Introduction
The compounded crises of the COVID-19 pandemic, war, and climate change have transformed the EU policymaking landscape. Policymakers’ attention has turned to the role of public investment. Public investment directed towards transformative change occupies centre-stage in such programmatic plans as the Letta and the Draghi reports, indicating the emergence of a new consensus around how the EU can actively intervene to remain productive and competitive in a changing global environment (Draghi, Reference Draghi2024; Letta, Reference Letta2024).
These plans signal a profound rethinking of state intervention away from the previously dominant austerity paradigm. The limited role of state intervention and public spending in previous decades left many states with decaying infrastructure, weakened social systems, and an urgent need for industrial adaptation to decarbonisation, digitalisation, and global production changes (Celi et al., Reference Celi, Guarascio and Simonazzi2020; Schneider, Reference Schneider2023).
The new consensus that has emerged in response to these challenges has been described as reminiscent of a Keynesian revival (Tooze, Reference Tooze2021). While debate has arisen about how enduring this shift in policymaking might prove (Wood et al., Reference Wood, Ausserladscheider and Sparkes2023; Packroff, Reference Packroff2024), there is nonetheless a broad perception that it constitutes a shift away from the previous paradigm rooted in neoliberal austerity and towards a rediscovery of public investment that might last beyond the pandemic (Constancio, Reference Constancio2020).
This essay aims to offer a more nuanced and critical account of this development’s cognitive foundations and consequences. Tracing the evolution of EU fiscal governance over the past two decades, we argue that this apparent Keynesian revival is rooted in a technical discourse that draws a rather weak distinction between growth-enhancing investment and ‘unproductive’ consumption. By framing the relation between these two concepts as a technical trade-off, this discourse depoliticises the distributional effects of fiscal policy and legitimises a narrow, supply-side understanding of the state’s fiscal role. Building on various critiques of mainstream economics and heterodox insights (Deleidi and Mazzucato, Reference Deleidi and Mazzucato2019; Ciaffi et al., Reference Ciaffi, Deleidi and Mazzucato2024), we argue that this dichotomy privileges certain classes and sectors, systematically excludes progressive redistributive policies while accommodating upward ‘redistribution’ towards large corporations and capital-intensive industries, and hides both political and interest-based dynamics beneath technocratic language.
We ground this argument in a reconstruction of the development of the Stability and Growth Pact (SGP) and its effects on the crucial case of Italy. Since 2015, the Commission has increasingly opened up space in its strict fiscal rules for supply-side and competitiveness-enhancing interventions (Mirò, Reference Miró2021). This logic has spread from fiscal rules to spending programmes such as the Recovery and Resilience Facility (RRF) and the new medium-term structural fiscal plans (MTSFPs). These moves disproportionately advantage certain sectors and cast the state as a private investment facilitator (Gabor, Reference Gabor2023). This essay contributes to the literature on the resilience of neoliberalism in the EU political economy (Schmidt and Thatcher, Reference Schmidt, Thatcher, Schmidt and Thatcher2013): it argues that, rather than displacing the austerity paradigm, the changes we study have prolonged it while narrowing the space for demand-side alternatives.
The essay is organised as follows. It begins by reconstructing the debate on the return of public investment in the EU. It then focuses on the difference between investment and consumption spending and, through a critical literature review, presents the central argument. After this, it presents an empirical vignette of the evolution of the EU fiscal framework and applies it to the case of Italy.
The return of public investment in the EU: Is Keynes really coming back?
The surge in state intervention during the COVID-19 pandemic and its aftermath has been depicted by many scholars as a critical juncture for European economic governance (Schmidt, Reference Schmidt2020) and described – perhaps somewhat hastily – as a ‘return of Keynesianism’ (Chohan, Reference Chohan2022). These rapid changes built on more gradual shifts during the mid-2010s, when the rigid austerity of the early decade began to soften against a backdrop of stagnation and widening investment gaps, epitomised by decaying infrastructure. During this period, EU fiscal governance became more attentive to social issues (Verdun and Zeitlin, Reference Verdun and Zeitlin2017) and increasingly embraced public investment, particularly after the Juncker Plan (Sarmento, Reference Sarmento2018). Lepont and Thiemann (Reference Lepont and Thiemann2024) describe this as the rise of the ‘European investor state’ – an emerging regime in which public spending regained legitimacy, though only when tied to growth-oriented policies that support private investment.
