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                                                                          EIB Working Paper 2022/14 - The scarring effects of major economic downturns

                                                                          The role of fiscal policy and government investment

                                                                          • Publication information

                                                                            23 Nov 2022

                                                                            62 Pages (PDF/EN)

                                                                            ISBN: 978-92-861-5407-2 (PDF/EN)

                                                                            DOI: 10.2867/792600

                                                                          • Related tags

                                                                            • Economics

                                                                          Part of the series :

                                                                          • Working papers
                                                                          PDF (EN)

                                                                          Description

                                                                          Despite the efforts of policy makers to tackle recessions as they happen, there is ample evidence that major economic downturns produce lasting negative effects on real GDP, pointing to the existence of “economic scarring”.

                                                                          This paper takes a fresh look at economic scarring in 26 OECD countries, including 14 EU member states, since 1970 and examines the role played by fiscal policy in limiting these impacts. It finds that higher current expenditure does not mitigate the lasting impact of major economic downturns on real GDP. By contrast, more government investment could help to do so, but this is generally less favoured as a policy response. As a result, scarring effects are significant, confronting governments with higher debt levels, which in turn weigh on the room for manoeuvre in subsequent downturns. In sum, fiscal policy makers face two difficulties in the event of a major economic downturn: adopting the right type of fiscal expansion, and finding the right time to pivot from short-term stabilisation to fiscal consolidation, while protecting investment.

