Back to the basics for the EU: Investment equals Growth

It was only last Saturday when the European finance ministers gathered in Italy to decide how to bring back growth, a long-plaguing hoarse of the EU economy. They came to the conclusion that more investment programmes are needed to help the financing of infrastructure projects and development of the economy. Not a single project proposed There are no details yet as far as the actual investment projects that will support this idea; the ministers decided to address this serious issue to the European Commission (EC) and the European Investment Bank (EIB) which must come up with some projects in the next meeting of the European ministers that will be held in Luxembourg in October. However, it seems that the EU officials are trying to find out a way to help the economy recover from the recent financial crisis. Michel Sapin, the French finance minister precisely said: “We don’t have a magic wand but we need growth, we need to stimulate demand without taking on debt, we need the right mix of public and private money”. His sayings are also reinforced by the fact that the EU economy grew only by 0.1% in 2013 with almost 25 million people unemployed. Financing the investment projects The main points-ideas that were discussed in this meeting are meant to provide ways of financing the projects. Italy was the first to propose the creation of a “pan-European market” that will function as a financing tool for smaller companies to raise capital. The next suggestion comes from a common strategy of France and Germany to approve projects to generate more private investments which will allow the EU economies grow in the coming years. Another way the Polish officials proposed was through the creation of a joint EU fund which will be able to leverage its own capital in order to provide financing, 700 billion euros worth of investment. The fund will of course be under  EIB’s sponsorhip. Last, but not least, the president of the EC Jean-Claude Junker brought to the table the creation of a 300 billion euros investment programme to boost the sluggish economy. Moreover, Vítor Constâncio, the vice president of the European Central Bank (ECB) who is in favor of “a reversal in the behavior of investment” supported Junker’s plan. A true need for investments Is growth slow because of poor investments? The figures show that low investments have led the economy to a downfall. Particularly, investment is now 20% below what it was in the euro area in 2007 and the situation gets even worse in the Southern Europe. At the other side of the Atlantic, the United States note only a 6% drop in investments. Further, there is a real investment gap according to DIW, the German economic institute. This gap is more than 250 billion euros or 2.5% relative to GDP which points the finger for immediate policy action. Will these proposals be enough? It is hard to know if the investment plans will be adequate to lead the EU economies to a path of growth and prosperity. It is certain though that when more money is invested in the economy then more infrastructure is built and more job opportunities are created. Consequently, money are put into people’s pockets who spend them in buying goods and help the economy recover. All in all, the EU must be very carefully balance investments with public money properly in order to achieve these goals.