Driven first by the pandemic, then by the war in Ukraine and the return of inflation, recent and more rapid changes in the EU’s understanding of the role of the state have increasingly challenged the austerity paradigm, culminating in the Draghi Report and the Letta Report. The post-pandemic macroeconomic consensus and EMU governance have moved towards a post-austerity settlement, marked by the revival of elements of a Keynesian-interventionist stance at the EU level (Ban, Reference Ban2020), more solidarity-based crisis management (Oana and Truchlewski, Reference Oana and Truchlewski2023), and a shift towards an ‘investment-led growth strategy’ (Corti and Vesan, Reference Corti and Vesan2023). At the same time, even in traditionally fiscally conservative countries such as Germany, calls for increased public investment have spread among key economic and industrial actors, as well as parts of the political-technocratic elite, including the Bundesbank (Bundesbank, Reference Bundesbank2025; Nagel, Reference Nagel2025), the Council of Economic Experts (German Council of Economic Experts, 2024), and the Federation of German Industries (BDI, 2023).
During the 2020s, as a result of major demand and supply shocks, European elites and economic actors grew increasingly aware of the loss of competitiveness in key emerging sectors, especially green (for example, EVs) and digital technologies. As it became increasingly clear that the inflation and energy crisis also threatened core industrial sectors (Schneider, Reference Schneider2023), the idea that an investment offensive was key to economic growth and prosperity gained further currency (Dorrucci et al., Reference Dorrucci, Nerlich and Bouabdallah2024).
Some scholars have defined this new orientation as ‘Technocratic Keynesianism’ (van ‘t Klooster, Reference van’t Klooster2022) or ‘Ordo-Keynesianism’ (Notermans and Piattoni, Reference Notermans and Piattoni2025). The first points to elite-driven attempts to inject the necessary amount of countercyclical macro-stabilization to preserve the EU capitalist economy, but in a context of strategic and ideational ambiguity, and without substantially addressing the critical aspects of EMU governance. The second emphasises how this shift entails the coexistence of restrictive fiscal rules with innovative countercyclical temporary exemptions in crisis times, provided that they aim for competitiveness-enhancing investments. Both interpretations see these transformations as inherently shaped by an economic technocratic elite’s attempts to save the existing EU governance system through de-politicised macroeconomic interventions with a view to avoiding more radical changes. What remains to be understood, however, is how this new consensus is materialised in practice and what consequences this shift entails for the future of EU governance.
This essay shows how a supply-side bias has been inscribed into EU fiscal governance through the investment/consumption distinction: first, by tracing how this apparently neutral accounting distinction has been progressively reloaded with a growth-enhancing, competitiveness-oriented logic; second, by illustrating, through the case of Italy’s MTSFP and the reformed SGP, how this bias has shaped both EU-level fiscal rules and national fiscal interventions.
We situate this transformation within longstanding debates on the resilience of neoliberalism in EU political economies (Schmidt and Thatcher, Reference Schmidt, Thatcher, Schmidt and Thatcher2013). Neoliberalism’s malleability allows it to absorb criticisms, while maintaining its ‘holy grails’ of market centrality and competitiveness (Schmidt and Thatcher, Reference Schmidt, Thatcher, Schmidt and Thatcher2013: 405). Resilience is made possible by the integration of its ideas into institutional structures, which reinforce ‘path-dependent’ developments and restrict possible alternatives (Schmidt and Thatcher, Reference Schmidt, Thatcher, Schmidt and Thatcher2013: 418). Our argument is threefold: first, in fiscal policy, the public investment turn extends the core paradigm to new policy opportunities without calling into question the overall framework but fostering new forms of fiscal expansion (Laruffa, Reference Laruffa2022). Second, the malleability of the public investment turn is enabled by the technocratic and discursive adoption of the investment/consumption distinction and the depoliticised use of the related fiscal trade-offs. Third, institutionalisation of this dichotomy in successive SGP reforms has provided the institutional foundations and technical justification for this resilience. The following sections examine how these elements of the new investment consensus developed.
Redefining categories: How is public investment productive?
