away from investment towards current expenditures. Infrastructure investment was disproportionately affected by the decline in public investment. EIB estimates show that overall infrastructure investment declined by about 25% between 2008 and 2016, with the government sector accounting for the lion’s share of this fall. From a sectorial perspective, investment in transport and education infrastructure experienced the strongest decline. The chapter clearly documents that the fall in government infrastructure investment does not reflect a saturation effect, the annual infrastructure investment gap is estimated to be about €155 bn and that construction of new infrastructure seems to continue to produce large positive economic spillover effects. This chapter advises, as a policy lesson, sound project selection: preparation and implementation are the keys to reversing the negative trend in investment activities in the EU, besides overcoming funding constraints. Obviously, to ensure the efficient use of available funds, sound infrastructure governance is also a key factor.

4. Public Investment Trends across Levels of Government in Italy

Chapter 4, by Floriana Cerniglia and Federica Rossi, addresses the case of Italy. They start from the premise that this country, over the last decade, has experienced the worst economic crisis, which has had a huge impact on the already weak public finance conditions. Italy had to implement extraordinary actions to contain and reduce its public debt. Public investments have been curtailed the most, with respect to other functional areas of expenditure. The chapter provides an overview of major trends in public capital expenditure, including local and national public companies, which in Italy are significant contributors to public investment. The chapter considers also the breakdown of public investment by levels of government. Since the reform of the Italian Constitution in 2001, the interactions between levels of government in Italy have become increasingly challenging. Coordination issues between the central government and sub-national governments in running current and capital expenditures as well as the financing of local expenditures (both current and capital) remain unsolved problems, which most obviously impact the time required to make an investment. Moreover, Italy’s regional divide remains large, and sadly, it continues to grow. The issue of having shares of public investments in North-Central Italy and the Mezzogiorno, that proportionally reflect the population in those areas, has been a serious political concern these last years. Finally, the chapter discusses some legislative and bureaucratic factors that keep investments in Italy from taking off and hinder the transformation of resources into actual construction sites. The authors conclude by an assessment of some policy prescriptions for the relaunch of Italian public investment.

5. Trends and Patterns in Public Investment in Spain

In chapter 5, José Villaverde and Adolfo Maza discuss the case of Spain, which, like Italy, has experienced the most acute economic crisis since the end of the Second World War. Because of that, the country had to face some important constraints in its public finances and public investment experienced a severe blow after the outbreak of the crisis. Before the 2008 Global Financial Crisis — namely during the period 2000–2007 — Spain was the country that registered the second highest increase in public gross fixed capital formation among the five biggest European countries (France, Germany, Spain, Italy and the UK), a rate (6.8% per year) that was also much higher than that of the EU (2.3%) and the euro area (2.6%). However, over the next period, 2008–2013, the situation changed completely: public investment dropped on an annual basis at a rate close to 11%; thus, Spain suffered the most acute decline in public investment by far among the among the big five. It also emerges that public investment in Spain has been very volatile and pro-cyclical over time (with large increase periods during boom times and huge falls during recessions); investment in infrastructures always represents the main component of public investment. This implies a policy agenda towards a more anti-cyclical stance and a rebalancing of types of investments, for instance the necessity to increase the share devoted to information and communications technology (ICT).

8. From Trans-European (Ten-T) to Trans-Global (Twn-T) Transport Infrastructure Networks. A Conceptual Framework

Paolo Costa, Hercules Haralambides and Roberto Roson, in chapter 8, look back at the genesis — in Europe — of the transnational transport infrastructure which has long coincided with the Ten-T network, developed — sometimes as a weak Keynesian stimulus — as a tool for strengthening the cohesiveness and economic efficiency of the internal market. Following the enlargement of the EU, Ten-T has been evolving from 1996 to 2013, and has been encouraging modal shifts from road and air to rail, inland navigation and short-sea shipping, in order to achieve higher environmental sustainability and combat climate change. However, during these notable efforts, little attention has been paid to the external dimension of European connectivity. Along with addressing a number of technical disruptions affecting transport and its infrastructure, the new wave of Ten-T revision — due by December 2023 — must depart from what has thus far been an introverted view of Europe as a single market (something that has often penalized European competitiveness) to an extroverted orientation of the Union as a key player in a global market. The growing economic centrality of Asia since China’s accession to the World Trade Organization (WTO); China’s strong interest in the Mediterranean Basin as the “super-hub” that connects four continents; and the eastward shift of the European economic barycentre: all of these developments indicate possible solutions for addressing the “geographical obsolescence” of the current Ten-T. In parallel, innovation-driven disruption of the worldwide maritime freight transport network and its infrastructure necessitates the streamlining of port nodes and rail networks around the world, in a way that at the same time addresses efficiently the current “technological obsolescence” of big parts of European infrastructure, predominantly of ports. The authors argue that new Ten-T network evolving into a Twn-T (Trans-Global) one ought to no longer be the product solely of European decisions: dovetailing Ten-T with China’s “Belt and Road Initiative — BRI” will not only be unavoidable but also, rather, a most welcome development.

