Investment in the Euro Area: Why Has it Been Weak?

31 Pages Posted: 24 Mar 2015

See all articles by Bergljot Barkbu

Bergljot Barkbu

International Monetary Fund (IMF)

Pelin Berkmen

International Monetary Fund (IMF)

Pavel Lukyantsau

International Monetary Fund (IMF)

Sergejs Saksonovs

International Monetary Fund (IMF)

Hanni Schoelermann

International Monetary Fund (IMF)

Date Written: February 2015

Abstract

Investment across the euro area remains below its pre-crisis level. Its performance has been weaker than in most previous recessions and financial crises. This paper shows that a part of this weakness can be explained by output dynamics, particularly before the European sovereign debt crisis. The rest is explained by a high cost of capital, financial constraints, corporate leverage, and uncertainty. There is a considerable cross country heterogeneity in terms of both investment dynamics and its determinants. Based on the findings of this paper, investment is expected to pick up as the recovery strengthens and uncertainty declines, but persistent financial fragmentation and high corporate leverage in some countries will likely continue to weigh on investment.

Keywords: Investment, Euro Area, Cost of capital, Credit, Corporate debt, Econometric models, Cross country analysis, credit rationing, lending, value, fixed capital, investments, financial crises, gross fixed capital formation, bond

JEL Classification: E22, E51

Suggested Citation

Barkbu, Bergljot and Berkmen, S. Pelin and Lukyantsau, Pavel and Saksonovs, Sergejs and Schoelermann, Hanni, Investment in the Euro Area: Why Has it Been Weak? (February 2015). IMF Working Paper No. 15/32, Available at SSRN: https://ssrn.com/abstract=2584383

Bergljot Barkbu (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

S. Pelin Berkmen

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Pavel Lukyantsau

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Sergejs Saksonovs

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Hanni Schoelermann

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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