Public investment definitions
Before tracing the specific role of the investment/consumption distinction in shaping EU fiscal governance, a preliminary conceptual clarification is necessary. In standard public finance accounting, the distinction between investment and consumption rests on the temporal profile of spending: capital expenditure produces durable assets that accrue benefits over multiple budget-years and thus justifies intergenerational cost-spreading through debt-financing, while current expenditure consumed within the year should be covered by current revenues (Musgrave, Reference Musgrave1959). This is the logic underpinning the classical ‘golden rule of public finance’: governments should borrow only to invest, not to fund current spending. This is not because investment is growth-maximising, but because it is temporally asymmetric in terms of its costs and benefits (Blanchard and Giavazzi, Reference Blanchard and Giavazzi2004). Under this accounting logic, building a hospital is capital investment even if its primary goal is not to stimulate GDP growth; conversely, teachers’ salaries are current expenditure even if their long-run productivity effects are considerable. According to Beramendi et al. (Reference Beramendi2015: 2): ‘[Investments] prioritise long-term returns; [Consumption] (most notably welfare transfers) prioritise short-term direct economic returns to voters’.
Our argument is not directed at this accounting convention as such, which is clearly heuristically useful. Rather, it concerns a specific transformation of the distinction between investment and consumption operationalised within EU fiscal governance, and in many policy and academic debates since the mid-2010s. Here, the temporal-profile criterion has been progressively displaced by a supply-side growth criterion: fiscal interventions are treated as legitimate ‘investment’ not primarily because they produce durable capital assets but because they are deemed ‘growth-enhancing’ and ‘competitiveness-promoting’ in a supply-side sense. Beramendi et al. (Reference Beramendi2015: 15), for instance, extend the previous definition of investment to ‘public expenditures that increase the productivity of the economy overall and of labour and capital in particular’, thus displacing the temporal criterion with a supply-side growth criterion.
This articulation of the investment/consumption distinction has become standard in policy discourse: public investment is treated not merely as leading to durable capital formation but as inherently growth-enhancing, providing a stimulus to productive capacity and potential output in the long run by boosting the productivity of existing private capital (Truger, Reference Truger2016; Miyamoto et al., Reference Miyamoto, Baum, Gueorguiev, Honda, Walker, Schwartz, Fouad, Hansen and Verdier2020). Thinking about fiscal policy in these terms reflects a largely supply-side understanding of the economy, in which the capacity of demand-stimulating interventions to affect potential output is systematically undervalued (Levrero et al., Reference Levrero, Palumbo and Stirati2013).
In this operationalisation, ‘long-term returns’ are interpreted systematically as supply-side productivity and competitiveness gains, to the effective exclusion of demand-side returns, redistributive effects, or social outcomes measured in non-GDP terms. As Alcidi et al. (Reference Alcidi, Corti and Gros2022) have shown regarding social investment, even spending with well-documented long-term social returns has struggled to qualify for ‘golden-rule’ treatment in the SGP debate. Three types of fiscal intervention are usually described as ‘investment’: ‘classic’ forms of public investment, typically comprising physical infrastructure investments; various articulations of so-called ‘social investment’ (Hemerijck, Reference Hemerijck and Hemerijck2018); and ‘new’ investments in green and digital technologies, which have emerged as a priority for EU competitiveness (Draghi, Reference Draghi2024).
Infrastructure investment, through which the government directly creates physical capital, is often considered the standard form of public investment. It stimulates private investment, taking advantage of the productivity increases made possible by public intervention (Schwartz et al., Reference Schwartz, Fouad, Hansen and Verdier2020). Moving beyond this materialistic notion of investment, the social investment paradigm (Bonoli, Reference Bonoli2013; Hemerijck, Reference Hemerijck and Hemerijck2018) reconceptualises certain types of social policy spending as future-oriented investment. Unlike traditional transfer-based policies, social investments prioritise developing human capital through education, training, skill formation, and social infrastructures.
Finally, green and pro-digitalisation public investment has emerged as a core EU priority. This ‘new’ investment type, we argue, is a main driver of the new public investment consensus. Its goal is to provide an updated competitiveness-enhancing strategy based on supply-side industrial policy (Wigger, Reference Wigger2019). This form of spending runs the increasing risk of ‘corporate welfare’: while this use of public money is referred to rhetorically as ‘public investment’ (for example, for green industrial projects) it implicates transfers to private actors with little or no conditionality, raising concerns over both normative and economic-effectiveness (Bulfone et al., Reference Bulfone, Ergen and Maggor2024).
This essay argues that the latter two recently-developed concepts of public investment – now central to public policy discourse – represent important turning points for the EU public investment turn, but have been integrated in EU policy discourse through a flawed logic. First, they rest on a selective reading of economic theory, particularly in how consumption and investment spending are distinguished, which has had significant political consequences on EU investment policy. Second, their application promotes a supply-side-only vision of legitimate public spending, framed as subject to a technical trade-off, and overlooking the macro-economic and distributive impacts of such spending. We trace the technical and normative underpinnings of these developments in the next section.
