EIB Investment Report 2020/2021 E-Book

• Herausgeber: European Investment Bank
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 801

Veröffentlichungsjahr: 2021

Beschreibung

The Europe Union's massive efforts to rebuild after the coronavirus pandemic present a unique opportunity to transform its economy, making it more green and digital – and ultimately more competitive. The Investment Report 2020-2021 looks at the toll the pandemic took on European firms' investment and future plans, as well as their efforts to meet the demands of climate change and the digital revolution. The report's analysis is based on a unique set of databases and data from a survey of 12 500 firms conducted in the summer of 2020, in the midst of the COVID-19 crisis. While providing a snapshot of the heavy toll the pandemic took on some forms of investment, the report also offers hope by pointing out the economic areas in which Europe remains strong, such as technologies that combine green and digital innovation.

Leseprobe

EUROPEAN INVESTMENT BANK INVESTMENT REPORT

2020/2021

Building a smartand green Europein the COVID-19 era

About the European Investment Bank

The European Investment Bank is the world’s biggest multilateral lender. The only bank owned by and representing the interests of the EU countries, the EIB finances Europe’s economic growth. Over six decades the Bank has backed start-ups like Skype and massive schemes like the Øresund Bridge linking Sweden and Denmark. Headquartered in Luxembourg, the EIB Group includes the European Investment Fund, a specialist financer of small and medium-sized enterprises.

About the Report

The EIB annual report on Investment and Investment Finance is a product of the EIB Economics Department, providing a comprehensive overview of the developments and drivers of investment and its finance in the European Union. It combines an analysis and understanding of key market trends and developments with a more in-depth thematic focus, which this year is devoted to European progress towards a smart and green future in a post-COVID-19 world. The report draws extensively on the results of the annual EIB Investment Survey (EIBIS) and the EIB Municipality Survey. It complements internal EIB analysis with contributions from leading experts in the field.

About the Economics Department of the EIB

The mission of the EIB Economics Department is to provide economic analyses and studies to support the Bank in its operations and in the definition of its positioning, strategy and policy. The Department, a team of 40 economists, is headed by Debora Revoltella, Director of Economics.

Main contributors to this year’s report

Report Director: Debora Revoltella

Report Coordinators and Reviewers: Pedro de Lima and Atanas Kolev

Disclaimer

The views expressed in this publication are those of the authors and do not necessarily reflect the position of the EIB.

Table of contents

Executive summary

Introduction

Part IInvestment and investment finance

1. The macroeconomic environment

2. Gross fixed capital formation

3. Financing corporate investment

Part IIInvesting in the transition to a green and smart economy

4. Tackling climate change: Investment trends and policy challenges

5. Climate change risks: Firms’ perceptions and responses

6. Leveraging the financial system to green the European economy

7. Intangible investment, innovation and digitalisation

8. Innovating for climate change: The green and digital twin transition

9. Infrastructure investment in the face of digital, climate and cohesion challenges

10. The impact of digitalisation and climate change policies on social cohesion

Data annex

Glossary of terms and acronyms

Executive summary

Post-pandemic: Stagnation or transformation?

Europe faces a choice. The recovery from the coronavirus pandemic provides a unique opportunity for transformation – the innovative retooling needed to thrive in the new, more digital world created by the pandemic, while also limiting climate change and preparing for its impact. It is an opportunity to set Europe firmly on a path to carbon neutrality by 2050 and shore up its global leadership in smart-green technology. It is an opportunity to repair the damage wrought by the pandemic and to strengthen social cohesion.

Yet there is also a serious risk. The uncertainties and financial strains created by the pandemic could keep the EU economy from embarking on the necessary transformation. The dangers are numerous: massive public spending is too untargeted; Europe falls behind the new wave of digitalisation; it fails to make the transition fast enough; and it loses the advantages of its leadership in green technology. Failing to live up to these challenges means more than just a longer recovery. It means that Europe’s sustainability, competitiveness and prosperity might be impaired for decades to come.

This report is about the investment needed to achieve the smart and green transformation of the European economy. It is about progress so far – the fallout from the pandemic and what is needed to get back on track. It examines the state of investment and investment finance for climate change mitigation and for the adoption of digital technologies. It looks at how Europe is positioned at the critical intersection of green and digital innovation, the role of investment by municipalities, and the risks and opportunities of the twin digital and green transition[1] for social cohesion. Throughout, the report examines the latest impact of the coronavirus pandemic and the urgent policy response needed.

Investing for the climate transition

In 2019, European investment in climate change mitigation increased gradually. In the EU27, this investment grew 2.7% from a year earlier to EUR 175 billion. The strongest growth was recorded in renewable energy generation, while investments in energy efficiency appeared to stagnate.

European investment in climate change mitigation is well behind that of China, but ahead of the United States – although the contexts are very different. China invested 2.7% of gross domestic product (GDP) in climate change projects, ahead of 1.3% in the European Union and 0.8% in the United States. However, the European Union has already gone much further in reducing emissions per unit of GDP. In a sense, Europe has already picked much of the “low-hanging fruit,” and its efforts increasingly have to focus on harder-to-reduce emissions.

The gap between Europe’s climate objectives and realised climate investment is growing. Since 2016, climate change mitigation investment has declined marginally as a percentage of GDP and overall investment, a trend that is likely to continue in 2021. According to the European Commission’s latest impact assessment, investments in the continent’s energy system would need to rise from an average of 1.3% of GDP per year over the last decade, to 2.8% of GDP over the next decade if the European Union is to meet its goal of cutting greenhouse gas emissions by 55% by 2030. Adding investments in transport brings the total over the next decade up to 3.7% of GDP per year. European investment in climate change mitigation is still insufficient.

In the coming decade, the focus has to shift from investment by energy producers to investment by energy consumers, including firms, households and municipal authorities. Of the additional investments needed in the next decade, 65% to 75% are expected to focus on improving building insulation, upgrading industrial processes, purchasing more efficient equipment and investing in new transport technologies.

The European Investment Bank Investment Survey (EIBIS) provides a window into climate-related investment by European firms:

•23% of European firms say that climate change and related weather events have already had a major impact on their business, vs. 14% in the United States. Another 35% of European firms report climate change effects to be minor.

