Euro area economic growth would quickly benefit from a rise in public investment from its current depressed levels as low inflation and loose monetary policies create favourable conditions for more spending, the European Central Bank said on Monday.
The ECB has long been calling for euro zone governments to invest more and cut taxes as it struggles to boost economic growth and inflation in the currency bloc despite its ultra-easy monetary policy.
Euro area public investments have fallen to all-time lows since the continent’s crisis, well below levels in the United States or Japan, keeping potential growth muted.
The European Commission has been working a plan to mobilise around 315 billion euros (246 billion pounds) worth of public and private investments between 2015 and 2017 but support for the scheme, known as the Juncker Plan, has been lukewarm so far.
“An increase in public investments has positive demand effects and can contribute to the economy’s potential output by increasing the stock of public capital,” the ECB said its Economic Bulletin.
“This finding strengthens the case for increasing public investments in the current low-inflation environment.”
ECB Executive Board member Benoit Coeure emphasised this message on Monday, saying the ECB could not foster growth on its own and governments in the euro zone should redirect spending towards investment and education.
The ECB bulletin showed how various simulations of an investment push all lead to rising growth both in the short and long term, although the spending is also likely to raise debt even in the long term, requiring a degree of caution.
Debt-financed investments would bring the biggest short term growth benefits but they are also likely to raise debt the most over time, the ECB added.
Tightening monetary policy would erode the growth and debt impact of investments, the ECB said. The central bank is committed to exceptionally low rates for many years to come.