Source: European Commission’s AMECO database, European Commission’s autumn forecasts.
The European Commission’s autumn economic forecast suggests notable growth in public investment in the aftermath of the COVID-19 crisis. Investment’s share of GDP is projected to increase to 3.4% in 2020, up from 3% in 2019. Compared to 2019, the amount spent on government investment will rise by 5.2% in nominal terms. The levels are not homogeneous across regions. In 2020, investment growth will be a little weaker in Western and Northern Europe (4.5% in 2020) and stronger in Southern Europe (7.5%) while in Central and Eastern Europe, public investment will grow by 5.6%. Government investment’s share of GDP will increase in all three regions. In 2021, the share will continue to increase in Southern Europe (2.7%), with nominal growth of 6.8%. The share will stabilise at 3.4% in Western and Northern Europe and at 4.7% in Central and Eastern Europe.
Governments are planning more investment to support the recovery, particularly in 2021. The expenditure targets included in the draft budget plans for 2021 submitted by euro area members suggest a more expansionary path, with a more prominent role for government investment. The largest differences between these plans and the European Commission’s forecasts of the target share of GDP for government investment are for Greece (6.6% vs. 4.1%), Estonia (6.7% vs. 5.9%), Italy (3.4% vs. 2.7%), Slovenia (6.24% vs. 5.8%), Spain (2.8% vs. 2.4%) and France (4.2% vs. 3.9%). If achieved, these targets will imply notably stronger investment growth, particularly in Southern Europe. For example, the Greek draft budget plan foresees an increase in the share of investment in GDP from 2.2% in 2019 to 3.6% in 2020 and 6.6% in 2021. Those increases will bring the share of investment in GDP in Southern Europe almost in line with the EU average (3.3% vs. 3.6%) in 2021.
Table 2
Government investment: Draft budget plans and European Commission’s autumn economic forecast
Source: European Commission’s autumn economic forecast and euro area members’ draft budget plans.
The prospect of activating the Recovery and Resilience Facility and the Multiannual Financial Framework (MFF) for the 2021-2027 budget period is enabling Member States to focus on capital expenditure in their 2021 budgets. The European Union’s recovery programme allows for a longer-term perspective. Without it, the marked increase in public deficits may have reduced governments’ ability to support the recovery by spending on investment. This is particularly evident when comparing the draft budget plan submitted in October with the European Commission’s spring forecasts. Aggregating the numbers shows that the planned increase in investment in 2021 is EUR 40 billion higher, with a share of GDP that is around 0.3% higher than in the forecast.[15] Many draft budget plans include references to the RRF, a central pillar of the NextGenerationEU recovery programme, as a key factor in the medium term.
Some Member States have discussed or already approved plans that aim to support the economy amid the COVID-19 crisis. Early June, Germany approved a large package worth EUR 52.8 billion for 2020-2021 that mainly consists of government investment. Part of the package includes EUR 15 billion supporting e-mobility, EUR 11 billion for artificial intelligence, communication technologies and networks, and EUR 15.3 billion for the digitalisation of public administration and local authorities. Investment in hydrogen technology (EUR 9 billion) and R&D (EUR 2.3 billion) is also planned. France has designed a support package that includes EUR 4.6 billion for the aerospace industry, including military and civil security purchases, along with EUR 8 billion for the automotive sector and its supply chain. The Spanish government set EUR 1 billion aside for strengthening science, technology and innovation and established a regional fund for investments in education (EUR 2 billion) in addition to EUR 9 billion for healthcare spending. As part of their extraordinary measures, many countries allocated funds to shoring up the automotive industry, which remains the easiest way to stimulate demand and activate a large and mainly local production chain. This effort involves incentives for renewing vehicle fleets, favouring low-emission vehicles. The automotive initiative includes the European Union’s largest Member States, namely France, Spain, Germany and Italy.
In 2020-2021, a substantial increase in capital transfers will appear on many public sector balance sheets. Capital spending, which includes investment and capital transfers, is projected to show a massive increase in 2020. Many governments have allocated considerable resources to shore up firms. Examples include the hardest-hit sectors, such as air transport, along with innovative firms or start-ups, firms in the utilities sector or, in general, “strategic” companies as shown in Table 3. Not all of these funds will necessarily be used and, even if they are, the equity injections by governments will likely be only temporary as the shareholdings will be sold to private investors at a later date.
Table 3
Programmes providing equity support for large, strategic firms or small businesses/startups
| Large or strategic firms | Small businesses | |
| Germany | 100 | 2 |
| France | 20 | 3.9 |
| Spain | 10 | |
| Denmark | 1.3 | |
| Ireland | 2 | |
| Italy | 45 | 2 |
Source: Bruegel, Bank of Spain, IMF Policy Tracker[16].
Figure 26
Capital expenditure as a share of primary current expenditure, 2020-2021 change relative to 2017-2019 (percentage points)
Source: European Commission’s AMECO database and EIB staff calculations.
Policymakers should keep in mind that historically, government investment has tended to decline substantially following a surprise contraction in GDP (Box A). We argue that this time, the outcome should be different. As a share of GDP, government investment has approached a 25-year low following several years of fiscal consolidation in the wake of the global financial crisis. Infrastructure needs in many European regions have been increasing after years of underinvestment (EIB, 2017; EIB, 2018). Furthermore, the biggest challenges for the future of the European Union – climate change and digitalisation – require even more government investment. At the same time, current ultra-low interest rates are allowing many governments to borrow very cheaply, easing fiscal constraints. Recent high estimates of the impact of government investment on GDP lend further support for an increase (International Monetary Fund (IMF), 2020).
Fiscal sustainability issues, however, require a careful balance between taking on new debt and re-orienting government spending from current to capital expenditure. Low borrowing costs could quickly increase and force fiscal consolidation (Lian, Presbitero and Wiriadinata, 2020). That said, sovereign borrowing costs are historically very low as a result of central-bank purchases of sovereign debt in most EU countries. Theoretically, governments could lock in low interest rates for their bonds if they extended the maturity of their borrowing. However, investor demand for very long-term securities may be low.[17] In addition, debt management offices tend to caution against varying long-established issuance patterns.[18]
Box A
Government investment following recessions and fiscal consolidation
Contingent liabilities and fiscal deficits have climbed rapidly in most EU countries as economic activity collapsed and government support programmes were rolled out. In its 2020 spring forecast, the European Commission estimated that government debt to GDP in the European Union will likely increase by 15 percentage points to 94%. The increase varies substantially across Member States, from 3.4 percentage points in Luxembourg, the country with the third-lowest government debt, to 26.6 percentage