•Just over half of EU firms do not think the transition to a net-zero emission economy will affect their operations over the next five years, and of those that do, the majority see the transition as an opportunity. The firms that expect the transition to have an impact say it could stimulate demand and improve their reputation. Firms are more likely to see the effect on their supply chain as negative, however, and energy-intensive firms expect more negative effects overall.

•45% of EU firms have invested in climate change mitigation or adaptation measures (vs. 32% in the United States), but fewer plan to do so in the next three years. The investment figure varies from 50% in Western and Northern Europe to 32% in Central and Eastern Europe. A slightly lower 40% of European firms are planning to invest in climate measures in the next three years. A majority of European firms, 75%, say uncertainty about regulation and taxation is impeding climate-related investment.

•The proportion of EU firms reporting investment in energy-efficiency measures increased to 47%, up almost 10 percentage points over 2019. The average share of investment devoted to energy efficiency rose from 10% to 12%, with large firms and manufacturing firms more likely to invest.

While more than half of municipalities have increased climate change mitigation investments over the past three years, two-thirds still consider the level of investment to be inadequate. The EIB Municipality Survey 2020 reveals that 56% of municipalities increased climate investment, but 66% consider their climate investment over the last three years to be inadequate. For investment in climate change adaptation, 44% increased investment and 70% consider investment to still be inadequate. This suggests that climate adaptation investment could be a more pressing issue in the future.

Investing for digital transformation

Europe’s future prosperity depends on leading the next wave of industrial transformation: digitalisation. The digital revolution has already transformed industries, production processes and ways of living and working, but many of these shifts are only just beginning. As with previous technology waves, taking an early lead can be critical for lasting competitiveness. Yet with the global innovation and technology landscape changing rapidly, Europe risks becoming entrenched in its position as a follower on digitalisation.

So far, the impact of digitalisation has been largely benign. Technological waves, like the first industrial revolution, have driven massive changes in the nature of work, its location and the skills people need. Digitalisation has already caused a shift towards high-skilled occupations, with these jobs tending to cluster in favoured urban areas, particularly capital city regions. EIBIS data present interesting evidence. Firms that have adopted digital technologies are also more productive, more innovative and more likely to export. They are creating more employment than non-digital firms and also pay higher wages on average. Digitalisation has provided a strong stabilising effect during the COVID-19 crisis.

But a painful process of re-adjustment awaits firms and regions that lag behind. A trend towards economic and geographical polarisation is emerging, contrasting the digital leadership of some firms and regions with the slow progress of others. Job growth in recent years has been driven by higher-skilled positions. In the near future, the accelerated loss of low and medium-skilled jobs through automation could create a massive need for re-skilling.

The adoption of digital technologies by EU firms is growing, but it has not yet closed the gap with the United States. By 2020, 37% of European firms had still not adopted any new digital technologies, compared with 27% in the United States. Encouragingly, the proportion of digital firms in the European Union grew by nearly 5 percentage points over the 2019 level, but the United States saw a comparable increase. The gap with the United States is particularly marked in the construction and service sectors, and in the adoption of technologies associated with the internet of things.

Firm size and market fragmentation appear to be holding back digital adoption in Europe. High fixed costs and financing obstacles for intangible assets often make it easier for large firms to invest in digital technologies. Adoption rates for micro and small firms are notably lagging on both sides of the Atlantic. The comparatively small average size of European firms – itself a partial reflection of the continued fragmentation of European markets along national lines, including for digital services – is likely contributing to the continent’s low digital adoption rates.

Municipal investment in digital infrastructure is advancing, but disparities could result in further polarisation. Over the last three years, 70% of European municipalities increased investment in digital infrastructure. Looking forward, municipalities state that digital remains a top priority, alongside social and climate-related investments. But there are strong regional disparities in the perceived adequacy of municipal infrastructure investment. A lack of digital infrastructure is seen as a major obstacle for investment by 16% of EU firms, vs. only 5% in the United States. There is also some evidence that digital adoption by firms is higher in municipalities that have better digital capacities and infrastructure.

Europe is losing ground within a rapidly changing global innovation landscape. While still at the forefront of technology, the European Union is investing less in research and development (R&D) as a percentage of GDP than other major economies, and China is emerging as a major player. Europe’s weakness lies in its lower business R&D spending. European companies are among global R&D leaders in various traditional industries, but are less present in fast-growing digital sectors such as software and computer services, where Chinese firms are starting to challenge the United States. The European Union also does not appear to be generating many new innovation leaders, especially in the digital sector, potentially jeopardising its long-term competitiveness.

The green-digital nexus: How is Europe positioned?

Digital technologies will be critical to the climate transition, and innovation at the intersection of digitalisation and decarbonisation will be paramount. Examples of enabling digital technologies include smart urban mobility and smart grids, precision agriculture, sustainable supply chains and environmental monitoring. The growth of teleworking during the pandemic illustrates how economic processes and products can increasingly be dematerialised. Innovation that uses digital technologies to achieve greener processes is of particular strategic importance for both future sustainability and competitiveness.

Europe is a global leader in green innovation, and even more so in innovation that is both green and digital – despite the United States’ leadership in most digital domains. According to the most recent data, Europe registered 50% more patents in green technologies than the United States, with Japan and China further behind. Moreover, Europe registered 76% more patents that combined both green and digital technologies than the United States, and four times more than China. Likewise, while the top global companies for digital innovation are largely American – with potential challengers from China – the top innovators for green technologies and technologies that combine green and digital elements tend to be European companies, with Japan in second place.

European firms lead the United States for green investment and digital adoption by green firms. Compared to the United States, European firms are less likely to have adopted digital technologies, but are more likely to invest in measures for mitigating or adapting to climate change. The share of firms that make green investments and are also digital adopters is also marginally higher in Europe (32% vs. 28% for the United States).

At the intersection of green and digital technologies, leading early in innovation may create a winner-takes-all effect. The development of green technology still offers great opportunities. Firms that have innovated in this sphere see the climate transition as leading to more dynamic markets, with more competitors entering, but not necessarily with a loss of competitive advantage for themselves. In addition, green-digital innovators are more likely to enjoy a wider, more global playing field. Such potentially large markets for green and digital innovations offer enormous possible rewards, perhaps leading to winner-takes-all dynamics for Europe.

