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Marco Buti, Philipp Mohl "Lacklustre investment in the Eurozone: Is there a puzzle?"

Marco Buti, Philipp Mohl, 4 June 2014

Investment in the Eurozone is forecast to remain below trend until 2015, with a particularly large shortfall in the periphery. Low investment reduces aggregate demand, thus lowering short-term growth, and it also hampers medium-term growth through its effect on the capital stock. This column highlights three causes of low Eurozone investment – reduced public investment, financial fragmentation, and heightened uncertainty – and proposes a series of remedies.

On the importance of investment for the Eurozone economy 

According to the European Commission’s most recent forecast, real economic activity in the Eurozone is expected to recover at a moderate pace until 2015, and to remain significantly weaker than in the US (European Commission 2014a).

One driving factor behind the differences in the growth outlook for the Eurozone and the US is investment. Investment constitutes an important component of aggregate demand, accounting for around 20% of real GDP in the Eurozone (21% of GDP in the US). So it comes as no surprise that the sharp fall in investment following the financial turmoil in 2008 contributed substantially to the severe economic downturn in the Eurozone. Investment is now picking up, but only slowly. While the investment to GDP ratio is projected to go back to its long-term average in the US, it is set to remain below it in most Eurozone Member States until 2015, with the shortfall particularly large in the more peripheral countries (see Figure 1).

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