Investment in times of recession and polycrisis is difficult. The war in Ukraine is costing the European economy 3.5% of GDP through soaring energy costs alone. But this should not prevent Europe “from significantly increasing its productive investment expenditure if it is to keep pace with global competition and achieve its net zero consumption targets,” the European Investment Bank insists. The EIB sees four major challenges to be addressed in the coming months.
Less innovative companies
Firstly, companies that are less likely to innovate or adopt new technologies than their American counterparts. “This is a persistent gap, exacerbated by the pandemic, when European companies proved less likely to transform than their US counterparts. Underinvestment in innovation and machinery and equipment could undermine Europe's ability to compete in the long term.” In terms of numbers, the share of companies engaged in innovation fell last year compared to 2021. The gap has actually widened by about 10 percentage points in the 2022 survey, to 19 percentage points. “This gap is explained by the fact that EU companies are investing less often in the adoption of new technologies and practices,” the EIB said in a report issued on Tuesday.
Those companies see their “investments held back by uncertainty, skills shortages and energy costs.” As for investments in the fight against climate change, the institution says that “despite the incentives created by rising energy prices, [they] are still held back by administrative obstacles and economic uncertainties.”
In terms of skills, 69% of local authorities surveyed for the report say they “lack the environmental and climate assessment skills needed to drive forward green investments.”
The gap with the US is widening
Secondly, in terms of the investments themselves.
Productive investment in Europe is 2% of GDP lower than in the US--and has been for more than a decade--the EIB says. “Excluding investment in housing, the data show that a gap of 1.5 to 2 percentage points of GDP in productive investment between Europe and the US has widened since the global financial crisis, and still persists. The reason for this gap is that the US invests more in machinery and equipment and in innovation, notably in information and communication technology equipment (in the services sector) and in intellectual property (in the public and defence sectors). Business spending on research and development is also low in the EU compared to its international competitors (1.5% of GDP in the EU in 2020 compared to 2.6% in the US and Japan).”
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The final challenge is investment to limit climate change. While they are increasing, “they remain far below what is needed to reach the EU’s net zero emissions target by 2050.” “The EU needs to invest €1,000bn per year to reduce greenhouse gas emissions by 55% by 2030. This is €356bn more per year than for the period 2010-2020,” calculates the EIB.
For the EIB, leadership in green technologies will be essential for future competitiveness, “but the EU's pre-eminence in this area is under threat.”
The need to protect public investment
The solution? “In a context of slowing growth and budgetary pressures, public investment must be protected.” The EIB wants to prevent the combined effects of monetary tightening and the coming period of fiscal consolidation from pushing investment into the background. “The EIB is encouraging countries to use the Recovery and Resilience Mechanism (RRM). The RRM is the main instrument of the NextGenerationEU programme and is endowed with €723.8bn. This facility represents around 1% of EU GDP to be disbursed over four years, or almost a third of total public investment.”
“Europe's future depends on our ability to transform ourselves and embrace the digital and green transitions. This requires bold investments, both in the public and private sectors. However, uncertainty, due to unpredictable policies and markets, is proving to be an obstacle to investment decisions,” said Debora Revoltella, EIB chief economist, at the EIB’s inaugural forum this week in Luxembourg. “We must not miss the opportunity of the green transition. Europe can build on its innovation lead in many green technologies and should further exploit the potential of the European single market, by reducing administrative barriers to investment and filling skills gaps.”
This story was first published in French on . It has been translated and edited for Delano.