Comply and invest: the effect of EU fiscal rules on public investment

Martin Larch and Wouter van der Wielen

Empirical Economics, 2025, vol. 69, issue 4, No 4, 1725-1750

Abstract: Abstract In the late 1990s, the EU adopted common fiscal rules to keep national public finances on a sustainable path and allow centralised monetary policy to effectively implement its mandate. After the global financial crisis, when public investment posted a particularly sharp decline, the same fiscal rules were seen as culprits. This paper takes a fresh look at the interplay between public investment and EU fiscal rules. Using a new database covering all EU countries from 1998 to 2023, our analysis shows that compliance with the commonly agreed fiscal rules is not the problem. On the contrary, governments who follow the rules have the space to spend on investment. Policy makers tend to sacrifice public investment expenditure when they face trade-offs within the more general constraints on public finances.

Keywords: Public investment; Social spending; Fiscal rules; Compliance; EU (search for similar items in EconPapers)
JEL-codes: C23 H54 H63 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s00181-025-02778-1

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