The COVID-19 shock demonstrated the power of policy. The quick rebound of investment in Europe (excluding in Ireland, where real investment is lagging behind) shows that public support was crucial in softening the impact of the economic shock on firms and households.
However, there are signs that the COVID-19 crisis has exacerbated existing asymmetries and inequalities. The pandemic’s impact is not being felt evenly across Europe. Regions are rebounding at different speeds. While digitisation and the green transformation of the economy are accelerating profound structural change, Europe risks becoming more unequal.
These are some of the key findings of the 2022 edition of the EIB’s annual Investment Report, ‘Recovery as a springboard for change.’
The report — the most comprehensive, regular examination of investment in the EU — looks back at the impact of the pandemic on individuals, firms, and countries within the European Union. It also looks forward, at how to use the recovery as a springboard for transformation by examining investment in climate change and digitisation and the role of public support in ensuring a just recovery, preventing rising inequalities.
“Public support was and remains crucial in safeguarding jobs and keeping business afloat during the pandemic. But our latest investment report shows that the different social and regional vulnerabilities that existed before the crisis are exacerbating an uneven recovery and amplifying existing heterogeneity,” said EIB Vice-President Ricardo Mourinho Félix.
“That is why the EIB will consistently ensure that the opportunities offered by the transition to a greener and more digital economy are shared throughout the EU. Modernising infrastructure must be accompanied by further investment in social infrastructure — and particularly in talent, skills and training — to make this historical transition one that is just for all.”
“In less than two years, real gross domestic product (GDP) and investment are back to pre-pandemic levels. Policy support has been crucial for the recovery, but the crisis is not over. Vulnerabilities and risks of asymmetries persist, while the capacity of firms and people to adapt to the new normal still have to be tested. Omicron is adding to the challenges, substantially increasing uncertainty,” said EIB Chief Economist Debora Revoltella.
“This is the time to start focusing on the future. Investment needs are huge, to adapt to the new normal and reap the benefits of the green and digital transition. Public and private investment have to complement each other. This calls for continued policy focus on public investment and increased efforts to catalyse private investment.”
Throughout Europe, real gross fixed capital formation — a measure of investment — declined substantially in 2020, but less than predicted. Moreover, it took just two years for investment to recover from the pandemic shock, compared to more than a decade after the global financial crisis.
By the end of the second quarter of 2020, real investment in the EU fell by a dizzying 14.6% relative to the fourth quarter of 2019. It quickly rebounded, however, and returned to its 2019 level by the second quarter of 2021 (excluding Ireland).
While the initial shock of the COVID-19 pandemic was largely indiscriminate and all countries in the EU were hit, the impact has now become more uneven with investment recovering at different speeds. By the second quarter of 2021, real gross fixed capital formation was above pre-pandemic levels (compared to the fourth quarter of 2019) in 20 EU members and below pre-crisis levels in seven countries.
The EIB Investment Report shows that public support was widespread and targeted firms most in need, but not “zombie” firms that were already financially weak. Firms with low cash buffers were significantly more likely to receive policy support. However, indicators of long-standing financial weakness, such as excessive debt, low interest coverage or low returns on assets, had no significant effect on whether a firm received assistance.
European firms now expect to increase investment this year. The proportion of firms investing in the past year was relatively low (79%), but a net balance of +18% of firms expected to increase investment in 2021, a sharp turnaround from the previous year (-28%). Sentiment indicators for the economic climate and availability of internal finance are switching back to positive as the recovery takes hold.
EU firms have been digitising as a response to the pandemic, but less so than US firms. Some 46% of EU firms have responded to the pandemic by becoming more digital, versus 58% in the United States. The share of US firms that have already adopted advanced digital technologies is also higher: 66% versus 61% in the EU.
Around 43% of European firms invested in climate measures to address physical and transitional risks — more than in the United States — despite some investment stalling because of the pandemic. The proportion of firms investing in climate measures is marginally below the 45% reported in 2020, but a growing number of firms expect to invest in the coming years. Overall, the share of EU firms investing and expecting to invest in the climate remains significantly higher than in the United States.
Supporting innovation among firms focusing on green technologies is a key element of Europe’s net-zero emissions strategy. By lowering the cost of greenhouse gas abatement or pollution reduction, greentech innovation can ensure the EU reaches climate neutrality in a cost-efficient manner.
Financing for greentech innovation has been on the rise in recent years. After a minor setback from 2013 to 2016, venture capital and private equity investments in European greentech companies increased sharply from 2017 onwards, reflecting growing societal concerns about the environment and sustainability, and the increased focus of EU policymakers on private financing as a catalyst for the green revolution.