Government spending reflects a country’s policy priorities. What does it say about the euro area? Which countries spend the most? To what extent do countries differ in their spending priorities? Has there been any convergence since the inception of the EU’s monetary union?
You can either read our policy paper here or see a short version including interactive data visualisations below.
Hovering the cursor over a data point gives additional information. The arrows at the bottom of each chart allow you to go back to a previous view.
Our findings in seven charts
- Government spending is below 40% of GDP in Ireland and the Baltics, but close to 60% in Finland and France.
- The differences do not seem to follow a North-South or West-East geographical dividing line.
- There is little evidence that euro-area countries have become more similar over time.
- The euro area saw a brief period of convergence after 2005 that peaked when the global financial crisis struck in 2009. But in the following years, divergence set in as some countries maintained the new spending ratios even as others reduced them.
- France has been among the largest spenders in almost every year and the ratio has increased in recent times. Italy is following the same trend from a lower starting point.
- Germany and Spain have converged as the German ratio is on a slow downward trajectory and the Spanish ratio increased between 2007 and 2012.
- A comparison of the five largest public spending categories shows that euro-area governments tend to have relatively constant spending priorities.
- However, divergence in government spending on social protection has increased since the beginning of the crisis.
- Large countries like France, Italy, and Spain show a trend towards increased spending on social protection while Germany is moving into the opposite direction.
- A number of smaller euro-area members, such as the Baltic countries and Ireland, saw only temporarily increased spending relative to GDP during the crisis and have mostly returned to the status quo ante since then.
- A detailed look at average expenditure levels confirms that euro-area countries display divergent spending priorities.
- Collective preferences in countries with stronger social democratic (e.g., Finland), corporatist (e.g., Germany), or liberal (e.g., Ireland) traditions may help understand these differences.
- Fluctuations during the global financial crisis reflect stable levels of government spending on education while economic output dropped.
- Italy is the only country among the four that has reduced nominal spending on education between 2005 and 2015 (-3%) while the others increased it by between 20% and 36%.
- Differences in spending are not always reflected in results. For example, Germany spends less on education than France but performs better in the PISA study.
- France and Spain have spent more on public investment (gross fixed capital formation) than Italy and Germany in almost every year since the start of EMU.
- Public investment has decreased in the years following the financial and sovereign debt crisis. The decline is especially pronounced in Spain and Italy, countries that faced strong pressure to consolidate their finances. This trend may have reversed in Spain but seems to persist in Italy.
- The data for Germany suggests that spending constraints are not the only explanation for a low level of public investment
- R&D expenditure in the euro area is currently well below the EU target of 3% of GDP.
- Governmental R&D plays a minor role compared to R&D in the (public and private) higher education and both are dwarfed by the business sector.
- The role of the business sector is especially important in Germany, the only large economy that comes closes to fulfilling the 3% target. Spain and Italy spend markedly less on R&D than the euro area average.
- Public spending ratios in the euro area vary widely and have shown no signs of lasting convergence since the inception of EMU.
- Social protection accounts for a large share of the difference. Notably, its share of GDP has increased in Italy and France, while it has decreased in Germany.
- The euro area’s four largest economies do not have much in common when it comes growth-enhancing ‘productive’ spending. France spends a comparatively large share of its GDP on public investment and education, while Germany spends more on R&D. Spain saw a very large drop in public investment during the crisis, but spending on education remained stable. In Italy, spending on all three policy areas seems to be on a declining path.
- Our analysis supports previous findings that spending levels and priorities reflect first and foremost domestic preferences and path dependency. This diversity is a legitimate expression of different values and interests and it may even be a source of economic resilience. However, it also suggests that it will not become any easier for euro-area institutions to find policies that fit all its members equally well.