Investing in Europe

Old problems and new opportunities

by Olimpia Fontana (Author)
©2022 Monographs 250 Pages
Series: Federalism, Volume 14


The book addresses the issue of investment in Europe, adopting a European economic policy approach. In the first part, a review of investment policy in Europe, as well as a macroeconomic theoretical perspective, are provided to better appreciate recent developments within a new investment narrative. By analyzing the context in which investment support policies have taken place at European level since the origins of what is now the EU, through the 2008 financial crisis, and considering the effects of the current pandemic crisis, the book proposes possible solutions based on internal and external investment plans for a new European economic model. In particular, three aspects are examined. First, the implication of the green transition on the social dimension; second, the opportunity to strengthen the partnership with Africa; third, how a large-scale investment plan could be financed.

Table Of Contents

  • Cover
  • Title
  • Copyright
  • About the author
  • About the book
  • This eBook can be cited
  • Table of Contents
  • Introduction
  • Chapter 1 Investment policy in European strategies: A brief history
  • 1.1 Industrial policy: A brief description
  • 1.2 Industrial policy in Europe
  • 1.3 European investment policy
  • 1.4 Jacques Delors’ White papers (1985-1993)
  • 1.5 The Lisbon Strategy (2000-2010)
  • 1.6 The Europe 2020 Strategy (2010-2020)
  • 1.7 A smarter, greener and more inclusive EU?
  • 1.8 Internal inconsistency between the Maastricht and Lisbon pillars
  • Chapter 2 Investment: Some definitions and macroeconomic dynamics
  • 2.1 Private investment
  • 2.2 Public investment: Not only infrastructure
  • 2.3 Intangible investments
  • 2.4 The EU budget
  • 2.5 Investment and savings: Two sides of the same coin
  • 2.6 The paradox of savings and possible ways out
  • 2.7 The Eurozone’s flaws
  • 2.8 Macroeconomic dynamics before the financial crisis
  • 2.9 The adjustment process after the crisis
  • Chapter 3 Investment and the financial crisis
  • 3.1 Growth and investment trends before and after the financial crisis
  • 3.2 Investment: The missing part of the narrative
  • 3.3 The reasons for low investment
  • 3.4 Investment developments at sectorial and country level
  • 3.5 Long terms causes: Secular stagnation and financialization
  • 3.6 Post Covid-19: Searching for strategic autonomy and trade diversification
  • Chapter 4 Proposals to boost investment in the post-financial crisis
  • 4.1 Economic surveillance during the financial crisis
  • 4.2 Not all imbalances are equal
  • 4.3 How to manage a balance sheet recession?
  • 4.4 Eurobonds, Union bonds and European taxes
  • 4.5 The European Commission response: The Juncker Plan
  • 4.6 From the investment clause to the golden rule
  • 4.7 A functional approach to the golden rule
  • Chapter 5 The Covid-19 crisis and solidarity in Europe
  • 5.1 Solidarity in Europe
  • 5.2 EU budget functions: Between theory and reality
  • 5.3 Macroeconomic stabilisation: Risk reduction or risk sharing?
  • 5.4 Allocation of European public goods
  • 5.5 How Covid-19 crisis has prompted more solidarity
  • 5.6 The EU’s first line of defence
  • 5.7 The long-term recovery package
  • Chapter 6 The European Social Green Deal
  • 6.1 The new development strategy for climate change
  • 6.2 The four pillars of the EGD
  • 6.3 Public investment and climate debt
  • 6.4 Financing the EGD
  • 6.5 Carbon pricing
  • 6.6 The green golden rule
  • 6.7 A green monetary policy
  • 6.8 The EIB as the EU’s Climate Bank
  • 6.9 Beyond GDP: Sustainability as an economic policy
  • 6.10 The decoupling of GDP growth and the welfare state
  • 6.11 Energy transition and the social dimension
  • 6.12 The socio-ecological nexus
  • 6.13 Social investment and infrastructure
  • Chapter 7 An investment plan for Africa
  • 7.1 Synergies of EU–Africa Cooperation
  • 7.2 African trade, between old and new friends
  • 7.3 Intra-African trade between good friends
  • 7.4 Complementary policies to African integration
  • 7.5 Steps forwards more EU-Africa integration
  • 7.6 Investment in Africa: Financing and critical aspects
  • 7.7 Alternative form of financing: Blending finance
  • 7.8 The European EIP
  • 7.9 Critical aspects of the EIP
  • 7.10 Migration management in the long-term perspective
  • 7.11 The presence of the new friend China
  • Chapter 8 The long and promising road to genuine European own resources
  • 8.1 The EU budget: A reform from both the revenue and expenditure sides
  • 8.2 New European own resources
  • 8.3 Gambling
  • 8.4 Tobacco
  • 8.5 CO2 emissions
  • 8.6 Tax avoidance
  • 8.7 Financial transactions
  • Conclusions
  • References
  • Sitography
  • Series Index

←16 | 17→


In recent years, much attention has been devoted to the issue of investment. Today, discussions are quite common in respect of collective efforts by European Union (EU) institutions, national governments, and the private sector to preserve investment spending. At all levels, local, national and European, political and academic, the narrative in Europe has gradually shifted; while until recently the prevailing view was that member states had to pursue structural reforms and stable public finances in order to achieve economic growth, more recently an alternative idea has gained ground, that of seeking the right combination of pursuing structural reforms while at the same time fostering investment.