Investment and consumption
The emerging EU consensus on public investment has various theoretical and technical roots. Its main ideological component is a specific use of the analytical and operative distinction between investment and consumption spending and their economic impacts. This distinction is based on a partial and often simplified reconstruction of the economics literature on the impact of different forms of fiscal intervention.
What is, in accounting terms, a straightforward distinction between investment and consumption spending has been elevated into a macroeconomic debate about the growth-enhancing effects of public expenditure, one on which the economic literature has yet to reach consensus. The 2008 financial crisis renewed scholarly interest in the differential effects of fiscal policy (Ramey, Reference Ramey2019), largely as a response to the failure of prevailing orthodoxies such as ‘expansionary fiscal consolidation’ to adequately address the downturn. The ensuing austerity measures and their damaging consequences prompted a reassessment of how different fiscal policy mixes might stimulate growth through the multiplier effect, particularly across Europe (Blanchard and Leigh, Reference Blanchard and Leigh2013). Yet evidence has remained mixed: some find lower multipliers for investment than for consumption (Ramey, Reference Ramey2019; Reference Ramey, Glaeser and Poterba2021; Boehm, Reference Boehm2020) or no difference (Haug and Sznajderska, Reference Haug and Sznajderska2024), while others report the opposite (Auerbach and Gorodnichenko, Reference Auerbach and Gorodnichenko2012) or stronger growth effects from consumption and social spending (Furceri and Zdzienicka, Reference Furceri and Zdzienicka2012). Even heterodox research finds that investment outperforms consumption only under specific conditions (Deleidi and Mazzucato, Reference Deleidi and Mazzucato2019; Ciaffi et al., Reference Ciaffi, Deleidi and Mazzucato2024). The sole robust finding to emerge across this literature is that short-term investment shocks have negligible GDP effects. The superiority of investment over consumption as a growth instrument remains unestablished, and the empirical case for prioritising one over the other is therefore far from settled.
A framing of investment as more efficient than consumption has nonetheless been widely adopted in political economy and political science. Beramendi et al. (Reference Beramendi2015), among others, present the tension between investment and consumption as the central axis of the politics of advanced capitalist societies. Closely connected to the social investment debate, this literature maps the conflict between consumption-oriented policies, understood as direct transfers targeting immediate social needs, and investment-oriented policies focused on long-term productivity through education, infrastructure and human capital development. While progressive in ambition, the social investment paradigm, associated with ‘flexicurity’, ‘workfarism’, and ‘employability’ (Hemerijck, Reference Hemerijck and Hemerijck2018), pairs these goals with a supply-side view of the economy and has been criticised for neglecting immediate social needs and disproportionately benefiting mid- and higher-skilled workers (Cantillon and van Lancker, Reference Cantillon and Van Lancker2013). It has nonetheless strongly shaped EU social policymaking and that of various Member States (de la Porte and Palier, Reference de la Porte, Palier, Garritzmann, Häusermann and Palier2022; Laruffa, Reference Laruffa2022).
We underline three critical fault lines in this understanding. First, the sharp distinction between consumption and investment rests on shaky empirical and theoretical foundations as established above, and becomes even more blurred in practice. Spending on education, training or childcare is labelled investment, while the wages of the teachers, trainers, and care workers delivering these services counts as consumption. This produces paradoxical outcomes: as Rainone (Reference Rainone2022: 38) shows in his analysis of the RRF, Member States could use funds to build childcare facilities but not to hire childcare workers.
Second, treating austerity constraints as fixed and external embeds a normative preference for fiscal consolidation that narrows the conception of what government spending can achieve. It creates a political-normative environment in which investment expenditures enjoy privileged status because of their supposed productive benefits, while consumption-oriented policies are associated with clientelism or path-dependent protection of labour market insiders; the possibility that welfare spending may support healthier, more productive citizens or fairer growth is dismissed.
