4. The Composition Effect of New Fiscal Rules in the Euro Area

An intense debate has been raging about the recent reforms in the euro area to enhance fiscal surveillance and to ensure the sustainability of budget deficits of its members, their consequences on governments’ fiscal positions and the macroeconomic outcomes (in chronological order the six-pack, the Fiscal Compact and the two-pack). This chapter focuses on the spending side of governments’ budgets and studies how expenditures evolved in the wake of the global financial crisis and in response to new regulations in the euro area. The authors wonder whether abiding by fiscal rules has changed the composition of public spending at the expense of public investment. Then they review the arguments on the possible impact of public investment (or capital) on economic growth (or GDP), including a discussion about the so-called Juncker’s Investment Plan, before making a few recommendations for increasing “safe assets.”