"Luiss Institute for European Analysis and Policy - LEAP: 'Financing Investment at Times of High Public Debt' report presented"

How can the European economy be revitalized amid the tension between rising debt and a deteriorating capital stock? The report “Financing Investment at Times of High Public Debt” seeks to answer this and other questions. It is the fourth volume in a series of analyses on public investment in Europe, curated by the Luiss Institute for European Analysis and Policy (LEAP) in collaboration with French and German research centers. The report was presented today at Luiss as part of a study day organized by OFCE-Sciences Po Paris and LEAP on the challenges facing Europe.

According to Francesco Saraceno (LEAP and Sciences Po Paris), one of the report’s authors, to make a truly impactful change, the use of investments (both public and private) must be accompanied by a new approach from policymakers. This approach should take into account the current changing conditions and move away from outdated models of economic thinking. Today’s meeting at Luiss, introduced by Valentina Meliciani (LEAP), provided an opportunity for a discussion among Saraceno, Carlo Bastasin (LEAP, Brookings Institution), Pier Carlo Padoan (Unicredit, LEAP), and Edoardo Reviglio (Yale University).

Each year, the report’s authors—Francesco Saraceno, Floriana Cerniglia (Cattolica), and Andrew Watt (IMK Berlin)—bring together a large group of researchers from think tanks, universities, and European and international institutions (the European Commission, the IMF, and the European Investment Bank) to explore how public policies can drive growth, economic stability, and the transition to a sustainable economy. The chapters, written in a non-academic style, are aimed at policymakers, business journalists, and anyone interested in the topics of growth and economic policy in Europe.

The report “Financing Investment at Times of High Public Debt,” published in December 2023, addresses how to balance the investment needs of the European economy with the sustainability of public finances strained by the many crises of the past decade.

Over the past two decades, a growing gap has emerged between the deterioration of public capital and the pressure of debt on public finances. In nearly all advanced economies, the stock of public capital has declined significantly compared to the average value of the 1990s, with some unexpected countries emerging as particularly problematic. Germany stands out above all, with its public capital stock in 2019 being 17% lower than in the 1990s (IMF data). Over the same period (1999–2023), debt rose almost everywhere: by 20 percentage points in the Eurozone, by 25 in Italy, and by as much as 50 points in France (European Commission data). This tension—between deteriorating public capital that is inadequate for the challenges of the transition and limited room for maneuver in public finances due to public debt—is the focus of the report, which explores how to navigate this predicament.

The report conveys several key messages for public debate, especially in light of the European elections in June:

• Investment cannot be left solely to national governments, whose room for maneuver is inevitably limited. Investment banks, European institutions, and the financial sector must be key players in the effort to adapt our economies.
• Contrary to popular belief, public investment does not compete with private capital. On the contrary, recent economic literature increasingly emphasizes the role of an infrastructure system that supports private activity as a driving force for the economy.
• This report, along with previous ones, highlights the inadequacy of accounting definitions for investment (in physical infrastructure). In today’s economy, intangible capital—education, health, skills, and social capital—is just as important as tangible capital.
• Today, European institutions no longer seem adequate to enable policymakers to tackle current challenges. In the late 1990s, the decision was made to impose restrictive budgetary rules on public policies, based on the belief—later proven wrong—that active policies were unnecessary. A recurring theme emerges from all chapters of this report and its predecessors: the need for a major governance reform. This cannot be limited to the already unsatisfactory revision of the Stability Pact; rather, its goal should be to restore room for maneuver for public policies (at the national or European level) without compromising financial stability.

Sheet:

Cerniglia, F., F. Saraceno, and A. Watt (eds) (2023) Financing Investment in Times of High Public Debt: 2023 European Public Investment Outlook. Open Book Publishers, Cambridge, 2023 https://books.openbookpublishers.com/10.11647/obp.0386/

The report is available for free download, as it is published under a Creative Commons license.

Previous volumes:

2020: https://books.openbookpublishers.com/10.11647/obp.0222.pdf;

2021 (focused on NGEU):https://books.openbookpublishers.com/10.11647/obp.0280.pdf

2022 (focused on the green transition) https://www.openbookpublishers.com/books/10.11647/obp.0328