However, Europe’s leadership in green-digital innovation could easily be lost. When looking at how much patents are cited by other innovators, Europe’s green-digital patent portfolio has a higher impact than all other regions. However, this impact per patent is still higher in the United States. Europe’s relative weakness in general digital innovation and its dependence on digital innovations from elsewhere could potentially undermine its position. Nevertheless, one of the key strengths of Europe lies in the transport sector. There, Europe leads not only in green and green-digital innovation, but also in digital innovation overall.

How has COVID-19 changed the economic landscape?

When the pandemic struck, investment had been strong in most of Europe, but had abruptly begun to slow. In 2019, aggregate investment in the European Union grew around 3% from a year earlier, outpacing growth in real GDP. The rate of investment at the end of 2019 was above its long-term average in all areas of Europe except Southern Europe. However, intensifying international trade disputes and weakening global trade started to weigh on that growth. On the cusp of the coronavirus outbreak, concerns were mounting about the stalling of trade-oriented economies – notably Germany’s.

The outbreak of the pandemic in Europe in mid-March had immediate and dramatic consequences for investment:

•Investment contracted precipitously, along with other economic activities, as a direct result of lockdown restrictions. This effect was mostly felt in the second quarter of 2020, when investment fell 19% compared with a year earlier, as most restrictions were lifted by the summer.

•Economic sentiment deteriorated strongly, with firms adopting a pessimistic outlook for the year ahead. Firms’ perceptions of the economic climate had already turned negative in 2019. Those sentiments took a further dive with the arrival of the pandemic. Overall expectations of sector-specific business prospects and the availability of internal and external finance also turned negative.

•Uncertainty about the future rose to become a major deterrent to investment. Uncertainty indicators spiked at the beginning of the pandemic. Although Europe’s determined economic policy response succeeded in calming short-term fears, a high degree of uncertainty about the future course of the pandemic and the resulting economic crisis has remained. Unsurprisingly, uncertainty now stands out as the most serious barrier to investment, being mentioned by 81% of EIBIS respondents.

•EU firms revised down short-term investment plans, adopting a wait-and-see attitude. Some 45% of firms expect to reduce investment in the coming year, while only 6% expect to increase it, a dramatic reversal of the relative optimism seen in recent years. Of those firms that decided to invest less because of the pandemic, half said they were postponing investment and another 40% said they were changing or re-scaling their plans.

•Climate change investment will not be spared. 43% of firms that plan climate-related investment in the next three years say the pandemic will negatively affect their investment plans. In general, utility-scale projects (such as windfarms) are expected to remain resilient in the short-term, but smaller scale investments in renewable energy and energy efficiency, which are linked to spending by households and firms, are expected to fall.

The pandemic also raised firms’ expectations about the need to digitalise and innovate to adapt to the future. The belief in the need to digitalise holds even as firms curtail investment and optimism declines.

•Half of European firms foresee an increase in the use of digital technologies in the future as a specific result of the pandemic. The proportion is even higher among firms that have already adopted digital technologies.

•More than one-third of firms expect the pandemic to impact their supply chains or the products and services they offer, underlining the need for adaptation and innovation.

•Some 20% of firms foresee a permanent reduction in employment, suggesting that a significant number of firms are pessimistic about their ability to “bounce back” once the pandemic recedes.

The impact of the crisis on firms’ financial situations bodes ill for investment, the recovery and Europe’s structural green and digital transformation in the medium term. The policy response to the COVID-19 crisis has so far succeeded in maintaining firms’ access to short-term credit. Nonetheless, the massive demand shock has cut firm revenues dramatically, particularly during phases of strict lockdown. Small and medium-sized enterprises (SMEs) have been particularly hard hit. A conservative estimate puts the loss of firms’ net revenue at nearly 13% of GDP in the first phase of the crisis. Firms could cover an estimated 3 percentage points of this shortfall with the buffers of cash and other liquid assets they built up before the pandemic. To cover the rest, however, they will have to reduce investment or increase borrowing. EIBIS data show that firms have consistently used internal resources to finance around 60% of investment. If they maintain this pattern, investment would have to drop by some 6.4% of GDP, equivalent to a 48.5% fall in corporate investment relative to 2019, with corporate debt rising by an estimated 3.2% of GDP. An alternative scenario, in which corporate borrowing is doubled, still sees firm investment fall by a quarter. Modelling based on historical responses of corporate investment to demand shocks, and the size of the COVID-19 shock, also suggests that a reduction in investment within this range is to be expected.

The crisis-driven expansion of government debt could pose a medium-term threat to much needed public investment. Across the European Union, public debt is forecast to reach 95% of GDP by the end of 2021, an increase of 15 percentage points since the start of the pandemic. With the fiscal rules of the European Union’s Stability and Growth Pact temporarily suspended and interest rates expected to remain very low, constraints on public spending are still limited. Nonetheless, as the global financial crisis demonstrated, times of strong fiscal stimulus have very often been followed by periods of sharp fiscal correction that tend to impact public investment disproportionately.

Post-pandemic, Europe’s digital and green transformation will be even more pressing, yet the investment needed to drive that transformation is at risk. Europe faces a critical decade for the success of the climate transition and for maintaining its ability to complete technologically. The pandemic has even intensified pressure for digitalisation and for innovation to adapt supply chains and product portfolios to the “new normal” that will prevail. Yet, the pandemic has also created severe obstacles to the investment surge that is needed for recovery and transformation. These obstacles include uncertainty and the legacy of the pandemic lockdowns on firms’ ability to finance future investment. Decisive, forward-looking intervention will be needed.

Action for a green, smart and cohesive Europe

Long-term vision is needed to lead Europe out of the crisis. The pandemic represents an almost unprecedented shock to European and world economies. A massive short-term emergency response was needed. In Europe, policymakers have done well to limit the immediate economic ramifications of the shock, partly by ensuring short-term liquidity is available to help businesses to survive. Going forward, however, Europe needs to enact a long-term vision on the green and digital transformation. The pandemic and its effects are an opportunity to address the long-term challenges that Europe faces. Not doing so would be counterproductive, potentially undermining the immediate economic recovery.

