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  • Economic Computation and Economic Cybernetics Studies and Research, Issue 4/2019; Vol. 53



    DOI: 10.24818/18423264/

    Ada-Cristina MARINESCU, PhD

    Institute for World Economy, Romanian Academy


    Geo-Alexandru SPANULESCU, PhD Candidate

    Maria-Anca CRAIU, PhD Candidate

    Ruxandra NOICA, PhD Candidate

    Doctoral School of the Romanian Academy, SCOSAAR



    Abstract. We will try to investigate in this article which are the determinants

    of public investment in European Union countries. Investments have experienced a

    serious downward trend in the last three decades in EU, and this decreasing trend has

    become more pronounced after the economic crisis. Therefore we will analyze the

    main determinants of public investment in EU in order to discover which variables

    have a significant impact upon investment evolution. We will use panel data for EU

    countries during the period 1995-2017 and we will employ regression models in order

    to study the impact of economic and fiscal factors upon public investment. The result

    of our analysis shows that public investment is positively influenced by output gap,

    revenues and population change, while GDP growth rate, net lending, expenditure,

    gross debt, interest rate and active population have a negative impact upon

    investment. Fiscal policy decisions also play an important part in engaging public

    investment expenditure.

    Key words: public investment, fiscal policy, macroeconomic determinants of

    gross fixed capital formation.

    JEL classification: E20, H54, R53

    Situation of public investment in European Union

    The economic crisis has lead to a substantial decrease of public investment

    throughout the European Union. Gross fixed capital formation of the general

    government accounted for 2.83% of GDP in 2018 in EU, down from 3.21% during the

    period preceding the crisis. Figure 1 shows the evolution of public investment for EU

    countries during 2000-2018, with forecast data for 2019-2020, witnessing a visible

    downward trend after 2008.

  • Ada-Cristina Marinescu, Geo-Alexandru Spanulescu, Maria-Anca Craiu,

    Ruxandra Noica



    DOI: 10.24818/18423264/

    Figure 1. Public investment in the European Union, 2000-2020, % of GDP

    Source: Eurostat – AMECO

    In figure 2 we have also represented the mean values of public investment

    during the period 1995-2017 for EU countries, depending both on country and year.

    The lowest mean values of public investment during this period were recorded in case

    of Belgium and Germany, while the biggest values were registered for Estonia and the

    Czech Republic. In general, new member states have a higher percentage of public

    investment because the capital stock is lower in these countries and there is an

    increased need for investment.

  • Determinants of Public Investment in European Union Countries



    DOI: 10.24818/18423264/

    Figure 2. Public investment - mean values by EU member state, 1995-2017












    D E

    B E

    U K IT A T IE D K

    C Y

    M T LT LV E S

    B G P L

    H U P T

    N L F I

    S K

    F R

    R O S I

    LU S E E L

    C Z

    H R E E

    2.20 2.23




    3.09 3.13



    3.53 3.58

    3.62 3.65

    3.78 3.79 3.80 3.82

    3.85 3.88 3.88






    4.72 4.75


    Mean of GFCF by COUNTRY

    Source: Author`s calculations

    If we analyze the situation of public investment in European Union by year,

    we can notice that 2016 and 2017 were the years with the lowest values for public

    investment, while during 2008 and 2009 public investment recorded the highest values

    during the period taken into consideration.

    The decrease of public investment can be seen even more clearly in the

    countries most affected by the economic crisis. In countries such as Ireland, public

    investment amounted to 2.14% of GDP in 2018, more than a percent decrease from

    3.50% in 2000, while in the case of Greece public investment reached 3.50% of GDP

    in 2018 dropping from 5.05% in 2000.

    Several explanations have been proposed for this substantial decrease in public

    investment in European Union. The implementation of public investment is motivated

    by political decisions to engage public expenditure, and periods of recession usually

  • Ada-Cristina Marinescu, Geo-Alexandru Spanulescu, Maria-Anca Craiu,

    Ruxandra Noica



    DOI: 10.24818/18423264/

    entail the cutting of public investment. On the other hand, public investment might

    have reached a critical limit, as several studies document a saturation of public capital

    stocks. Issues related to the productivity or efficiency of public investment are also

    tackled in the attempt to understand the process of engaging public investment.

    The evolution of public investment can be also related to the evolution of

    private sector investment. An increase in public investment can have both crowding in

    and crowding out effects upon private investment. Public investment can have a

    crowding out effect upon private investment as an increase of public investment can

    contribute to the increase of deficits and in this situation private investment will be

    affected. An increase in public investment will require more funds for financing, which

    can be obtained by increasing the level of taxes or through borrowing from the capital

    markets, resulting eventually in an increase of the borrowing cost and of interest rates.

    In this case private investment will experience a decrease as well. On the other hand,

    public investment may contribute to economic growth and may produce also a rise in

    private investment due to productivity boost.

    Public investment is closely related to the measures of fiscal consolidation.

    During the economic crisis, the European Union countries followed significant fiscal

    consolidation programs, and within these programs, the reduction of public investment

    was one of the measures most widely adopted. The pattern of fiscal consolidation

    usually implemented at EU level is applied through investment cuts – 25 out of 32

    lasting and significant budget consolidation episodes, which took place in the EU-15

    between 1980 and 1997 were mostly obtained through investment cuts (Balassone and

    Franco, 2000).

    At the political level, investment expenses are usually considered the most

    convenient category of budgetary expenditure which can be cut during crisis. This

    trend of reducing public investment during budgetary consolidation is followed

    extensively in all countries. Political decisions are short-term oriented and politicians

    usually prefer to cut investment expenses, which are not compulsory and whose effect

    is visible on long term, as compared with other categories of more urgent public


    Therefore, in order to protect public investment from being a disadvantaged

    category of expenses, several initiatives were proposed, including the introduction of a

    golden rule which would exclude public investment from the fiscal deficit rule. Thus,

    public investment can be financed by borrowing, while current governmental expenses

    should be financed from taxes. Such a measure could save public investment by

    allowing an unlimited financing for investment as long as the debt engaged for

    implementing public investment is backed up by the public capital stock thus created

    and future generations can benefit from the effect of these expenses.

  • Determinants of Public Investment in European Union Countries



    DOI: 10.24818/18423264/

    Borrowing for investment does not represent actually debt because it serves

    future generations and it is therefore natural for them to bear the cost of public

    investment from which they benefit.

    Investment thus assumed will turn into public capital. The golden rule will

    contribute to the fact that the stock of public debt will be complemented by a similar

    stock of public capital. The golden rule proposes that no borrowing should be allowed

    except to finance the public investment so that debt will be matched by increases in the

    public capital stock.

    The golden rule of public inv