Third, and relatedly, the demand side of fiscal policy is systematically underweighted. The predominant concern is with expanding supply-side capacity, with little attention to the stimulative effects of public spending on consumption, employment, and wages, and their spillovers on investment and productivity. When demand effects are considered at all, the prevailing view is that public investment generates larger and more durable multipliers than consumption or wage-boosting policies. This forecloses debate over alternative fiscal strategies in which domestic demand plays a greater role, and reinforces the EMU’s structural bias towards export-led growth (Scharpf, Reference Scharpf, Hassel and Palier2021) and a state role centred on de-risking and sustaining private sector competitiveness (Schneider, Reference Schneider2023). The persistence of this investment-consumption divide, we argue, continues to shape EU fiscal policymaking in ways that retain the core supply-side logic of the previous decade, even in an era nominally more open to fiscal expansion.
The emergence and evolution of the ‘new EU investment consensus’
Having established the theoretical underpinnings of the investment-consumption divide, we now trace how this framing became institutionalised in EU fiscal governance, reconstructing how this new understanding of investment developed across the various reforms and reinterpretations to which the EU system of fiscal rules has been subjected since the 2010s and up until its most recent reform. We highlight how the prioritisation of investment over consumption was the result of attempts to implement the tight fiscal constraints of the EU apparatus, while also creating space for growth-enhancing interventions, all without departing from a supply-side understanding of growth and fiscal policy. In analysing these developments, we make reference to their practical implications through examples from the crucial case of Italy (Gerring, Reference Gerring2007), the third biggest economy in the Eurozone, the biggest recipient of RRFFootnote 1 funds and a country whose fiscal trajectory has been at the core of the European fiscal debates since its entry into the Eurozone. Italy’s fiscal prominence within the Eurozone makes it a compelling case with which to explore broader trends in the EU’s evolving consensus on fiscal investment (Storm, Reference Storm2019; Guarascio et al., Reference Guarascio, Heimberger and Zezza2025).
The SGP – the system of rules put in place to ensure the EMU’s fiscal sustainability – has undergone multiple reforms in its thirty years of existence. Because of the multiple shortcomings of previous reform attempts, a major overhaul of the SGP was implemented following the sovereign debt crisis. Fiscal rules were transformed into a much tighter and more complex surveillance structure aimed at countering any possible tendency towards the excessive deficits deemed responsible for the sovereign-debt crisis (Tesche, Reference Tesche2023). But this very tight system quickly began to show its limits, as its austerity-prone tendencies largely strangled growth and recovery in the Eurozone in the mid-2010s. It became increasingly clear to EU policymakers that an excessive focus on fiscal sustainability had shut down the necessary space EU economies needed for growth and that the SGP was more of an obstacle rather than an aid in producing financial and economic stability within the EMU (Mérand, Reference Mérand2021). Grappling with these changes, European authorities started to amend the rules through internal re-definition of their application. Responding to pressure from struggling Member States such as Italy, these changes introduced new space for stimulus intended to restart EMU growth trajectories (Locatelli, Reference Locatelli2026). The EU debate shifted its focus to public investment, and the potential introduction of a ‘golden rule’ gained prominence within policy discussions: the underlying idea was to introduce space for investment – even in a system of very restrictive fiscal rules – by spinning off fiscal interventions deemed to constitute public investment from debt and deficit calculations (Saraceno, Reference Saraceno2016).
Since 2015, the Commission has introduced a number of limited exceptions to the post-crisis fiscal rules to accommodate investment spending (Truger, Reference Truger2016). The so-called investment clause permits interventions classified as investment to be excluded from standard budgetary calculations, thereby creating room for expansion within the existing framework. However, its strict conditions, applicable only to non-deficit countries under limited growth scenarios and with EU co-financing made this exception very rare and almost impracticable. Indeed, to date, only two Member States have successfully applied it (Pekanov and Schratzenstaller, Reference Pekanov and Schratzenstaller2023). Similarly, the introduction of the so-called structural reform clause opened up space for fiscal flexibility in exchange for structural reforms in the labour market (European Commission, 2015).
These ways of adapting strict fiscal constraints to stimulate growth were the result of a supply-side understanding of growth-stimulating policies, embedded in both EU institutions and the understandings of Member States’ attempting to negotiate. The idea of using structural reforms as bargaining tools in exchange for more fiscal flexibility, for instance, came about as a result of the Italian government’s attempt in 2016 to achieve compliance with the EU fiscal framework (Maccarrone, Reference Maccarrone2019). When then-prime minister Matteo Renzi realised in 2015 that, despite bringing the deficit down below 3%, compliance with EU targets would require further cuts, he devised a strategy of exchanging structural reforms for fiscal flexibility, which later were formalised in the 2015 SGP clauses (Maccarrone, Reference Maccarrone2019).