Overcoming policy uncertainty is essential to unlocking investment, particularly for the climate transition. The recovery of corporate investment will depend, in part, upon a concerted policy response that instils confidence in European businesses about the trajectory of the recovery and the constancy of policy support. Firms see uncertainty about regulation and taxation as the greatest obstacle to climate-related investment. An ambitious yet predictable carbon-pricing (or taxation) regime would do much to provide businesses with the reliable information they need to invest. The surge in R&D in renewable energy during the global financial crisis – driven in part by the EU Climate and Energy Package – demonstrates how concerted policy could spur innovation while also acting counter-cyclically to help the economy recover.

Greening and digitalisation present opportunities to create new jobs – even in the short-term. One fear is that the digitalisation and climate transitions will destroy jobs, just when Europe is trying to recover. The transitions will drive a shift in the kind of skills demanded and lead to the reduction of some kinds of employment – more routine jobs via automation and jobs in carbon-intensive industries. Yet the transitions will also create jobs, and the overall impact on employment could be positive. In the shorter term, the urgent need for a surge of investment in building renovations, the adoption of digital technologies and infrastructure improvements, including at the municipal level, could provide the kind of counter-cyclical employment boost the economy needs.

Policy actions need to address regional disparities and promote social cohesion. Across Europe, differences in progress on digitalisation and climate-related investment are huge, with firms and municipalities in Western and Northern Europe often very advanced, and many cohesion regions at risk of being left behind. At the same time, job losses through automation and decarbonisation will not be felt equally across regions, with the risks of this twin transition tending to concentrate in Central and Eastern Europe. Policies that actively foster social cohesion are needed, such as measures to promote employment, facilitate the reallocation of workers, advance decent work and offer local opportunities for displaced workers. On the positive side, the most at-risk regions also tend to present some of the greatest needs and opportunities for investment for energy-efficiency improvements to buildings, other forms of decarbonisation and digitalisation. These are areas where Invest EU and the Just Transition Fund can play an important role.

Inclusion and cohesion will depend on active support for re-training and the propagation of digital skills. The digital and green transitions will drive the changing demand for skills. The limited availability of skilled staff remains the second most important barrier to investment (reported by 73% of European firms) in the EIBIS survey. With 42% of the EU population lacking basic digital skills, reforming adult learning programmes and broader participation are needed to deal with the risks of a growing gap in workers’ skills and further polarisation of the labour market. Online learning creates new opportunities, but it must be coupled with investment in quality education to address inequalities and provide a foundation for life-long learning.

Public investment is needed and should be sustained, despite the financial wound left by the pandemic. Public investment was on a mild upswing before the pandemic, but still below 20-year average levels. This upswing helped infrastructure investment to rebound slightly after years of contraction. Most European municipalities have increased infrastructure investment over the last three years and plan further rises, as they think the current level of investment is still inadequate. Public investment has a vital role to play in the green and digital transitions, complementing and facilitating private investment, but that spending could be jeopardised by the rise in public indebtedness caused by the pandemic. This time should be different, however. Ultra-low interest rates allow for very cheap public borrowing and have made debt cheaper to service, yet so far the savings generated have mainly supported current expenditure, not investment. Government investment is near a 25-year low, following years of fiscal consolidation. Years of underinvestment have caused a build-up in infrastructure investment needs. Above all, the challenges of decarbonisation and digitalisation require a boost to public investment that cannot be delayed without massive damage to Europe’s long-term sustainability and competitiveness.

Support for corporate finance will need to shift from short-term measures to funding that encourages investment and innovation, including more equity or equity-type finance. At the onset of the crisis, the key priority was to immediately help cash-strapped firms. With the summer reopening of Europe’s economies, support shifted to ensuring the proper flow of credit by providing funding and guarantee products for banks. This support has remained essential during the second infection wave. In the post-crisis environment, however, more equity-type products like venture debt will be needed. Equity finance is better adapted to absorbing losses and supporting risk-taking activities, including innovation. Continued support for the Capital Markets Union 2.0 project is crucial.

To spur climate investment, greater transparency is needed on the impact and risks of climate change. The climate transition will require the mobilisation of private finance on a massive scale. Initial interest in the private sector is promising, but limited. Funds focusing on environmental, social and corporate governance investment are in demand and some new markets, such as green bonds, are developing. However, growth remains slow and the premium paid for green investments remains tiny. Uncertainty surrounding true environmental risks and their impact on financial assets is preventing investors from being more discerning. Enhanced information, along with the development of simple and transparent standards, such the EU Taxonomy for sustainable activites, should help spur investor demand. At the same time, banks have a major role to play in Europe’s largely bank-based financial system. Central banks and national supervisors are pushing banks to better price climate risks into their loans, while also encouraging the investors to delve more deeply into the risk. Enhanced disclosure guidelines and the increased awareness of climate stress have led to a wider spread in borrowing costs between green and brown loans and bonds, which will increasingly support the greening of the economy.

A coordinated EU response could catalyse the transformation. Investment in one region or EU member has significant spillover effects for neighbouring regions and countries. With resources available from the municipal to the European level, coordination is essential to maximise the synergies of such investment. The coordinating role of European policy can help to reduce policy uncertainty and instil a vision of a digital, net-zero carbon future. EU support is needed to create the conditions for more equity-based finance for businesses and to provide clarity on carbon prices, green financial products and the climate-related risks that banks are exposed to. EU support, such as the Just Transition Fund, is also needed to address the wide divergence in regional progress on the digital and climate transitions, and the regional inequalities that these transitions could exacerbate.

Debora Revoltella

Director, Economics Department

European Investment Bank

Introduction

The coronavirus pandemic swept across Europe with a ferocity and speed that caught EU governments by surprise. Facing a vertiginous rise in infections and deaths, governments took drastic action to halt the virus’s spread by severely limiting people’s movement. Those restrictions essentially froze the European economy, and it fell to policymakers to keep its heart beating. Initial attempts to curtail the spread of the coronavirus in early March fell short, and governments found themselves facing a health crisis unlike anything they had ever seen before. As the number of cases and COVID-19-related deaths surged across the European Union, governments took sweeping measures to flatten the curve of new infections and to ease mounting pressure on national health systems. These measures, however, have strangled economic activity. The consequences for employers and employees would have been catastrophic – worse than any modern-day crisis – if policymakers had not stepped in with sweeping measures to limit the economic shock.

