EIB | Investment Report 2023/2024: Transforming for Competitiveness.

Preface by Debora Revoltella, Director of the Economics Department |  The digital and green transitions, combined with a growing roll-back of globalisation, are pushing the European economy to transform to be more sustainable, resilient,  productive, and competitive. Now is the time to accelerate efforts to achieve those aims. After the severe economic shocks caused by the COVID-19 pandemic and the energy crisis, growth has slowed, and the economy risks falling into recession. However, unlike previous crisis periods, investment has remained surprisingly strong. This has been thanks to a combination of factors, including the high level of policy support with a strong focus on public investment, and the health of businesses, which enabled them to withstand the shocks comparatively well. Moreover, this period has seen some advances in the transformation of the European economy, despite the strains. Public investment remained resilient, and businesses have been investing in digitalisation, energy efficiency and reinforcing their supply chains.

Conditions for investment are rapidly deteriorating, however. Higher interest rates are coinciding with a reduction in fiscal space and a winding down of fiscal support for the overall economy. The financial buffers that have helped companies to keep investing, despite weakening growth and rising rates, are gradually being depleted. In this context, there are risks ahead for both public and private investment.

At the same time, effectively transforming the European economy will require huge levels of investment. Europe faces the challenges of digitalisation, ageing, the emerging  trend of deglobalisation and cutting its reliance on fossil fuels. Competitiveness is the leitmotif that brings these elements together. Staying competitive will depend on the  ability of firms to progressively increase productivity and successfully sell their goods and services in the global marketplace, ultimately improving living standards in a sustainable way. Competitiveness also depends on firms’ ability to drive change and adapt to it through innovation, which must be supported by the availability of skilled  employees, infrastructure, adequate finance and a conducive regulatory environment. In Europe, a well-oiled single market is also vital for enabling innovation. Fully removing internal barriers, increasing competition and taking advantage of economies of scale could smooth the reallocation of resources required for transformation and further improve efficiency, productivity and, ultimately, competitiveness.

To meet its climate goals and remain competitive, Europe needs to invest heavily in research and development (R&D), skills, infrastructure and the adoption of green, digital and more productive technologies. And despite the resilience of investment in recent years, funding to support these aims remains insufficient. In terms of productive  investment (a measure that excludes housing), Europe lost pace after the global financial crisis, falling behind the United States. The gap between the European Union and the United States is still some 1.5 percentage points of gross domestic product (GDP), largely driven by lower investment in machinery, equipment and innovation. Europe’s position in other important areas, such as R&D spending and the issuance of patents, is threatened, especially by China. And Europe faces the added challenge of ending its dependence on imported fossil fuels, with electricity prices projected to remain elevated for more than a decade before renewable energies start to push them down.

The investment to address these needs must be made by the private sector, for the most part. But that will not happen at sufficient speed and scale unless the public sector acts to create enabling conditions and to support investment in a catalytic way. As global competition accelerates, Europe must focus on the essentials: enhancing innovation and ensuring that innovative and highly productive firms have the resources and conditions they need to grow. These firms require a competitive environment that is open to change and disruptive innovation, as well as access to the sizeable and level playing field offered by the EU single market, which will allow them to reap economies of scale. They also need more suitable financial resources, such as equity or quasi-equity instruments, to be able to scale up their operations.

In the context of growing geopolitical risks and deglobalisation, there is also a need for more investment in the diversification and resilience of supply chains. The EU economy benefits from its openness to trade, while the EU single market offers strategic opportunities to diversify supplies among EU members.

However, Europe needs targeted strategies to further enhance its resilience against supply disruptions, particularly for raw materials that are critical to the green transition. Europe’s aim to reduce emissions by 55% by 2030 represents a still greater challenge for the economy, but it also brings many opportunities. From innovating green  technologies to deploying them, Europe’s climate ambitions are reflected in increasingly clear incentives and the emergence of market-leading players.

Improving the availability of skills – by investing in education and training and by facilitating workers’ ability to move – is also critical for the economy to transform and improve its competitiveness. The single market is a huge asset, but Europe has not yet fully realised its potential to facilitate the efficient allocation of capital and other resources and to help European firms grow into global champions.

This edition of the European Investment Bank’s annual Investment Report focuses on the European economy’s effort to transform and become more competitive, and to remain at the global technological frontier. The analysis it presents is supported the annual EIB Investment Survey of 12 000 European firms, the latest edition of which also included a special module on manufacturing firms covered by the EU Emissions Trading System. This report is divided into two parts. The first provides an assessment of the
macroeconomic and financial environment in the European Union. It discusses trends and developments in investment, focusing on government and corporate investment. The second part looks at the structural challenges of promoting innovation and digitalisation, and addressing climate change.

You can read the full report here.

Compliments of the European Investment Bank – a Platinum member of the EACCNY.