The European Investment Bank (EIB) Investment Report 2022/2023 highlights Europe’s need for resilience and renewal in the face of economic shocks caused by the COVID-19 pandemic, energy prices, and budgetary pressures. Europe must invest in innovation, particularly in green technologies, to compete globally. However, Europe’s ability to address long-term challenges such as the climate transition and digitalisation is hampered by a lack of skills and regulatory obstacles. The report also notes disparities between EU member states’ exposure to rising energy costs and levels of public debt, which could widen gaps between countries.
Investment in the European Union recovered rapidly in 2021 and 2022, rebounding to levels before the pandemic, but this strength belies a persistent weakness in productive investment. When investment in housing is excluded, data show that a gap in productive investment of 1.5 to 2 percentage points of GDP opened between Europe and the United States after the global financial crisis, and still persists.
Investments to limit climate change are increasing but are still well below what is needed to meet Europe’s target of net-zero emissions by 2050. EU climate investment has rebounded after dipping during the pandemic, but investment needs to step up considerably if Europe is to meet its goals.
While Europe is trailing the United States in digital innovation, green technologies have so far stood out as an area where the European Union excels. Europe is a leader in patents for green technologies used for sustainable mobility, smart grids and wind power, while it is neck and neck with the United States and China on energy storage and, to a lesser extent, solar energy. To stay competitive, Europe will need to consolidate its position and expand its involvement in more cutting-edge innovation, such as hydrogen technologies.
Sustained public investment is an essential complement to private investment, but it is under threat. Historical data show that public investment is typically more vulnerable than other types of public spending in times of belt tightening. Tighter monetary policy, combined with debt built up during the pandemic, could pressure governments to consolidate their finances by cutting public investment. However, this would be counterproductive.
Analysis of the past five decades shows that maintaining or accelerating public investment during crises is associated with less economic scarring in the medium term, as measured by economic output.
Local government investment (in digital infrastructure, education and research and development, for example) encourages growth and private investment. This effect is particularly strong during downturns.
Countries need to protect public investment by making it a priority in national budgets. The effective implementation of the €723.8 billion Recovery and Resilience Facility will help many countries to do that. The facility represents around 1% of EU GDP to be disbursed over four years, or almost one-third of total public investment.
The energy crisis and inflation are disproportionately affecting poorer households and people already disadvantaged by the pandemic. Despite public support, the financial situation of poorer, younger and less qualified people worsened as a result of the pandemic. These groups are also suffering more from rising prices, given that they spend a bigger share of their income on food and energy, have less savings to fall back on and are generally more vulnerable to the effects of inflation.
Regional cohesion is also at risk, with less developed regions in Eastern Europe more exposed to economic and political stress. One factor is the uncertainty created by the Ukraine war, which is slightly higher in Eastern Europe, and which acts as a major deterrent to private investment. Cohesion regions also seem to particularly lack the technical capabilities needed to access pubic or EU funds and increase investment. Across Europe, 69% of municipalities say that a lack of environmental and climate assessment skills is a barrier. Digital skills, engineering and other technical skills, and regulatory understanding are not far behind.
Firms’ sales largely bounced back after the initial COVID-19 lock-downs. But firms are increasingly concerned about energy costs, and a growing share say those costs are impeding investment. A lack of skills and uncertainty are also challenging investment. In addition, small businesses’ ability to obtain finance started deteriorating in 2022, reflecting monetary tightening and investors’ reluctance to take on risk.
For firms, the top three factors hampering investment are:
Investment by firms is crucial for the green transition. Overall, firms invested more in climate change measures in 2022, following a dip during the pandemic. However, the outlook for corporate investment to tackle climate change is mixed, with uncertainty and administrative barriers weakening investment incentives created by high energy costs.
Europe needs to invest massively for the future. The right mix of policies, support and incentives could spur private investment and protect public investment from budget cuts. EU and national policymakers need to act decisively to create an investment friendly environment.
More specifically, they need to: