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Europe faces a choice. The recovery from the coronavirus pandemic provides a unique opportunity to transform the European economy so it can thrive in the new, more digital world created by the pandemic. The massive public funds dedicated to the recovery could also be instrumental in 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 digital and 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 investing the large sums needed for the transformation. The dangers are numerous:
- Massive public spending could be too untargeted.
- Europe could fall behind the new wave of digitalisation.
- It could loses the advantages of its current 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.
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About the report
The Investment Report, issued annually by the European Investment Bank, provides a comprehensive overview and analysis of investment and the financing of investment in the European Union. The report builds on a unique set of databases and survey data, including EIBIS, an annual survey of 12 500 firms in Europe. It provides critical inputs to policy debates on the need for public action on investment, and on the types of intervention that can have the greatest impact.
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The impact of COVID-19
When the pandemic struck, investment had been strong in most of Europe, but had abruptly begun to slow as international trade disputes intensified. The pandemic has weighed heavily on EU firms’ investment 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. 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 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.
Key figures:
- 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
- Some 20% of firms expect to reduce employment as a result of the crisis
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1. The macroeconomic environment
2. Gross fixed capital formation
3. Financing corporate investment
Climate change
European investment in climate change mitigation increased gradually in 2019, but it is still insufficient to meet the European Union’s climate goals. Since 2016, investment has declined slightly as a percentage of gross domestic product (GDP), and the trend likely continued in 2020. Throughout the European Union, investments in energy systems and will have to rise significantly if Europe is to meet its goal of cutting greenhouse gas emissions 55% by 2030.
Some bright spots exist, however. Investment was strong in renewable energy generation, where Europe is a leader. But in the coming decade, investment must shift from energy producers to consumers, firms, household and local governments for carbon emissions to drop sufficiently.
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Key figures:
- 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.
- 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 proportion of EU firms reporting investment in energy-efficiency measures increased to 47%, up almost 10 percentage points over 2019.
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4. Tackling climate change: Investment trends and policy challenges
5. Climate change risk: Firms’ perceptions and responses
6. Leveraging the financial system to green the European economy
Digital
Europe’s future prosperity depends on leading the next wave of industrial transformation: digitalisation. 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.
A painful process of re-adjustment awaits firms and regions that lag behind. A geographical polarisation is emerging, magnifying the split between the digital leadership of some firms and regions with the slow progress of others. While the adoption of digital technologies by EU firms is growing, but it has not yet closed the gap with the United States
Key figure:
- By 2020, 37% of European firms had still not adopted any new digital technologies, 27% in the United States.
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7. Intangible investment, innovation and digitalisation
The green-digital nexus
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.
Europe is a global leader in green innovation, and even more so in innovation that is both green and digital.
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 they are more likely to invest in measures for mitigating or adapting to climate change. While Europe has an early lead in green-digital innovation is strong, it must continue to invest and innovate to remain ahead.
Key figure:
- Europe registered 76% more patents that combined both green and digital technologies than the United States, and four times more than China.
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8. Innovating for climate change: The green and digital twin transition
A smart, green and socially cohesive Europe
The pandemic represents an almost unprecedented shock to European and world economies. The European Union’s massive emergency response has limited the immediate economic ramifications of the shock, but going forward Europe needs to lay out a long-term vision of the green and digital transformation.
Greening and digitalisation present opportunities to create new jobs – even in the short-term. It is true that the transitions will drive a shift in the kind of skills demanded and lead to the elimination or reduction of some kinds of employment. But it will also create new jobs, and the overall impact on employment could be positive. The shift could benefit some regions more than others, however, and policy action needs to address regional disparities and promote social cohesion
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9. Infrastructure investment in the face of digital, climate and cohesion challenges
10. The impact of digitalisation and climate change policies on social cohesion