Of course, to achieve this important change we have, in just a few years, had to go through two of the most serious crises since the Second World War: the financial crisis and the Covid-19 pandemic. However, within Europe due attention has not always been given to this component of economic activity, nor has there been agreement among academics on the effect investment can have on the economy and on the relationship between public and private investment. The two crises we have experienced have led to a change in attitudes towards investment, although in very different ways, and with different timing. While during the financial crisis, which later turned into a sovereign debt crisis in the Eurozone, a discourse about the investment gap compared to pre-crisis levels emerged – especially with reference to private investment – conversely the pandemic crisis has led to a more general questioning about the role of the public sector in the economy, and the relationship between the state and the market. In addition, the climate change challenge has raised doubts about the ability of the market alone to allocate resources (i.e. capital) to specific sectors, beyond profit considerations. Part of this reflection has to do with the traditional role of industrial policy in Europe, which has been absent for years.

Industrial policy has changed over time, from mainly being a national policy with governments promoting national champions in the 1960s, to become a European responsibility by the early 1990s. However, in this ←17 | 18→second period industrial policy was considered in relation to the creation of the European internal market, with priority put on competition policy. As a consequence, this has made it difficult to implement industrial policy measures to support targeted sectors or industries considered strategic for the EU.

As such, in Europe the issue of industrial policy has for years taken the form of various medium-term strategies and agendas that have been pursued in conjunction with the various multiannual budgets that assign (limited) funding to specific European programmes. Since the financial crisis, a new conception of industrial policy has emerged alongside the need to activate European instruments capable of stimulating greater investment, with a view not only to sustain competitiveness and growth, but also to offer better prospects for societal welfare. For example, in this period an understanding of investment needs was set out in the Juncker Plan, although with its limitations.

In addition to this change of pace in industrial policy, the EU has committed to the Sustainable Development Goals (SDG) set out in 2015 as part of the 2030 Agenda for Sustainable Development, providing a shared blueprint for peace and prosperity for people and the planet. These targets have been assimilated within European policies, in particular in the ambitious long-term plan for climate neutrality, the European Green Deal (EGD). In consequence, industrial policy changed once again, with a more specific qualification of green industrial policy, to be pursued at European and national levels.

Achieving this result, which can be considered as a starting point for rethinking the growth model (if we want to continue to think in terms of growth and not, for example, of human development) has not been easy in the European context; several elements throughout the history of the EU and its institutional settings have made it difficult to move towards what can be defined as a new model of sustainable development, both environmental and social. As already mentioned, the kind of industrial policy that the EU has pursued to solve structural weaknesses of low competitiveness and low growth potential, through its various agendas, like the Lisbon Strategies and Europe 2020, has not delivered the expected results, in particular with reference to targets for employment and research investment.

One of the problems with the EU approach is connected to its economic governance, with, on the one hand, the macroeconomic pillar, ←18 | 19→based on budgetary discipline and, on the other, the microeconomic pillar, consisting of Lisbon-like strategies. The two pillars are deemed to be incompatible, given the tensions between the simultaneous pursuit of an ambitious agenda of structural reforms, and compliance with fiscal consolidation provisions. As a matter of fact, in an incomplete monetary area like the Eurozone fiscal rules are necessary, as they aim at preserving fiscal sustainability, avoiding the transmission of inflation tensions across countries. However, the European fiscal framework has arguably failed to deliver, with mixed results in term of compliance.

Fiscal rules were suspended in spring 2020 through the activation of the general escape clause, to enable a sizable fiscal response to the Covid-19 crisis. However, the clause should be lifted as soon as a sustained normalisation of economic activity has materialised, and different rules must then be anticipated. Just before the pandemic, the European Commission initiated a review of fiscal rules to assess the strengths and weaknesses of the increasingly complex fiscal surveillance framework. The subsequent pandemic increased the need for new rules that, among other things, have a more conducive approach to investment.

Another relevant issue regards a proper understanding of variable investment, from a macroeconomic perspective. What is lacking is a consideration of investment as a component of a more general equilibrium that must apply both at the domestic and external levels, and concerns the level of savings. Without considering the implication that certain fiscal rules may have on the rest of the economy, in particular with regard to external imbalances, the risks associated with the prevailing export-led growth model cannot be fully understood. This was particularly the case after the financial crisis had evolved into a sovereign debt crisis, where the most hard-hit countries were those with high external debt, not public sector debt. However, the solutions provided by the EU were not commensurate with these states’ needs, and neither answered demands for a risk sharing mechanism at the central level, nor those for a massive European investment plan. As such, the European integration process did not make any substantial progress towards a federal arrangement, and the economic situation in the EU has remained mired in prolonged stagnation, with low growth and very low interest rate.