The economic policy response was swift and unprecedented. Monetary authorities, national governments and European institutions took concerted action to contain the economic damage and to deliver a quick and comprehensive response. Cash-strapped businesses were injected with funds and central banks ensured that credit flowed freely. Financial regulators pushed for widespread moratoriums on debt repayments and supported massive loan-guarantee programmes. Millions of jobs were saved thanks to programmes to subsidise employment through short-time work schemes. The European Central Bank (ECB) and national monetary authorities also backed up the financial system by providing sufficient liquidity and smoothing the path for public and private debt issuance.

The short-term response to the pandemic proved essential to limiting the fallout, but those short-term measures must be aligned with policies that help the European Union meet its long-term challenges. The partial economic rebound over the summer attested to the success of the policy response in the first half of 2020. While the broad response proved instrumental in stemming the decline in economic activity, it also sucked up substantial public resources. EU government debt increased by 8.4 percentage points to 88% of gross domestic product (GDP) from the first to the second quarter of 2020. The European Commission expects debt to GDP to reach 94% by the end of 2020. A second wave of contagion and lockdowns in the autumn further exacerbated the crisis. The resulting uncertainty raises questions about the sustainability of governments’ blanket support for the private sector. Massive government stimulus, along with weakening private-sector fundamentals and incentives, could potentially derail the European Union’s drive to address its two main challenges – climate change and digitalisation. Aligning short-term support during the crisis with long-term objectives is crucial.

The Investment Report 2020-2021: Building a smart and green Europe in the COVID-19 erafocuses on the two major structural challenges for Europe – digitalisation and climate change. It is organised into two parts. The first part outlines trends and developments in investment in the European Union, while the second focuses on the structural challenges of climate change and digitalisation. The experience of the pandemic has stressed just how difficult, but important, it is to address these two issues. The International Energy Agency estimates that greenhouse gas emissions in 2020 will be 8% lower than in 2019 – the largest recorded annual decline. While the decrease is encouraging, it is nowhere near the European Union’s target of a 55% net reduction of carbon emissions by 2030. If anything, the crisis has illustrated the fundamental economic overhaul needed to meet the challenge of climate change. The COVID-19 experience has also confirmed that, going forward, rapid digitalisation is indispensable. The digital capabilities of individuals, firms and governments were key to Europe’s resilience during the pandemic. In the future, growth, innovation and even climate change will increasingly depend on digital interaction. At the same time, digitalisation and climate change adaptation and mitigation will require major structural changes and will challenge social cohesion. Addressing these challenges in a timely manner could maximise the potential benefits of the transition.

The analysis provided in the report stems from three in-house surveys. The EIB Investment Survey (EIBIS), whose fifth annual survey was conducted in the summer of 2020, adds valuable information about the impact of the coronavirus pandemic. The survey’s climate module was extended, and it provides unique information on the impact of climate change on firms’ decisions. Following the EIB Municipality Survey in 2017, a second survey in 2020 focused on the infrastructure investment decisions of EU cities and municipalities, and asked how climate change was influencing their decisions. The third survey, run online in cooperation with Ipsos, collects companies’ assessments of their efforts to introduce environmental innovations, the motivations for doing so and the obstacles encountered.[1]

The report begins with a detailed analysis of the impact of the pandemic on the economy, overall investment and corporate investment and finance.Chapter 1 sets the scene with an overview of the economic environment, the impact of the pandemic on real economic activity and the financial sector and the economic policy response. It outlines the extraordinary decline in economic activity resulting from government measures to curb the spread of the pandemic and the corresponding swift policy response. It stresses the importance of EU-wide policy initiatives that have the potential to change economic policymaking in the European Union.

Investment in the European Union fell precipitously in the second quarter of 2020.Chapters 2 and 3 home in on corporate investment and investment financing, presenting the main results of the EIBIS 2020. The chapters outline the extraordinary decline in investment triggered by elevated uncertainty and the imposed restrictions on economic activity, even though credit flowed freely and governments and the European Union provided substantial policy support. Despite these supportive measures, investment activity could remain subdued beyond the pandemic because of an erosion in firms’ ability to self-finance their activities. To counteract a longer slowdown, policy support should evolve in stages. Governments, which started by providing liquidity at the onset of the pandemic and then maintained the flow of credit, now need to focus on enhancing the types of financing available for firms by providing more equity products.

The scale of the policy response risks weighing on government investment. The global financial crisis showed that large fiscal stimulus could be followed by a sharp fiscal correction in which government investment falls substantially. The temporary suspension of EU fiscal rules and the massive intervention of the ECB have eased the pressure on governments this time around, allowing them to maintain focus on productive public investment. The benefits should be considerable, since government investment often has a catalytic effect on private investment and positive spillovers to the rest of the EU economy.

Investment in climate change mitigation remains insufficient to achieve the ambitious EU target of achieving carbon neutrality by 2050.Chapter 4 outlines recent investment trends in climate change mitigation and adaptation. While it acknowledges the recent uptick in climate-related investment in the European Union, it stresses the need for further substantial increases if the European Union is to meet its goal of carbon neutrality. To accelerate investment, EU governments and the private sector have important roles to play. Governments will have to scale up investment, but perhaps more importantly, their policy mix should shift towards incentives that will boost investment in climate action. Incentives are crucial because most of the investment needed to make the economy carbon neutral will have to come from the private sector.

The transformation of the economy is a major opportunity for all firms.Chapter 5 focuses on the outstanding climate challenges facing the corporate sector. It probes the degree of awareness of EU firms and their willingness to deal with the effects of climate change. The chapter stresses that firms’ decisions to invest in climate-related measures will affect their competitiveness and determine whether they play an active or passive part in the transformation. Half of the firms in the European Union are investing in climate measures, and they show a stronger propensity to do so than their counterparts in the United States. That said, the pandemic might derail some firms’ investment plans, despite the significant spending needed to achieve the European Union’s ambitious targets. These developments underline the importance of the European Green Deal as a catalyst for the green transition. The green deal provides a coherent plan for defining investment in climate change mitigation and adaptation and lays out proper incentives for the public and private sectors. Businesses say they need clarity on the climate. Regulatory uncertainty and taxation are cited as the main impediments for climate-related corporate investment, according to 73% of EU firms.