                                                                          All publications in this series

                                                                          • EIB Working Paper 2023/01 - Advanced digital technologies and investment in employee training
                                                                          • EIB Working Paper 2022/15 - Estimating financial integration in Europe
                                                                          • EIB Working Paper 2022/13 - COVID-19 and the resilience of European firms
                                                                          • EIB Working Paper 2022/12 - Determinants of the exchange rate, its volatility and currency crash risk in Africa’s low and lower middle-income countries
                                                                          • EIB Working Paper 2022/11 - A structural analysis of foreign exchange markets in sub-Saharan Africa
                                                                          • EIB Working Paper 2022/10 - How do firms cope with losses from extreme weather events?
                                                                          • EIB Working Paper 2022/08 - Are EU firms climate-ready?
                                                                          • EIB Working Paper 2022/09 - Productivity and responses to the pandemic
                                                                          • EIB Working Paper 2022/07 - Corporate training and skill gaps
                                                                          • EIB Working Paper 2022/06 - Hot off the press
                                                                          • EIB Working Paper 2022/05 - How much is too much?
                                                                          • EIB Working Paper 2022/04 - Investment expectations by vulnerable European firms
                                                                          • EIB Working Paper 2022/03 - Estimating conditional treatment effects of EIB lending to SMEs in Europe
                                                                          • EIB Working Paper 2022/02 - How to foster climate innovation in the European Union
                                                                          • EIB Working Paper 2022/01 - Firm-level policy support during the crisis
                                                                          • EIB Working Paper 2021/12 - Complementarities in capital formation and production
                                                                          • EIB Working Paper 2021/10 - The simpler, the better: Measuring financial conditions for monetary policy and financial stability
                                                                          • EIB Working Paper 2021/09 - Market finance as a spare tyre? Corporate investment and access to bank credit in Europe
                                                                          • EIB Working Paper 2021/08 - Do capacity constraints trigger high growth for enterprises?
                                                                          • EIB Working Paper 2021/07 - Can European businesses achieve productivity gains from investments in energy efficiency?
                                                                          • EIB Working Paper 2021/06 - Efficiency and effectiveness of the COVID-19 government support
                                                                          • EIB Working Paper 2021/05 - The impact of bank loan terms on intangible investment in Europe
                                                                          • EIB Working Paper 2021/04 - Aggregate productivity slowdown in Europe
                                                                          • EIB Working Paper 2021/03 - Assessing climate change risks at the country level
                                                                          • EIB Working Paper 2021/02 - The birth of new high growth enterprises
                                                                          • EIB Working Paper 2021/01 - Towards a new growth model in CESEE
                                                                          • EIB Working Paper 2020/09 - Investment vs debt trade-offs in the post-COVID-19 European economy
                                                                          • EIB Working Paper 2020/08 - EIB Group Survey on Investment and Investment Finance
                                                                          • EIB Working Paper 2020/07 - The growing digital divide in Europe and the United States
                                                                          • EIB Working Paper 2020/06 - Digital technologies and firm performance: Evidence from Europe
                                                                          • EIB Working Paper 2020/05 - Financing constraints and employers’ investment in training
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                                                                          • EIB Working Papers 2020/03 - Employer provided training in Europe: Determinants and obstacles
                                                                          • EIB Working Papers 2020/02 - Impact of FDI on economic growth: The role of country income levels and institutional strength
                                                                          • EIB Working Papers 2020/01 - How can favourable financing improve energy efficiency investments? Evidence from new experimental data
                                                                          • EIB Working Papers 2019/11 - Macro-based asset allocation: An empirical analysis
                                                                          • EIB Working Papers 2019/10 - Structural and cyclical determinants of access to finance: Evidence from Egypt
                                                                          • EIB Working Papers 2019/09 - The impact of international financial institutions on small and medium enterprises: The case of EIB lending in Central and Eastern Europe
                                                                          • EIB Working Papers 2019/07 - What firms don’t like about bank loans: New evidence from survey data
                                                                          • EIB Working Papers 2019/08 - Investment: What holds Romanian firms back?
                                                                          • EIB Working Papers 2019/06 - Promoting energy audits: Results from an experiment
                                                                          • EIB Working Papers 2019/05 - Skill shortages and skill mismatch in Europe: A review of the literature
                                                                          • EIB Working Papers 2019/04 - Can survey-based information help to assess investment gaps in the EU?
                                                                          • EIB Working Papers 2019/03 - Financing and obstacles for high growth enterprises: the European case
                                                                          • EIB Working Papers 2019/02 - How energy audits promote SMEs’ energy efficiency investment
                                                                          • EIB Working Papers 2019/01 - Blockchain, FinTechs and their relevance for international financial institutions
                                                                          • EIB Working Papers 2018/08 - Debt Overhang and Investment Efficiency
                                                                          • EIB Working Papers 2018/07 - Young SMEs: Driving Innovation in Europe?
                                                                          • EIB Working Papers 2018/06 - Resource Misallocation in European Firms: The Role of Constraints, Firm Characteristics and Managerial Decisions
                                                                          • EIB Working Papers 2018/05 - Sovereign risk and corporate cost of borrowing: Evidence from a counterfactual study
                                                                          • EIB Working Papers 2018/04 – Investment of financially distressed firms: the role of trade credit
                                                                          • EIB Working Papers 2018/03 – The corporate equity puzzle
                                                                          • EIB Working Papers 2018/02 – Access to Finance and Innovative activity of EU firms: a Cluster Analysis
                                                                          • EIB Working Papers 2018/01 – What Finance for What Investment? Survey-Based Evidence for European Companies
                                                                          • EIB Working Papers 2017/03 – Loan characteristics, Firm Preferences and Investment: Evidence from a unique experiment
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                                                                          • EIB Working Papers 2017/01 – Stabilising virtues of central banks: (re)matching bank liquidity
                                                                          • EIB Working Papers 2016/08 – Intangible investment in the EU and US before and since the Great Recession and its contribution to productivity growth
                                                                          • EIB Working Papers 2016/07 – Cross border banking: pull-push effects of parent banks on subsidiaries’ credit extensions
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                                                                          • EIB Working Papers 2016/05 – Banks Credit and Productivity Growth in the EU
                                                                          • EIB Working Papers 2016/04 – Project Finance in Europe: An Overview and Discussion of Key Drivers
                                                                          • EIB Working Papers 2016/03 – Collateral Regimes and Missing Job Creation in the MENA Region
                                                                          • EIB Working Papers 2016/02 – International Financial Flows in the New Normal: Key Patterns (and Why We Should Care)
                                                                          • EIB Working Papers 2016/01 – Infrastructure Investment in Europe and International Competitiveness
                                                                          • EIB Working Papers 2015/01 – Competitiveness of the European economy
                                                                          • EIB Working Papers 2013/02 - Private Infrastructure Finance and Investment in Europe
                                                                          • EIB Working Papers 2013/01 - Infrastructure Investments in Eastern Neighbours and Central Asia (ENCA)
                                                                          • EIB Working Papers 2012/05 - The costs of climate-change adaptation in Europe: a review
                                                                          • EIB Working Papers 2012/04 – Green Electricity Investment in Europe: Development Scenarios for Generation and Transmission Investments
                                                                          • EIB Working Papers 2012/03 – Choosing the optimal climate change policy in the presence of catastrophic risk
                                                                          • EIB Working Papers 2012/02 – The Role of Economic Policy in Climate Change Adaptation
                                                                          • EIB Working Papers 2012/01 – Strategic adaptation to climate change in Europe

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                                                                          7 February 2023

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