After a brief review of the empirics of investment in Europe, this chapter seeks to accomplish four tasks, thereby focusing on the countries that are members of Economic and Monetary Union (EMU). First, it assesses the validity of the standard view that supply-side inadequacies and rigidities at Member State level are to blame for weak investment performance and that market-oriented structural reforms are the solution. Finding that view wanting, it then considers some reasons why touted supply-side reforms may not have substantial positive effects. Following a review of other explanations for weak investment, the chapter concludes that economic governance reform at EMU level is crucial. This is because stable and balanced demand growth that sustains - but also limits - pressure on the supply side is critical for keeping investment at elevated levels.
This article poses the question of whether monetary financing of public investment constitutes a viable way forward for the euro area. The problems of low inflation, high unemployment and public debts seem scarcely resolvable in an environment that is constrained by the virtual exhaustion of monetary policy and legal limitations on expansionary fiscal policy. The author draws on the literature on monetary finance to identify key features of a scheme that could function in the context of EMU. He proposes to achieve an indirect monetary financing of public investment by the ECB committing to take newly issued EIB bonds on to its balance sheet. This would be essentially costless in a deflationary environment and could be expected to exhibit high multiplier effects. The independence of the ECB is maintained by making bond purchases subject to an inflation ‘trigger’.