Business investment is not the only thing under pressure in Europe. Government investment has rebounded slightly, but spending and incentives are expected to come under pressure in the euro zone economy as fiscal health improves. The United States still has a budget deficit of more than 6%, while eurozone countries are bound to adhere to budget rules, reducing opportunities for increased investment. The rise of populists in many countries has made it difficult to cut traditional government spending on health and welfare, meaning that incentives for government and business investment are at risk. As countries scramble to secure spending money amid Russia’s ongoing war in Ukraine, the logical exception appears to be defense. But even there progress has been slower than expected in terms of increased structural spending, and orders have gone elsewhere, given Europe’s modest defense production capacity.
However, this is not the case everywhere. The EU Recovery and Resilience Fund plays an important role in financing private and public investments. In Southern and Eastern European countries, this is significant and is evident in the post-pandemic recovery in investment. Southern countries in the eurozone have jumped ahead and are now outpacing pre-pandemic investment trends, while northern countries are driving an overall lackluster economic recovery. However, to be fair, a large part of this was due to Italy’s “superbonus” sequestration incentive scheme, which had a huge impact on investment. We expect Recovery Fund projects to be completed by 2026, resulting in significant investment increases for most economies in the South.
However, this is not the only way governments influence investment. Political uncertainty in the euro area is increasing as traditional political parties are losing power and political fragmentation is increasing. Of course, this is true globally, with protectionism on the rise, including the growing threat of tariffs. This creates additional hurdles for business investment.
