EIB Papers Volume 13. n°1/2008 - European Investment Bank

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114 Volume13 N°1 2008 EIB PAPERS ABSTRACT Most new EU member states (NMS) need further fiscal adjustment to support economic growth and macroeconomic stability. In this context, achieving income convergence with other EU members rests more with maintaining productivity growth, attracting foreign savings, and improving investment efficiency than with increasing government spending (including for infrastructure). Additional institutional fiscal reforms, aimed at improving expenditure efficiency and facilitating private sector investment, will be needed to support these objectives. However, further fiscal adjustment and reforms do not necessarily need to depress public investment. New financing options for public investment – including from various EU funds and through public-private partnerships – can ease existing fiscal and macroeconomic constraints, but present both new opportunities and challenges that need to be handled carefully. Gerd Schwartz (gschwartz@imf.org), Ana Corbacho (acorbacho@ imf.org), Qiang Cui, and Giovanni Ganelli are, respectively, Assistant Director, Senior Economist, Senior Research Officer and Economist with the International Monetary Fund. Paolo Manasse is professor of economics with the University of Bologna.
1. Introduction Macro-fiscal policy challenges and public investment in new EU member states Fiscal policy in the new EU member states (NMS) faces a challenging dilemma. 1 On the one hand, fiscal policy must support growth and convergence by allowing increased levels of investment, not least to upgrade infrastructure. On the other hand, fiscal policy must safeguard macroeconomic stability and fulfil the budget requirements of the EU Stability and Growth Pact, while facing additional expenditure needs for complying with the European laws and standards (the so called Acquis Communitaire). 2 These standards call for reforms in the labour market, the tax and pension systems, subsidy schemes, and other areas, which may entail up-front costs. In addition, many countries must prepare to buffer the impact of increasing expenditure pressures related to an aging population within a sustainable medium- to long-term macro-fiscal framework. To varying degrees, many NMS have carried out fiscal adjustment in recent years, with implications for the level of public investment. Although a large part of this adjustment has fallen upon public expenditures, including public investment, reductions in domestic funding for public investment have, to some extent, been counterbalanced by the availability of new financing support. Part of this financing has been provided by EU funds directed toward projects with a regional impact and of common European interest. In addition, many countries are advancing the implementation of public-private partnerships (PPPs) as an alternative to traditional public investment to develop infrastructure. Against this background, this paper looks at some specific fiscal policy and public investment issues in the NMS. In particular, the paper aims to address the following questions. First, what do recent growth experiences in NMS imply for macro-fiscal coordination? Second, what has been the impact of fiscal adjustment on public investment levels? Third, where do NMS stand with respect to infrastructure? Fourth, what is the role of new financing sources, including EU funds and PPPs? Strong fiscal positions are critical for reducing macroeconomic vulnerabilities and enhancing growth prospects in the NMS. In general, fiscal policies should aim to raise the efficient use of the whole envelope of available financing to address investment needs. Still, the diversity of growth experiences and fiscal policy stances among NMS underscores that country-specific fiscal strategies are needed. While some countries have resorted to investment cuts to consolidate fiscal positions, others have been more successful in both accommodating higher levels of investment and reducing fiscal imbalances. Also, new available financing presents opportunities as well as challenges, requiring improvements in the institutional framework for investment and PPPs. In the case of EU funds, absorbing the substantial additional resources under the new financial perspective will demand important efforts to reallocate expenditures and to step up absorptive capacities. Similarly, 1 For the purpose of this study, the NMS include the countries that became members of the EU in May 2004, plus Bulgaria and Romania that became members in early 2007. 2 This term denotes the treaties, regulations and directives passed by the European institutions as well as judgments laid down by the Court of Justice. Candidate countries must adopt, implement, and enforce all the acquis to be allowed to join the EU. In addition, they often have to set up or change the relevant administrative or judicial bodies which oversee the legislation. The “chapters” of the acquis address, for example, issues related to the free movement of goods, services, persons, and capital, company law, competition, transport, energy, research, industrial policy, education, energy, environment, culture, consumers, and health protection, as well as stipulations for cooperation in the fields of justice, customs, foreign and security policy, and financial and budgetary provisions. Gerd Schwartz Ana Corbacho Qiang Cui Giovanni Ganelli Paolo Manasse EIB PAPERS Volume13 N°1 2008 115
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Preface This year the European Inve
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Government investment is not the sa
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A common feature for the new member
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The share of transport in governmen
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The proxies are subject to caveats.
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The shares of infrastructure and ho
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Government transport investment has
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Transport and other infrastructure
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In some countries a shock to public
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Table 1. Some VAR studies (publishe
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EIB Papers Volume 13. n°1/2008 - European Investment Bank

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