Putting investments and structural reforms on the same level in achieving fiscal objectives signals a specific conception of the possibilities for growth and fiscal sustainability: anything that raises potential GDP is sustainable and therefore legitimate as a form of fiscal expansion. This notion is strongly encouraged by European fiscal rules, which embed a preference for potential GDP, even though this variable has been heavily criticised for its use in policy precisely because of the complexity of its estimation and supply-side assumptions. This preference has limited the scope for other possible growth-stimulating interventions.
The introduction of the 2015 SGP clauses further strengthened this understanding and cemented the debate, restricting space for alternative fiscal expansion and more substantive discussions about transforming the framework. After the COVID-19 pandemic, the question of investment resurfaced and new SGP reform proposals revived discussions about incorporating broader exceptions for public investment within the EU’s fiscal framework (Alcidi et al., Reference Alcidi, Corti and Gros2022; European Parliament, 2023). In November 2022, a Commission proposal for transforming the SGP explicitly mentioned the possibility of excluding certain spending items from the calculation of MTSFPs, particularly expenditures aligned with EU priorities (European Commission, 2022). These priorities include national energy and climate plans, among others (Pekanov and Schratzenstaller, Reference Pekanov and Schratzenstaller2023). However, the lack of clear definitions and criteria for such exemptions left significant uncertainty about whether the revised fiscal framework provided sufficient space for the level of public investment necessary to address pressing ecological and geopolitical challenges. All the while, this framework foreclosed rethinking of the fiscal effects of other types of ‘consumptive’ expenditure.
Under the current rules which eventually emerged from these proposals, the extent to which public investment is accommodated depends on the medium-term structural fiscal plans set out by Member States. These plans aim to set the path for the evolution of public expenditure for four- to seven-year periods, constructed based on technical trajectories defined by the EC and informed by debt sustainability analyses (DSA) (Darvas et al., Reference Darvas, Welslau and Zettelmeyer2024).
While replacing the previous framework’s focus on the output gap, the newly introduced DSA suffers from similar limitations to the previous approach. Estimating debt sustainability is a complex technical exercise based on economic modelling of the future path of economic development in different countries. Its use has recently come under strong criticism for the degree of technical complexity it introduces into fiscal policymaking (Heimberger, Reference Heimberger2023; Reference Heimberger2025). Technical complexity had, indeed, proven a much-criticised issue in the previous system of fiscal rules, because it had complicated fiscal advice and often rendered it inconsistent, masking the political implications of fiscal policy decisions behind a veil of technical complexity (Heimberger et al., Reference Heimberger, Kapeller and Schütz2017; Locatelli, Reference Locatelli2026; Tesche, 2022). Linking investment exemptions to DSA risks compounding these past problems of opacity and inconsistency. In 2024, a difficult political agreement was found and the revised EU fiscal rules came into force (see Table 1).
An analysis of the Italian medium-term structural fiscal plan submitted in 2024 offers a particularly illuminating window into the concrete distributional consequences of the investment/consumption paradigm as it operates through the reformed SGP. Unlike the RRF, the MTSFP is not a crisis instrument but a structural fiscal commitment that governs the composition of public spending over a four- to seven-year horizon. It is therefore a more direct test of our argument: it shows not what a temporary emergency fund can finance, but how the investment/consumption distinction systematically shapes the ongoing choices available to a Member State within the EU’s binding fiscal framework. The Italian case is paradigmatic in this regard.
In submitting its MTSFP, Italy requested an extension from four to seven years, invoking the new clause that grants more time in exchange for growth-enhancing investments (MEF, 2024). The plan combined reforms and investment commitments closely aligned with the Commission’s priorities, resembling the governance model of the RRF. Italy pledged reforms in tax administration, the judiciary, and expenditure management to unlock space for investment, following the ‘money for reform’ principle (Zeitlin et al., Reference Zeitlin, Bokhorst and Eihmanis2023).
Investment measures focused on boosting R&D spending, streamlining incentives for firms, and expanding childcare coverage, building partly on RRF projects. The Commission appraised the plan positively, highlighting its consistency with CSRs, debt sustainability, and growth objectives. Crucially, the new framework does not exclude investments from deficit calculations but uses them to justify longer fiscal-adjustment horizons. This reflects continuity with the EU’s earlier consolidation logic: investment is permitted as long as it supports competitiveness, productivity, and private-sector crowding-in, rather than Keynesian demand stimulus.