The financial sector is an important enabler of the green transition.Chapter 6 points out that investor interest is gradually shifting towards companies with clearly defined sustainability goals, but many issues remain. For instance, the uncertainty surrounding the true green content of financial assets reduces investors’ ability to assess their merits. Enhanced information and the development of simple and transparent standards should alleviate major impediments to stronger growth. The important role played by banks in the European Union will require enhanced disclosure about the exposure of bank assets to climate risks.

The digital transformation is taking centre stage, affecting virtually all sectors of the economy. The global innovation landscape is changing rapidly due to the growing importance of digital technologies and the emergence of China. Chapter 7 notes how European firms are lagging when it comes to innovation in the fast-growing digital sectors such as software and computer services, which may create challenges for long-term competitiveness. Furthermore, European firms are not only trailing in digital innovation, but also in digital adoption. In the European Union, 37% of firms remain non-digital, compared with 26% in the United States. Firms say that access to digital infrastructure is more restricted in the European Union compared with the United States. Higher rates of digital innovation and adoption are linked to greater job creation and resilience, but also to higher investment in climate change mitigation and adaptation – investment that is crucial for achieving ambitious European climate targets.

Innovation in green technologies will play a key part in the transition to a carbon-neutral economy. Current technologies are insufficient for meeting the climate goal without significant disruptions to lifestyles in advanced economies or development in emerging economies. Hence, innovation is essential to producing the clean technologies needed for a smooth transition. Chapter 8 builds on an analysis of patent data and the results of the online survey with Ipsos on green innovation to study the important symbiosis between digital and green technologies. The authors stress that technological advances will need to permeate every aspect of our lives, from energy systems to materials and land use, if we are to successfully navigate the transition to carbon neutrality. Digital technologies are expected to make a major contribution to these innovations.

The European Union is currently leading the way in the joint development of green and digital technologies. The transition will require more than creating knowledge. That knowledge will also have to be shared and adopted. The European Union also seems to excel in knowledge diffusion compared to global peers, but this diffusion tends to remain within national borders.

Efforts by cities and municipalities will be instrumental in building a digital and green future.Chapter 9 shows that local government investment in green and digital infrastructure is important for pulling in private investment in climate measures. Gaps in green and digital infrastructure vary across the European Union and exacerbate regional inequality.

The report concludes by studying the impact of digitalisation and the green transition on social cohesion.Chapter 10 looks at how digitalisation and the green transition will create and destroy jobs – while at the same time changing the relative importance of occupations. That upheaval will cause significant shifts in demand for labour, with profound social and economic consequences. This shift is likely to affect regions and countries in the European Union differently, with some parts at greater risk. Dealing with these risks will require strong local governments that can identify future job opportunities, provide adequate support for individuals and devise strategies to transform and revitalise local economies. Providing workers with the necessary skills is essential to managing the disruptions of the twin green and digital transition and to maximising its benefits.

Throughout the report, EU countries are often grouped into three regions with common features. Central and Eastern Europe contains the countries that have joined the European Union since 2004 and that rely substantially on EU cohesion and structural funds. Cyprus, Greece, Italy, Malta, Portugal and Spain form the Southern Europe group. The remaining EU countries are in Western and Northern Europe. While geographical location defines the groups, the countries within each group share many common structural economic characteristics, thereby justifying the regions’ usefulness in economic analysis.

PART I

Investment and investment finance

Chapter 1

The macroeconomic environment

The measures taken to fight the coronavirus pandemic have severely disrupted the global economy. Trade and investment channels have been interrupted, the movement of people has been seriously restricted, and businesses have been forced to operate at reduced capacity or to temporarily abandon their operations. Confidence levels have fallen markedly and labour markets have frozen. Prior to the second lockdown, the International Monetary Fund (IMF) and other institutions were already expecting gross domestic product (GDP) in the European Union to shrink by 6% to 8%, a fall unrivalled since the Great Depression.

In Europe, the policy response has been swift and unprecedented. Monetary policy, national fiscal policies and European economic policy have all contributed to circumventing the economic fallout. The response from EU institutions, Member State governments and the European Central Bank (ECB) was quick and comprehensive. To some extent, the magnitude and nature of the action are a game-changer for Europe. An obvious example is the joint issuance of debt securities by Europeans – a crisis response that was very well received by the markets.

Subsequent virus waves remind us that pandemic concerns will dwarf most of the other policy issues until a vaccine is widely distributed, which won’t be until well into 2021. Policy measures were designed in emergency situations, but second lockdowns around Europe illustrate that a series of waves cannot be ruled out. Because the side-effects of the lockdown measures might be expected to intensify as the crisis becomes more protracted, there is good reason to revisit policy measures to fine-tune the balance between short-term support and longer-term programmes. In addition to shoring up short-term demand, the policy package can become truly instrumental in ensuring the success of the three pillars of the recovery: resilience – greening – digitalisation.

Introduction

In 2019, the European economy was gradually slowing down after six years of relatively weak expansion. The slowdown could be traced back to more sluggish international trade resulting from tensions between the United States and some of its main trading partners. Just as the export-oriented engines of European growth were running out of steam, the coronavirus pandemic broke out. The virus spread quickly around the globe, forcing governments to take sweeping measures in an attempt to arrest it. The associated restrictions brought whole swathes of the EU economy to a near complete standstill with severe implications for consumer spending, investment and overall economic activity. The ECB deployed a major policy package in response, and this time, domestic fiscal policies and European policy also joined forces to safeguard the European ecosystem during the lockdowns imposed in the various countries.

This chapter sets the stage for the analysis provided throughout this report by giving an overview of the economic situation at the outbreak of the pandemic. The first section outlines the macroeconomic environment in Europe and the world in the first half of 2020, focusing on the link between EU economies, global growth and international trade. The second section details the latest developments in real GDP growth and labour markets in the European Union. Four boxes provide further detail. Box A quantifies the likely effects on GDP of the re-introduction of government restrictions in the fourth quarter of 2020. Box B frames the economic shock due to the pandemic in a historical perspective. Box C outlines the challenges to European social protection systems posed by the pandemic. Box D discusses the use of short-term working schemes in the European Union during the crisis. The third section focuses on financial developments and the fiscal and monetary policy response to the considerable economic shock. Box E in this section outlines EU banks’ credit exposure and policy responses. The chapter ends with concluding remarks and policy implications.

