Bei, the EU’s real gross domestic product (GDP) and investment returned to pre-pandemic levels in less than two years.
Investments in the European Union are picking up as social and geographical inequalities grow
Investments in Europe: an unprecedented shock and a rapid rebound in investment supported by public intervention.
The support targeted the short-term liquidity gap created by the crisis, but not the “zombie” firms that were already financially weak.
Policy support has been a stepping stone to transformation: Companies have reactivated their investment plans, started digitizing and are preparing to invest in greentech.
However, the economic shock of COVID-19 has amplified the existing geographic and social inequalities.
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 digitalisation and the green transformation of the economy are accelerating profound structural change, Europe risks becoming more unequal.
These are some 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 digitalisation. And it discusses 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. “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 European Union. 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 has still to be tested. Omicron is adding to the challenges, substantially increasing uncertainty,”. “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.”
Investment in the European Union: Policy support weakened the link between the impact of the crisis and future 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 European Union 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 crisis was largely indiscriminate and all countries in the European Union 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.
What is even more important is that the policy support allowed firms to maintain their investment plans, irrespective of the sales losses experienced. Firms that received support were also more likely to preserve their investment programmes and therefore accelerate their transformation.
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.
Source Bei, European Investment Bank