Italy’s plan thus blends old and new elements. It pledges fiscal consolidation, with net expenditure growth capped at 1.5% and a structural primary surplus above 3% of GDP by 2029–2031, but stabilises public investment above 3% of GDP, a level not seen since the 2000s. Consolidation relies less on absolute cuts than on expected efficiency gains from reforms and better tax compliance. Still, higher investment is to be financed at the expense of other spending categories, reaffirming the supply-side orientation of the new EU fiscal consensus.
For example, the plan includes higher investment spending on childcare (already a priority in the RRF) in order to reach the 33% level of childcare coverage required by Italian law and get closer to the 45% coverage levels demanded by EU targets. These extra funds made available by investment exceptions at the central state level cannot cover the operational costs of childcare facilities (UPB, 2025), however, enabling only expenditure on physical infrastructure and other ‘investment’ aspects of public spending. This leaves personnel costs to the already strained budget of local administrations (UPB, 2025). While the extra spending on childcare represents an improvement and a necessity in Italy’s rapidly ageing society, the logic of separating consumption from investment spending risks reducing the effectiveness of extra space and imposing further strain on local administration.
Finally, the investment/consumption paradigm’s political contingency is thrown into sharp relief by the most recent shift in EU fiscal priorities, namely the large-scale expansion of defence spending. The ReArm Europe/Readiness 2030 plan activated the SGP’s national escape clause, allowing 17 Member States to deviate from their MTSFP’s expenditure path by up to 1.5% of GDP annually over 2025–2028, with additional defence spending temporarily excluded from the adjustment path (Boivin and Darvas, Reference Boivin and Darvas2025; European Commission, 2025a).Footnote 2
What makes this development analytically significant for our argument is not its geopolitical motivations, but the industrial logic that accompanies it. Defence investment is framed by the Commission’s White Paper communications as ‘boosting technological innovation, supporting European competitiveness, promoting regional development and powering economic growth’ (European Commission, 2025a). This framing replicates the language used in the previous phase to legitimate green and digital investments, and it does so for an analogous political-economic reason: large industrial actors (from Rheinmetall to Leonardo, from steel to advanced manufacturing) stand to benefit from guaranteed public demand and de-risked private investment, just as green industry coalitions did before them (Bulfone et al., Reference Bulfone, Ergen and Maggor2024).
We acknowledge that defence spending does not map neatly onto the supply-side investment logic traced in this essay, as it blends security as well as growth rationales, and potentially encompasses significant ‘consumption’ components such as personnel costs. What the defence case nonetheless illustrates is the selective nature of the fiscal flexibility embedded in European fiscal governance and the reformed SGP, and the paradigm’s capacity to carve out exceptions for politically-prioritised spending while maintaining consolidation pressures elsewhere. This confirms Schmidt and Thatcher’s (Reference Schmidt, Thatcher, Schmidt and Thatcher2013) point about neoliberalism’s resilience through adaptation – even when the adaptation also responds to imperatives, such as geopolitical security, that lie outside the paradigm’s original intellectual framework.
Conclusion
In this essay, we highlighted the emergence of a new consensus in EU policymaking and analysed both its conceptual foundations and pitfalls. We have argued that the EU has moved from a supply-side competitiveness strategy based on internal devaluation and cost containment to a supply-side perspective in which competitiveness is supposed to be achieved through a mix of the ‘rationalisation’ of spending, consolidation (though spread over a longer time-horizon), and supply-side investments coupled with reforms – the aims of which remain limited to increasing the productive capacities of the economy, crowding-in or de-risking private investments, and boosting competitiveness (Gabor, Reference Gabor2023). Within this frame, demand considerations and their effects on growth continue to be overlooked. We traced how this approach relies on the distinction between (unproductive) consumption and (growth-enhancing) investment used to determine what kind of spending merits being allowed more ‘fiscal space’. Through the case of the Italian medium-term structural fiscal plan, we explored some of its practical implications for policy empirically. The analysis showed that this emerging consensus is realised in an approach to fiscal policy which remains substantially consolidation-based, with few investment-related exceptions, the growth-generating impacts of which are subject to debate.
