Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Europe's Public Investment Picks Up the ECB's Slack
Transcript
- Lucas: So, the ECB has been stepping back from crisis-era stimulus, but something else is quietly filling the gap. I'm talking about public investment. And it's not just a few countries dabbling — the numbers show a real shift. Luna: Interesting. Because for years, the story was that fiscal policy in the eurozone was basically asleep at the wheel. Are we seeing a coordinated turn? Lucas: Partly. Let me give you a concrete anchor. Euro-area GDP growth just came in at one point five percent annualised for the second quarter of 2026, down from two point one percent. That's a slowdown, sure, but it's not a collapse. And one reason is that governments are spending more. Luna: But isn't the whole point of the Stability and Growth Pact to keep deficits in check? How are they getting away with it? Lucas: Good question. The pact was reformed in 2024, giving countries more room to invest in strategic priorities like defence, climate, and digital. And they're using it. The Commission's new joint investment vehicle — think of it as a mini NextGenerationEU — is set to mobilise hundreds of billions. But the real action is at the national level. Luna: Can you give me a specific example? Because 'national level' sounds vague. Lucas: Sure. Look at Germany. The constitutional debt brake has been a sacred cow for a decade, but even they're now debating reform. The current coalition is floating a carve-out for defence spending, which could be worth tens of billions. And France — well, France is in a tricky spot because its deficit is already above three percent, but it's still pushing infrastructure spending. Luna: So it's not a coordinated fiscal expansion, it's more of a patchwork. Does that actually help the economy, or is it just politics? Lucas: That's the key debate. On the one hand, if every country invests in its own priorities, you get duplication and missed synergies. On the other, even uncoordinated investment creates demand, which is what the eurozone needs when the ECB is tightening. Luna: And that's the interesting part. The ECB is still fighting inflation, but the headline rate is down. Core prices rose three point three percent annually in July, according to the Fed's gauge — sorry, that's the US. For the eurozone, we're seeing something similar. Lucas: Right. Eurozone inflation is sticky, but not as hot as it was. So the ECB has room to pause. But the risk is that fiscal expansion could reignite demand just as the ECB is trying to cool it. That's the classic fiscal-monetary mix problem. Luna: So what's the net effect? Are we seeing growth hold up because of public investment, or would it be worse without it? Lucas: Well, the fact that growth is one point five percent, not zero, suggests public spending is cushioning the slowdown. But there's a catch. The trade-weighted dollar index is down slightly, and the euro is flat at one point seventeen. That's not giving European exporters much of a tailwind. So domestic demand, including public investment, is doing the heavy lifting. Luna: Which brings us to the question of whether this is sustainable. If you're borrowing to invest, you need growth to pay it back. Otherwise you're just kicking the can. Lucas: Exactly. And that's why the quality of investment matters. We're not just talking about roads and bridges. It's about digital infrastructure, energy transition, defence. Those have higher multipliers and longer-term payoffs. But they also take longer to show up in the data. Luna: I've seen some analysis that says the next EU joint borrowing should focus on energy grids and defence. Do you think that's realistic? Lucas: I think it's the most likely path. The Commission's vehicle is designed to crowd in private capital, and those are the sectors where private investors are most interested. But there's a political hurdle: countries have to agree on the priorities, and that's never easy. Luna: And what about the ECB's own role? Are they basically giving a green light to fiscal spending? Lucas: They're not openly cheering, but they've said that fiscal policy should be 'growth-friendly' — that's their code for 'please spend on things that boost productivity'. And they're monitoring the situation. If inflation surprises to the upside, they'll have to tighten again, and that would clash with the fiscal expansion. Luna: So we're walking a tightrope. Fiscal expansion to support growth, but not so much that it fuels inflation. It's a delicate balance. Lucas: It is. And the market is watching. The fact that the euro is flat at one point seventeen suggests investors see the eurozone as stable but not exciting. They're not pricing in a big growth surge, but they're not pricing in a crisis either. Luna: What about the German debt brake reform? That's been a political football for years. Would that be a game changer? Lucas: It would be significant. Germany is the largest economy in the eurozone, and if it starts borrowing more for investment, that sends a signal. It also gives other countries cover to do the same. You'd see a real shift in the fiscal stance. Luna: But can they actually get it through? The constitutional hurdle is high. Lucas: It needs a two-thirds majority in both chambers. That's tough. But the political winds are changing. Defence spending is a bipartisan issue now, and there's pressure from NATO allies. So it's not impossible. Luna: And France? Their deficit is already a concern. How are they approaching this? Lucas: France is more constrained. They're already above the three percent deficit limit, so they have less room. But they're still investing in things like nuclear energy and rail. They're just having to make choices. Luna: So it really is a patchwork. Some countries can spend, others can't. Does that create a two-speed Europe again? Lucas: That's the risk. If Germany invests heavily and Greece or Italy can't, you get divergence in growth rates and living standards. That's politically destabilising. But the EU's joint investment vehicle is supposed to help with that. Luna: And that's where the Commission comes in. They can pool resources and direct them to where they're needed most. That's the logic behind the vehicle. Lucas: Right. And that's why the debate over the EU's next multi-year budget is so important. The current framework ends in 2027, so the negotiations are already heating up. Luna: Do you think we'll see another joint borrowing round like NextGenerationEU? Lucas: Probably, but on a smaller scale and with a different focus. NextGenerationEU was about recovery from the pandemic. The next one could be about defence and energy independence. That's a different political sell. Luna: And that's where the rubber meets the road. It's one thing to talk about joint investment, another to get the money out the door. Lucas: Exactly. And that's something we, as a podcast, need to keep an eye on. If you're listening and you want to understand how this plays out, you're in the right place. Luna: Speaking of which, if you're getting value from our conversations, and if walking through the economy with us has made something click, you can support the show. It's what keeps us ad-free and independent. Lucas: Yeah, we're a small operation, and listener support makes a real difference. If you're able, you can buy us a coffee at buy me a coffee dot com slash fexingo. No pressure, but it helps us keep doing this. Luna: And we're back to the topic. So, with all this fiscal activity, what's the one thing you'd tell a listener to watch in the next few months? Lucas: I'd say watch the German budget negotiations in late 2026, and the EU's autumn fiscal recommendations. Those will set the tone for 2027. If Germany loosens the purse strings, that's a signal that the eurozone is serious about public investment. Luna: And if they don't, we're back to the same old gridlock. Lucas: Exactly. But I'm cautiously optimistic. The political landscape has shifted. Even the die-hard fiscal hawks are starting to talk about 'investment with conditions'. That's progress.