10. Contemplative Studies of the 'Natural' World

As mentioned, the Cohesion Policy is the EU’s main investment policy and — in the wake of the 2008 Global Financial Crisis — the European Regional Development Fund and the Cohesion Fund became the major sources of finance for investment in many countries. Francesco Prota, Gianfranco Viesti and Mauro Bux, in chapter 10, review how this policy has evolved over time in terms of financial size and geographical coverage. Firstly, in the programming period 2000–2006, the centre of gravity in Structural Funds allocation shifted from the Southern regions too the Eastern regions of Europe. What is interesting is that, looking at the expenditure composition by types, ‘transport infrastructure’ and ‘environmental infrastructure’ are the main expenditure items. The investments in transport infrastructure financed by the Cohesion Policy have changed the accessibility of EU regions. In particular, many regions in Eastern Europe have significantly benefitted from the Cohesion Policy financed transport infrastructure investments in terms of improved accessibility. Also, as result of the 2008 crisis, the Cohesion Policy has been the major source of finance for public investment for many Member States of the European Union. In 2015–2017 it represents around 14% of the total; this figure is larger than 50% in some small Central and Eastern European countries, in Portugal and Croatia; larger than 40% in Poland; larger than 30% in most of the other Central and Eastern European countries. In the EU-15, the figure is lower in most Member States (7% for Spain, 4.4% for Italy and 2.5 % for Germany). However, it has reached 20% of total capital expenditures in Convergence regions in Spain, 15% in Italy and 10% in Germany.

2. Public Investment and Capital in France

In chapter 2, Mathieu Plane and Francesco Saraceno take up the case of France, where public investment has seen contrasting trends in recent decades. Although it was rather dynamic until the 2000s, a real inflection took place at the turn of 2010 when the government turned to austerity, and a large part of fiscal adjustment was achieved by reducing capital expenditure. Their chapter starts by looking at the evolution of general government net wealth from the late 1970s. While still positive, the consolidated net wealth is today at an all-time low. Indeed, after reaching a record level in 2007 (58.1% of GDP) it has lost 45 points of GDP in the space of eleven years. Plane and Saraceno then focus on the evolution of the stock of non-financial assets held by the general government. Most of this is non-produced (land), and it has fluctuated greatly because of changes in prices. The stock of fixed assets, which represents the accumulation of public productive capital, has been much more stable, and it is owned mostly by local governments. The authors then focus on flows (investment), to conclude that, with the exception of intellectual property rights, all components of public investment are today at historic lows and it is “civil engineering works” that have experienced the greatest decline. For the last three years, public net investment was negative, meaning that France does not accumulate public capital anymore. In fact, since 2009 the increase of debt has not been used to finance new investment but mostly current expenditure. Finally, the chapter analyses, by means of a multi-sector macroeconomic model, the impact on growth in different macro sectors, of a permanent increase of public investment. Based on this analysis, the chapter concludes with an assessment of the public investment needs of the French economy, and, like other chapters of the Report, pleads for the introduction of a Golden Rule of public finances aimed at preserving capital expenditure.

7. Social Investment and Infrastructure

Anton Hemerijck, Mariana Mazzucato and Edoardo Reviglio, in chapter 7, offer an original perspective: the most competitive economies in the EU spend more on social policy and public services than the less successful ones. However, the twenty-first century knowledge economies are ageing societies and require European welfare states to focus as much — if not more — on ex-ante social investment capacitation than on ex-post social security compensation. The growing needs for social services will require new and updated social infrastructure. According to a report on social infrastructure in Europe coordinated by former President of the European Commission Romano Prodi in 2018, the minimal gap is estimated at €100–150 bn per annum and represents a total gap of over 1.5 tn in 2018–2030. Long-term, flexible and efficient investment in education, health and affordable housing is considered essential for the economic growth of the EU, the well-being of its people and a successful move towards upward convergence in the EU. But how do we finance the great new needs with such a pressure on public finances? The chapter suggests innovative financial solutions using institutional and community resources to lower to cost of funding of social infrastructure. One such solution is the creation of a large European Fund for Social Infrastructure, owned by State Investment Banks (SIBs) and institutional long-term investors, which would fund its operations by issuing a European Social Bond. In this endeavour, a central role must be played by the EIB and by State Investment Banks. The authors discuss the potential role of these “mission-oriented” SIBs in social innovation by changing their mission. They should not simply “compensate market failures” but also become institutions that “shape the market” and become major providers of sustainable long-term and patient finance to deliver public value.

3. Public Investment in Germany

Chapter 3, by Sebastian Dullien, Ekaterina Jürgens and Sebastian Watzka, reports on German debates about public investment. As with France, underinvestment by the public sector over the past two decades has led to a severe deterioration of the public capital stock. Moreover, demographic change, decarbonization and digitalization pose significant challenges for the German economy which imply additional public investment needs. A detailed sector-by-sector overview of investment requirements concludes that investment requirements add up to at least €450 bn over the next decade. Through a macroeconomic simulation, it is shown that a debt-financed increase of public expenditure of this magnitude would be compatible with keeping the debt-to-GDP-ratio below 60% and would have a positive impact on potential growth.