Notwithstanding these critiques, the pandemic has, however, brought about tremendous improvements in the EU, in terms of a new momentum in solidarity between countries. Instruments that had been requested for years were put into place, in particular the Eurobonds.←19 | 20→

Although we are still a long way from what many have called the Hamiltonian moment,1 seeds of further European integration have been laid, opening up the possibility of further political ambitions, that will be needed to face climate change and its related implications. This book does not aim to analyse every aspect of the European agenda for next decades, the EGD, which by its nature is broad and cross-cutting across sectors, policies, and levels of government. Rather, it focuses on a few elements that could contribute to making a European climate strategy more effective, based on investment plans that look at the social dimension and external cooperation with the African continent. For this to be possible, further steps on the revenue side of the European budget must be taken, in particular by introducing new European own resources. In this way, the EU would be adequately equipped to manage, in a unified way, not only the fight against climate change, but also the provision of other European public goods that are crucial for the security and prosperity of European citizens.

←20 | 21→

Chapter 1

Investment policy in European strategies: A brief history

1.1 Industrial policy: A brief description

Investment strategy is not only about putting money in the economy in order to obtain a return. It is part of what is called industrial policy, which has a very large scope, which covers a range of measures aimed at enabling a country to achieve its strategic objectives by enhancing domestic productive capabilities and international competitiveness. Starting with a clarification of what industrial policy is, and what it means for Europe, contributes to an understanding of the context of investment and its long-term trend.

Although it is difficult to define industrial policy precisely, a commonly used definition is “any type of selective government intervention or policy that attempts to alter the structure of production in favour of sectors that are expected to offer better prospects for economic growth in a way that would not occur in the absence of such intervention in the market equilibrium” (Pack and Saggi, 2006, pp. 267-268).1

After a long debate two different kinds of measures of industrial policy have been identified: on the one hand, horizontal policies seeking to improve operational conditions and capabilities across a number of sectors, and on the other vertical/selective measures, focused on specific industries, firms or sectors. Examples of selective/vertical measures can include: the promotion of infant or fledgling industries in the hope that, through government assistance, they will become profitable and internationally competitive; support for the restructuring and modernisation of industries that are regarded as important because of their role ←21 | 22→as employers or exporters, or because of their links to national defence, or because they produce technology that will be used in other parts of the economy; the creation of national champions through government-induced mergers; and the rescue of failing firms (Owen, 2012).2

The distinction between horizontal and vertical measures may, however, not be as clear. For example, a horizontal measure may have a relative impact that is different depending on how this general measure affects a specific sector. Therefore, a more comprehensive view implies going beyond this apparent trade-off, and thinking in term of a system-based approach, no longer focused on a sequence of disjointed and narrow and sectorial intervention, but rather on a combination of horizontal measures and selective complementary measures needed for specific sectors, that are not necessary or relevant in others. Accordingly, a new, more holistic approach should be: more relevant, through the identification of the most appropriate policies for each sector; more widely applicable, through greater coherence and the integration of policies; and more consensual, through the involvement of key stakeholders (Aiginger and Sieber, 2006).3 This approach should affect the structure of the economy as a whole, not only manufacturing, in a unifying effort with “traditional goals of industrial policy on the one hand, with the objectives of competition policy, as well as with broader goals like social and economic cohesion and environmental standards on the other, narrow definitions of industrial policy and border fights between sub disciplines are less likely”(Aiginger and Sieber, 2006, p. 581). From these preliminary definitions, it is evident that coordination between the private and public sectors is essential, where market forces and private entrepreneurship would be at the centre of the agenda, and where, as Dani Rodrik (2004)4 writes, governments would also play a role in coordinating and defining the strategic sphere, beyond simply setting the rules, in an effort to present a new agenda for economic policy.←22 | 23→

The instruments used in industrial policy range from direct and indirect support to specific firms and industries – through, for example, grants, subsidies, loans and tax credits – to support for knowledge institutions, infrastructure and skills. The characteristics of the instruments used for industrial policy vary considerably, ranging from the very narrow to the very broad, including all government initiatives to improve the business environment. An attempt to categorise all possible instruments by broad domains contributing to an industrial policy is set out in Tab. 1.1.


ISBN (Softcover)
Publication date
2022 (February)
Bruxelles, Berlin, Bern, New York, Oxford, Warszawa, Wien, 2022. 250 pp., 21 fig. b/w, 3 tables.

Biographical notes

Olimpia Fontana (Author)

Olimpia Fontana has a PhD in political economy from Università Cattolica del Sacro Cuore with a thesis in Post Keynesian economics and heterodox economic models. She is Mario Albertini Fellow of the Centro Studi sul Federalismo, where she has been a researcher since 2013; she’s Adjunct Professor in Macroeconomis at Università Cattolica del Sacro Cuore, Cremona Campus. She deals with European economic policy issues, with a focus on the Eurozone economic governance and investment policy related with environmental and social aspects.


Title: Investing in Europe
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