On the basis of these empirical conclusions, we contend that this shift in the EC’s approach reflects a transformation of the ‘consolidation state’, the austerity-driven mode of state intervention which followed the financial crisis and pursued fiscal policies designed to increase the state’s credibility with what Streeck labels the Marktvolk (i.e., investors) (Streeck, Reference Streeck2015).Footnote 3 This shift does not seem to constitute a move either towards a new Keynesian state, as some had hoped during the pandemic, or the rise of the ‘Big (Green) State’, however (Gabor, Reference Gabor2023). Rather, this emerging new state model appears to pursue the same objectives of fiscal consolidation while increasing the use of public spending to steer or financially-stimulate private-sector investment towards key sectors. Scholars have tried to grapple with this transformation from many different angles, using ideas such as that of the ‘European investor state’ (Lepont and Thiemann, Reference Lepont and Thiemann2024) or the ‘de-risking state’ (Gabor, Reference Gabor2023). Our contribution builds on this literature by showing how the origins of this shift, and its ongoing reiteration, are underwritten by economic notions that obscure the political economy of public investment and fiscal trade-offs. In masking these political choices, the EC’s approach maintains fiscal consolidation as the dominant frame, even as public spending is increasingly mobilised to steer private investment. The economic notions underpinning the EC’s new fiscal rules do not merely reflect analytical ambiguity, but also attempt to frame public investment in ways that obscure the distributive and fiscal trade-offs involved.
We have critically analysed how the EC’s new role in steering investment is hidden between the apparent turn away from austerity and the allegedly emerging consensus on public investment. The succession of carve-outs and exemptions that we traced, and reconstructed in Table 1, up to the latest openings for green, industrial, and defence spending, shows that fiscal constraints are not absolute and neutral, but selective and political. The fiscal space created for defence, for example – unprecedented in scale and in the rapidity of its creation – demonstrate that the EU’s capacity for fiscal expansion is not only structurally or institutionally limited, but also hemmed in by the political-ideational framework that determines what forms of public spending are considered legitimate. This selectivity is not economically derived but produced politically, and it precisely this, we argue, that the technocratic language of the investment paradigm was designed to obscure.
Evolution of EU fiscal framework.
Table 1. Long description
The table titled Evolution of EU fiscal rules presents a timeline of key events and reforms in the EU’s fiscal framework. It is divided into several phases: Introduction and consolidation, First SGP Reform, Eurocrisis, deepening and strengthening of the rules, In search of flexibility and investment space, Formalisation of more flexibility, Pandemic and aftermath, and Reintroduction and reform of the SGP. The table has two columns: one for the year and one for the event. Row 1: Introduction and consolidation, 1992, Maastricht Treaty: Convergence criteria. Row 2: 1997, SGP agreed: 3 percent deficit and 60 percent debt-to-GDP nominal values. Row 3: 1999, Corrective arm comes into force. Row 4: First SGP Reform, 2005, Reform of the SGP; Structural balance enters the EU framework. Row 5: Eurocrisis, deepening and strengthening of the rules, 2010, Six-pack is introduced. Row 6: 2012, Agreement on the Fiscal Compact. Row 7: 2013, Two-pack enters into force. Row 8: In search of flexibility and investment space, 2015, Flexibility clauses found in existing set of rules; Juncker Plan Investment Plan; investment clause for EU-co-financed investments and structural reform clause. Row 9: 2016, 2019, Formalisation of more flexibility; (Failed) proposals for investment stimulus plans and golden rules; Green New Deal. Row 10: Pandemic and aftermath, 2020, NGEU and SGPs general escape clause of the SGP. Row 11: 2023, 2025, Reintroduction and reform of the SGP; MTFSPs; exemptions for defense spending.
However, we want to stress that this essay also recognises the importance of ‘not throwing out the baby with the bathwater’. Public investment is desperately needed to enable EU economies to face future challenges and to support a more sustainable and inclusive economic prosperity, counterbalancing previous decades of austerity. Nonetheless, we underline that if policymaking frameworks remain attached to narrow and limiting notions of investment, such as the ones that we have seen dominating at the EU level, our capacity to tackle those political and economic challenges in a fair and effective way will remain seriously curtailed.
Acknowledgements
We are particularly grateful to Arianna Tassinari, Jana Windwehr, Manuela Moschella, and Sebastian Diessner for their insightful and constructive comments and their support, as well as all the participants who provided precious feedback on earlier versions of this manuscript at the SISEC 2025 Conference in Pavia, the MPIfG Research Group in Political Economy of EU Integration, and the SASE 2025 Conference in Montréal. We also thank the two anonymous reviewers who have engaged deeply with our manuscript and provided extensive and valuable feedback.
Competing interests
The authors declare that they have no known competing interests, of a financial or other nature, nor personal relationships that could have compromised the work reported in this paper.
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