The European Union stands at a pivotal moment in shaping its long-term economic resilience. Achieving key ambitions in climate transition and digital modernization demands a significant rise in public infrastructure spending across member nations. Recent analysis confirms that higher public investment can drive economic expansion and lower joblessness without undermining fiscal stability. With global trade dynamics shifting due to geopolitical instability, Europe must strengthen internal engines of growth—and strategic public spending should be central to this shift.
A major report led by Mario Draghi underscores the urgency: public investment is not optional but foundational for the EU’s competitiveness. The bloc faces an annual shortfall of between €750 billion and €800 billion—equivalent to about 4.5 percent of its total economic output—particularly in energy resilience, digital connectivity, and decarbonization efforts. This gap is not just a target; it reflects a structural need for modernization.
Decarbonizing the economy alone requires sustained public funding. Governments must direct substantial resources into power grids, transport systems, and energy-efficient building upgrades, amounting to an additional one percent of GDP each year until 2030. Yet current national budget plans suggest a contrary trend. Data on multi-year fiscal strategies show that roughly one-third of EU countries anticipate reducing their domestic public investment levels. Tighter budgetary discipline is closely linked with deeper cuts in capital spending, threatening progress on essential infrastructure.
Empirical findings from a comprehensive study across all 27 EU states reveal that public investment yields strong macroeconomic returns. Each euro invested generates around €1.30 in real, inflation-adjusted economic output within three years—a multiplier effect consistent with prior research by the IMF and OECD. These gains extend beyond GDP: unemployment tends to fall following investment increases, especially over the short term.
Contrary to concerns about displacing private activity, public investment often encourages private sector spending, creating a synergistic boost. Importantly, even though government debt may rise when projects are financed through borrowing, the simultaneous growth in national income helps keep the debt-to-GDP ratio stable over time—preserving long-term fiscal health.
To meet strategic infrastructure needs, the EU must raise public investment by at least one percent of GDP annually. While ambitious, this goal is feasible with smarter policy design. Although recent allowances let countries exclude extra military spending from deficit rules, much of this spending counts as consumption, not investment, and thus delivers smaller economic returns.
The main barrier lies in the EU’s updated fiscal framework, which incentivizes austerity in many nations. Policymakers should fully utilize existing flexibilities in these rules. Adjusting technical assumptions about how public investment affects growth and debt sustainability in country evaluations could make a significant difference—without requiring legal changes.
National governments should also increase co-financing for EU-level programs, as such outlays are not counted under post-hoc expenditure limits. Where domestic constraints persist, leaders must advocate for a successor fund to NextGenerationEU to directly tackle the investment deficits highlighted in the Draghi assessment.
Investment returns are strongest—multipliers exceeding 1.5—when spending targets clear infrastructure gaps, strengthens institutions, supports innovation, or drives transformative change. Evidence consistently shows that well-planned, timely public investment enhances economic performance, especially during periods of economic stress.
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Europe Needs A Public Investment Revolution To Secure Its Economic Future
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. n nThe investment imperative n nThe 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. n nThe 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. n nAnalysis 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. n nThe macroeconomic dividend n nOur 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. n nApplying 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. n nThe 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. n nCharting the path forward n nThe 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. n nThe 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. n nNational 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. n nInvestment 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.