## Investment in the Euro Area: Why Has It Been So Weak?

_IMF Blog, February 19, 2015_

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## Bibliographic details
- Authors: Bergljot Bjrnson Barkbu, S Pelin Berkmen, Hanni Schlermann
- Published: February 19, 2015

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### Overview
- Authors: Bergljot Bjørnson Barkbu, S. Pelin Berkmen, Hanni Schölermann
- Date: February 19, 2015
- Core finding: Investment in the euro area, particularly private non-residential investment, has not recovered since the onset of the global financial crisis and fell more drastically than in many prior financial crises.

### Key drivers of weak investment
- Low or negative growth:
  - Creates a "Catch 22": investment is low because firms lack demand, and growth is weak partly because investment is low.
  - Particularly pronounced in Spain, where changes in real GDP explain variation in investment well.
- Crisis legacies that further depress investment:
  - High corporate leverage / indebtedness impairs creditworthiness and borrowing ability (noted for Portugal, Italy, France).
  - Policy uncertainty reduces firms' willingness to invest (important in Spain, Italy, Greece, Ireland, and the euro area as a whole).
  - Borrowing constraints and difficult access to bank finance (noted for Italy and Portugal).
  - Financial constraints vs. cash financing: some firms use internal cash flows to finance investment, with higher cash inflows associated with more investment in Spain and Germany.

### Quantitative findings
- Cumulative unexplained shortfall in investment (difference between investment predicted by output changes alone and actual level of investment):
  - Ranges between 3 and 6 percent of GDP when only output changes are considered.
  - Narrows to ½ -2 percent of GDP when additional factors are included (uncertainty, indebtedness, borrowing costs, cash buffers, financial constraints).
- Country example:
  - In Italy and Portugal, the unexplained shortfall declines from about 6 percent of GDP to less than 1 percent of GDP when accounting for the additional factors.

### Implications and policy recommendations
- Short-term demand support:
  - Investment should pick up as the recovery strengthens.
  - Continued accommodative monetary policy and the use of available fiscal space at the national level can help support investment by raising current demand.
- Address crisis legacies and financial impediments:
  - Dealing with corporate debt overhang and high non-performing loans should be a priority, as indebtedness impedes investment.
  - Improve firms’ access to capital and lower borrowing costs.
  - Complete the banking union and build a capital markets union to boost investment prospects.
- Structural and regulatory reforms:
  - Make financial intermediation more effective.
  - Implement more flexible labor and product markets.
  - Undertake reforms to improve the business environment to raise growth expectations and reduce policy uncertainty.
- Overall approach:
  - A comprehensive policy effort to reduce policy uncertainty, revive "animal spirits," and contribute to a sustained recovery in investment.

*Source: Investment in the Euro Area: Why Has It Been So Weak? — https://www.imf.org/en/blogs/articles/2015/02/19/investment-in-the-euro-area-why-has-it-been-so-weak*

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## References

- [October 2014 World Economic Outlook](http://www.imf.org/external/pubs/ft/weo/2014/02/)
- [https://www.imf.org/wp-content/uploads/2015/02/eur-weak-investment-chart-1.jpg](https://www.imf.org/wp-content/uploads/2015/02/eur-weak-investment-chart-1.jpg)
- [https://www.imf.org/wp-content/uploads/2015/02/eur-weak-investment-chart-2.jpg](https://www.imf.org/wp-content/uploads/2015/02/eur-weak-investment-chart-2.jpg)
- [on the euro area](http://www.imf.org/external/ns/cs.aspx?id=317)

_Source: https://www.imf.org/en/blogs/articles/2015/02/19/investment-in-the-euro-area-why-has-it-been-so-weak_