The European Union faces a critical crossroads. To achieve its strategic goals in climate action and digitalisation, public infrastructure investment must rise considerably across member states. Our new research demonstrates that increased public investment can stimulate economic activity and reduce unemployment without jeopardising debt sustainability. As geopolitical tensions reshape global trade, Europe must pivot towards domestic growth drivers—and public investment should lead this transformation.
The investment imperative
The Draghi report on EU competitiveness makes an unequivocal case: public investment is essential for Europe’s strategic objectives. The continent faces an annual investment gap of €750 to €800 billion—roughly 4.5 per cent of EU GDP—encompassing energy security, digital infrastructure, and decarbonisation. This figure represents not merely an aspiration but an economic necessity.
The decarbonisation challenge alone demands substantial public commitment. EU governments must channel significant investment into energy systems, transportation networks, and building retrofits, requiring an additional one per cent of economic output annually through 2030. Yet current trajectories point in the opposite direction.
Analysis of national governments’ multi-year fiscal plans reveals a troubling pattern: approximately one-third of EU countries project cuts to their nationally financed public investment ratios in coming years. More stringent fiscal consolidation correlates directly with deeper investment reductions. Without policy intervention, the essential boost in climate and digitalisation infrastructure will remain unrealised.
The macroeconomic dividend
Our study provides empirical evidence on public investment’s macroeconomic impact across growth, unemployment, private investment, and public debt ratios. The findings challenge conventional wisdom about fiscal sustainability: when public investment generates greater economic returns and future tax revenues than it adds to government debt, borrowing to finance such investment becomes economically rational rather than fiscally reckless.
Applying state-of-the-art statistical methods to data from all 27 EU member states, we demonstrate that public investment delivers substantial positive effects on economic development. Each euro of public investment generates approximately €1.30 in inflation-adjusted output within three years—a cumulative multiplier of 1.3 that aligns with meta-analysis evidence and previous IMF research using OECD country samples and earlier datasets.
The benefits extend beyond GDP growth. Unemployment rates decline following public investment increases, particularly in the short term. Rather than crowding out private sector activity, public investment tends to stimulate private investment—a complementary effect that amplifies economic benefits. Most significantly for fiscal hawks, these positive macroeconomic effects ensure debt sustainability remains intact. While government debt rises when credit-financed investment occurs, the concurrent increase in national income means the debt-to-GDP ratio remains stable even after three years.
Charting the path forward
The EU must increase public investment by at least one per cent of economic output annually to meet its strategic objectives in energy, transport, and digital infrastructure. This target, while substantial, remains entirely achievable with appropriate policy frameworks.European policymakers have allowed EU member countries to activate the national escape clause to exempt additional military spending, but much of that falls under government consumption rather than investment. Hence, military spending multipliers must be expected to be significantly smaller than for proper public investment in energy and digital infrastructure.
The primary obstacle emerges from fiscal consolidation pressures under the EU’s new fiscal rules, which currently drive austerity measures across many member states. Policymakers must exploit the flexibility embedded within these rules to their fullest extent. Crucially, governments should revise key assumptions about public investment’s effects on growth and debt sustainability within the technical framework for country-specific assessments—changes that require no legal amendments.
National governments should simultaneously expand co-financing of EU programmes, as these expenditures fall outside ex-post compliance assessments under the expenditure rule. Where domestic fiscal constraints prove insurmountable, governments must champion the creation of a new EU investment fund to succeed NextGenerationEU, directly addressing the investment gaps the Draghi report identifies.
Investment multipliers reach their peak (with multiplier values above 1.5) when spending addresses clear infrastructure needs, builds institutional capacity, drives research and development, or catalyses mission-oriented structural change. The evidence consistently demonstrates that well-designed, strategically timed public investment bolsters economic development, particularly during challenging economic periods.
Former European Central Bank President and Italian Prime Minister Mario Draghi argues persuasively that Europe has become overly dependent on foreign demand for growth stimulation. Throughout the 2010s, wage stagnation and restrictive fiscal policies suppressed domestic demand, leaving Europe lagging in productivity growth. With the Trump administration’s protectionist stance reducing American appetite for European exports, and China’s import growth decelerating, Europe must reorient towards domestic growth engines. Public investment must occupy centre stage in this strategic pivot.
Philipp Heimberger is an economist at the Vienna Institute for International Economic Studies (wiiw).
Cara Dabrowski is an economist at the Vienna Institute for International Economic Studies (wiiw).
