Not a day too soon, Europe is confronting the reality that it is investing too little. That is true for both public and private sectors, it is true for creditor economies and high-debt states, and it has been true for a long time. For years, many European countries barely invested enough to maintain their existing capital stock, if that.
As external crises abound, the EU is starting on the back foot: there is an infrastructure shortfall to make up before even beginning on the mammoth task of Europe’s green transition, recasting its energy system and securing its defence capacity.
The need for more investment is universally acknowledged. But willing the ends has not yet led to willing the means — spending more public money. Public investment itself has to rise, of course. Government incentives will also be needed for private investment to reach sufficient levels and the right areas.
That means the investment imperative runs headlong into the EU’s rules constraining public spending: the state aid (subsidy) framework and the “economic governance” (budget) framework. The former, designed to prevent member states from outbidding each other to attract companies, is being tweaked and remains under pressure for even more loosening. The latter is undergoing wholesale reform.
The changes are still fiercely contested, often in predictably knee-jerk ways which reveal old faultlines between southern and northern states. Behind the defence of shibboleths, there are difficult questions regarding how to ensure more spending would actually boost the right kind of investment. But the direction of travel is clearly towards more flexibility.
More leeway for public investment or subsidies, however, runs into another pillar of EU co-operation: a level playing field in the single market. If national budgets have to become more investment-friendly, not all can be equally generous. Whether because of budget rules or market borrowing rates, some will be unable to match the largesse of others. The result of a large but geographically uneven subsidy bonanza may be a large but geographically uneven productivity boom, with the fruits of the green transition reinforcing existing inequalities.
Only three years ago, similar fears that pandemic support packages would upend single market fairness pushed the EU across the Rubicon of common borrowing and a (small) fiscal union. It is unsurprising that analogous fears today produce calls for more of the same, such as an EU-level “sovereignty fund” to finance the required industrial transformation.
There is a contradiction, then, between the goals of more investment, strict constraints on national budgets and no additional common spending. The future of Europe’s economy depends on resolving this trilemma.
For the northern “frugal” states, whose ambitions from climate to defence are in increasing conflict with their traditional budget hawkishness, this is particularly difficult. Denying there is a problem is a political and practical dead end. Some will insist member states can fund investment incentives by raising other taxes or cutting spending elsewhere. But any single country’s climate or strategic investments will benefit other Europeans too. Simple economic logic means that without additional incentives, national governments will underinvest relative to narrower domestic priorities.
Looking for ways to avoid tackling the trilemma is tempting. Cheaper energy would do wonders for investment. However, it requires more infrastructure spending in the first place.
There are policies that can soften the trade-offs. Doubling down on trade and regulatory policies that convince companies a huge EU market for green goods is imminent should lift investment and has no cost. And while corporate Europe’s complaint of an “existential threat” from the US Inflation Reduction Act is self-serving (EU subsidies are larger than America’s), the move does highlight that the US delivers its subsidy dollars faster and more predictably. Practical ideas to replicate this, such as the European Commission’s suggestion of a common scheme for national tax credits, would help deploy existing funds faster.
But even so, the trilemma would remain. It reflects divergent visions of how to run the economy — and the European project itself. More than technical policy fixes, statecraft is needed to resolve it.