The cross border environment in Europe and the world

The COVID-19 crisis erupted in the beginning of 2020, when the world economy was already slowing as uncertainties and geopolitical and trade tensions mounted. The pandemic was, by its very nature, unexpected. The virus emerged in China and quickly spread to the rest of the world. It propagated quickly within Europe as a result of the closer integration of economies through trade and personal travel. This section explores the cross-border dimension of the crisis, focusing on the European economy and stressing the need to protect the long-term integrity of the single market.

Using lockdowns to flatten the curve

COVID-19 is a genuinely global shock to the world’s economy. By its very nature, the original pandemic shock was unrelated to the structure of the world’s economies. Its origin was independent from economic policies, but the policies put in place to limit the virus’s spread had economic implications. Most countries implemented lockdowns and restricted the free movement of people within national territories and across borders. Infection waves were not fully synchronised across continents, but they tended to be relatively closely aligned within Europe, with its highly integrated landscape.

The first wave hit Europe towards the end of the first quarter of 2020 and the second wave in the beginning of the fourth quarter.Figure 1 shows the trend in COVID-related deaths in the world’s major economies. In the second wave, the rise in the death rate seemed to be less acute as countries are better prepared thanks to the lessons learned from the first wave. However, the implementation of a second lockdown in most European countries serves as a reminder that the situation will remain problematic until a vaccine is distributed to a large share of the population.

Imposing lockdowns has, so far, been the policy option to curbing the increase in infection rates and avoiding bottlenecks in the health system. The chain of events is as follows. Higher infection numbers help the virus spread. This increases the likelihood of vulnerable people becoming infected, who, more than other people, may require hospitalisation in intensive health care units. Given the limited number of spaces, the system can quickly be stretched to its capacity, driving the fatality rate up substantially. To avoid this, lockdown policies, with varying degrees of strictness, have been implemented across the world to flatten the curve. As shown in Figure 2, these policies drastically limit freedom of movement and require some shops and public places to be closed.

Figure 1

Fatality rates (COVID-19 deaths per 100 000 inhabitants)

Source: European Centre for Disease Prevention and Control (ECDC) and EIB calculations.

Note: Last record 3 November 2020.

Figure 2

Google mobility indicators (EU average)

Source: Google Community Mobility Reports and EIB calculations.

Note: Last record 2019. GDP weighted. The reports chart movement trends over time by geography, across different categories of places. Mobility is compiled in deviation from a baseline day, defined as the median value from the five week period 3 January – 6 February 2020.

Lockdown policies took a toll on economic activity, and in 2020 global trade and world GDP collapsed. It is not only Europe, but the entire world economy that has been hugely affected. In its October 2020 World Economic Outlook, the IMF forecasts that global real GDP will contract by 4.4% in 2020, and rebound in 2021 (Figure 3). Emerging market economies are facing an extremely challenging situation, with GDP declining in 2020 for the first time since the early 1990s, if not earlier. This is in stark contrast with the global financial crisis. In addition to the toll on public health, emerging economies have had to deal with the losses in domestic activity caused by containment measures, plummeting foreign demand, collapsing commodity prices and disappearing capital flows.

Prior to the second wave, a relatively swift rebound in worldwide economic activity was still expected. The IMF October 2020 World Economic Outlook was prepared and issued well before the second wave of infection and lockdown in Europe, and pointed towards a relatively swift rebound in the world economy. However, the arrival of the second wave means that it will take longer for economies to begin fully functioning again, which is not expected before a vaccine is widely distributed. As the crisis may last well into 2021, some emerging economies very dependent on tourism may well suffer two consecutive years of ultra-weak activity.

The pandemic hit some European economies harder than others. It is not fully understood how the virus spreads, but in Europe higher infection rates triggered more stringent lockdowns, which weighed on individual economies. Other factors were also at play, such as the composition of GDP and the share of tourism (Sapir, 2020). The COVID-19 crisis will most likely lead to structural changes in the economy as some sectors decline or remain lacklustre for a long time (including international travel and tourism, or transport services as people turn more to remote working and therefore commute less) while others expand to support new lifestyles (such as telecoms, and, more broadly, digital activities). Given the differences in the composition of European economies, some economies are likely to be more affected than others.

Figure 3

Composition of global growth (% and percentage points)

Source: IMF October 2020 World Economic Outlook (WEO) and EIB calculations.

Note: Projections over 2020-2024. Last record 2024.

Figure 4

Global exports in the world economy (exports over GDP, %)

Source: IMF October 2020 WEO and EIB calculations.

Note: Last record 2020, partially projected.

During the second wave, governments have tried to rebalance the economic costs of lockdown policies. After the first wave, the strategy of limiting the spread of infection by testing and isolating positive cases was stepped up, but so far, this strategy has not sufficed. At the onset of the second wave, bars and restaurants were closed in most of Europe, followed by the introduction of curfews, and then lockdowns.

The longer the crisis, the deeper the scars. Infection waves may continue until a vaccine is widely distributed. Relatively good news was reported in the beginning of December with several vaccines approved for use by medical authorities in various countries. In the best case scenario, however, the mass production and administering of a vaccine will take months, which means the crisis is likely to continue well into 2021. The longer the crisis, the deeper the scars, and the greater the increase in corporate and government borrowing. Meanwhile, as the pandemic wears on, containment policies will inevitably continue to immobilise the economy, while public support will focus on maintaining the ecosystem and limiting capital erosion (Lagarde, 2020).

A protracted drag on external trade?

Prior to the crisis, globalisation was at a standstill. The reasons for the halt in the ascent of globalisation are numerous: fears stemming from the global financial crisis, the trade war between the United States and China, the maturing of the Chinese economy, the limits to manufacturing growth and the stronger development of services, and receding multilateralism. As a result, the GDP-to-external-trade ratio had flattened somewhat since 2008, as shown in Figure 4.

The COVID-19 crisis may further dampen the long-term prospects for external trade. With the crisis, firms have taken on-board the need to increase the resilience of their production chains. They have started rethinking their global value chains, no longer focusing simply on maximising returns but also looking at how they can reduce risks by increasing the strength of their networks. Governments are also likely to take on greater weight in the post-pandemic economy with increased public spending, partly to reinforce healthcare systems (Organisation for Economic Co-operation and Development (OECD), 2020b). Finally, countries may reallocate the production of products deemed strategic to guarantee national independence (medicines and health equipment for instance).

What impact will the pandemic have on globalisation vs. regionalisation? How will the rethinking of resilience vs. cost change global supply chains? Bonadio et al. (2020) estimate that the impact of foreign lockdowns accounted for one-third of the total pandemic-related contraction in global GDP. However, the immediate impact of the crisis on the redefinition of supply chains appears to be limited, as it takes a lot of time and effort to find different suppliers of comparable quality. Car manufacturers, for example, cannot simply move from China to another country with low labour costs and expect to find manufacturers of, say, airbags that can meet the same quality standards quickly.

The COVID-19 crisis, however, will have a permanent impact. It is magnifying the effects of existing mega-trends: the new industrial revolution, growing economic nationalism and the drive for sustainability. The extent of the COVID-19 crisis’s disruption to working practices and behaviour patterns seems substantial. Companies have accelerated the digitalisation of their supply chains and customer channels, and many are moving faster in adopting artificial intelligence and automation. Other changes in the workforce are also afoot.

The pandemic may accelerate longer-term shifts toward shorter and less fragmented value chains (United Nations Conference on Trade and Development (UNCTAD), 2020b). Industry 4.0 is pushing the move towards automation and smart technologies in manufacturing and industrial processes (Baldwin, 2019), along with growing economic nationalism and the need to make human activity more environmentally sustainable and less resource dependent. These trends are set to reduce gross trade in the global value chain, limiting the circulation of intermediate inputs and final products in the medium term. These trends will also lead to further concentration in the value added in certain geographic areas. As another consequence, production will shift from global to regional and sub-regional value chains. Automation and reshoring will see an upswing to increase flexibility and reduce the risks that firms face during a global shock. These trends are driven by considerations related to the resilience and robustness of supply chains, not national protectionism.

Maintaining cross-border transport infrastructure is key to ensuring good conditions for the economic recovery. Much-reduced mobility has put transport infrastructure at risk. The air transport of passengers and goods is a core component of the world’s economy. According to Airport Council International, traffic at Europe’s airports decreased by 73% in September 2020 compared to a year earlier. More than one-quarter of Europe’s airports are at risk of insolvency if passenger traffic does not start to recover by the end of 2020. While these airports are mainly regional, larger airports are affected too. The sudden spike in their debt levels – an additional EUR 16 billion for the top 20 European airports – represents 60% of their average debt in a given year. Internal transport infrastructure is also at risk. According to Eurostat, the number of rail passengers was cut in half in the majority of EU Member States in the second quarter of 2020, compared with the same quarter a year earlier.[1]

Protecting the single market and reducing the spillover of negative effects

European economies are more open than other advanced economies. Export dependence, defined as the share of exports and imports to GDP, is above 66% in Germany and higher than 40% in France (Figure 5). Overall, external trade in goods and services accounts for 27% of euro area GDP, a share that rises to 45% when including trade among EU members. The European economy is therefore highly integrated and maintaining cross-border movement is key to its functioning, more so than elsewhere in the world. Regions located close to borders also rely heavily on commuting foreign workers to function (Figure 6). Taking into account the implications of cross-border mobility restrictions is therefore of paramount importance, and the corresponding policies must be developed at the European, and not just the local, level. A major risk is that uncoordinated lockdowns lead to repeated virus outbreaks and, in turn, further lockdowns across Europe, resulting in steeper declines in GDP (Kohlscheen et al., 2020).

Figure 5

External trade in goods in EU economies (% GDP, 2019)

Source: EIB Economics Department calculations based on Eurostat.

Note: Last record 2019.

Guaranteeing a level playing field and preventing increased divergence within Europe are essential. Given asymmetries in financial conditions, the European single market is at risk and widening disparities should be avoided. In Figure 7, we correlate the decline in GDP with GDP per capita for EU economies. While EU countries have been affected to different extents – the decline in GDP following the first wave ranged from zero to 14% – the impact is unrelated to countries’ relative wealth. It would have been reasonable to expect the capacity of hospitals and health services to be related to income per capita, with poorer countries less able to provide medical assistance and therefore implementing longer and more stringent lockdown policies to prevent the rapid saturation of the medical system. While this factor may have played a role, many others were also at issue. Ultimately, and fortunately, the magnitude of the shock was unrelated to the level of economic development. Preventing a widening of divergences in Europe after the pandemic will be critical.

Figure 6

Cross-border workers (country of work, thousands, 2018)

Source: European Commission, 2019 Report on intra-EU Labour Mobility.

Figure 7

EU economies: Income per capita and ouput decline during the first wave

Source: Eurostat and EIB calculations.

Note: Last record, October 2020.

A strong EU response is needed to avoid second-round effects and negative spillovers. Above and beyond the policy measures of individual Member States, a strong need exists for a common, mutually reinforcing EU response to the crisis. European economies are strongly interconnected and a shock experienced in any member spreads to the rest of the European Union through labour movements, value chains, terms of trade and external demand. These spillovers can be fairly significant. In addition to the direct impact of the crisis, a 1% change in the GDP of Germany, France, Italy and Spain results in a further indirect change in the euro area’s GDP of 0.25%, 0.2%, 0.1% and 0.1 % respectively, merely on account of trade spillovers in the euro area (ECB, 2013).

Similarly, a positive shock in any EU country triggers favourable effects throughout the European Union. The impact of EIB loans is a good illustration of how interdependent EU economies are. Macroeconomic modelling by the Economics Department of the EIB Group together with the Joint Research Centre of the European Commission shows that, in the long run, indirect effects can be substantial. Cross-country spillovers in the European Union explain, on average, 40% of the impact of EIB investment on jobs and GDP in EU members. While smaller and more integrated countries gain more in relative terms, large EU countries also benefit greatly from positive spillover effects. In Germany, for instance, spillover effects account for more than 30% of the total impact of EIB investment on jobs (EIB, 2018).

Latest developments in the real European economy

EU GDP shrank massively in the first half of 2020

Growth in most EU economies slowed in 2019, especially in the second half of the year (Figure 8a).