In an increasingly volatile global landscape, there is an urgent need to enhance Europe’s competitiveness and address its security needs. This column, drawing on the 2025 European Investment Bank Investment Report, emphasises three key drivers to consolidate Europe as a global leader. First, it needs to unlock business opportunities via market integration and simplification of bureaucracy. Second, it should leverage existing strengths, including its research base, green leadership, and social model. Finally, it needs to maximise the impact of public sector interventions through a more targeted, coordinated, and European approach.
In an increasingly volatile global landscape, Europe faces critical strategic choices on security, defence, economic resilience, and external dependencies. The fast-evolving geopolitical context is challenging the basis of Europe’s global strategic positioning and growth model, as well as the rules for international trade and cooperation. Already last year, the reports by Mario Draghi (2024) and Enrico Letta (2024) called for urgent change to enhance Europe’s competitiveness and address its security needs, including through a deeper single market, a Savings and Investment Union, more European coordination of industrial policy, and a European push to address very substantial investment needs. The upending of the geopolitical status quo unleashed after Donald Trump’s inauguration in the US has only multiplied the sense of urgency for Europe to act.
Ursula von der Leyen, President of the European Commission, defined the new European Commission as an investment commission. The Competitiveness Compass (European Commission 2025) proposes key interventions in relation to industrial policy, reducing regulatory burdens, breaking down single market barriers, and improving access to risk capital, in a way that directly responds to the earlier reports (Zettelmeyer 2025). Several proposals are currently being launched, including the Clean Industrial Deal and Omnibus regulations aimed at simplification. In this context, this year’s European Investment Bank (EIB) Investment Report (European Investment Bank 2025) emphasises three key drivers to consolidate Europe as a global leader: large-scale investment in innovation and economic transformation, EU market integration, and simplification. It shows the importance of leveraging Europe’s strength – notably its strong research base, social model and green transition leadership – whilst also maximising the impact of public investment support.
The current investment landscape
We come from a period in which there was a strong and successful policy focus on investment, thanks to collective efforts of EU member states through the Recovery and Resilience Facility (RRF), EU funds, and financial instruments like the European Fund for Strategic Investments and InvestEU.
However, since 2024, investment growth has come to rely entirely on the public sector. Private investment is contracting (Figure 1). At the same time, investment needs remain significant – Draghi’s €800 billion – and with even more likely required for security and defence. This raises the question of how it could be possible to support a further acceleration of investment.
Past episodes of sustained investment acceleration in the EU were driven by structural changes that unlocked new business opportunities. These include the creation of the single market, waves of accession to the EU and, most recently, the acceleration following the pandemic and spurred by the Green Deal and the Recovery and Resilience Facility (Figure 2).
Figure 1 Investment growth and contributions by sector (year-on-year, % and percentage points)
Source: EIB staff calculations based on Eurostat.
Note: EU without Ireland. Real gross fixed capital formation by sector, deflated using total investment deflator.
Figure 2 Investment rate in the EU (current 27 member states, % of GDP)
Source: EIB staff calculations based on IMF WEO October 2024.
EU integration and simplification can unlock business opportunities
Increasing the depth of the single market will help Europe’s firms remain globally competitive by expanding markets and incentives to invest. According to the latest EIB Investment Survey (EIBIS) of 12,000 European firms, 60% of those that export – and 74% of frontier innovators – say they face barriers from different national regulations and consumer protection standards when exporting to another country within the EU.
Reducing the fragmentation of EU capital markets through a fully-fledged Savings and Investment Union, meanwhile, will be crucial to unlocking finance for innovation. Our analysis suggests that the probability of firms issuing equity is not related to GDP per capita but rather to financial market size, integration, and depth (Figure 3). Moreover, being able to issue equity to finance investment has an impact on firms’ behaviour. All things equal, firms that have access to equity finance have investment growth rates that are seven percentage points higher than others. They are also 13 percentage points more likely to be developing innovative new products (Figure 4).
Figure 3 Impact on probability of equity issuance (percentage points)
Source: EIBIS-ORBIS 2016-2023.
Note: Market size and integration includes total market capitalisation and a composite indicator of rest of the world integration. Market depth includes public market financing (market capitalisation relative to GDP) and capital raised through initial public offerings (IPOs) relative to GDP, as well as pre-IPO risk capital (venture capital investment relative to GDP). For details see EIB (2025).
Figure 4 Estimated impact of equity issuance on firm’s performance (percentage points)
Source: EIBIS-ORBIS 2016-2023.
Note: Investment rate is the average net investment rate in the three years ahead. Intangible investment is the rate over total assets. Results that are not statistically significant at the 90% confidence level are indicated with diagonal stripes. For details see EIB (2025).
The cost of bureaucracy is also a significant burden for EU firms, and particularly for smaller enterprises. According to the EIBIS, about 86% of EU firms employ staff dedicated to deal with regulatory compliance, with an associated cost of 1.8% of turnover. The cost increases to 2.5% of turnover for small and medium companies. By comparison, EU firms’ spending on energy after the energy shock amounted to just 4% of turnover.
Leveraging on EU strengths
Europe has a strong base in industry, trade, and research. The challenge lies in how Europe can leverage this base to enhance productivity and competitiveness. On patent issuance, the EU is falling behind in biotech, digital technologies, and artificial intelligence, despite some areas of excellence. Large European players dominate in a handful of more traditional sectors, but their dependency on foreign companies for digital technologies and services is causing concern as artificial intelligence comes to the fore. Looking at the adoption of innovations, the share of EU firms taking up advanced digital technologies in general, and artificial intelligence in particular, is rising in parallel with the trend in the US, although Europe is still slightly behind (Figure 5).
Figure 5 Use of artificial intelligence (% of firms)
Source: EIBIS 2019-2024.
Innovation is one area in which Europe’s leadership on the green transition is paying off. Despite fierce global competition, Europe still competes on the ‘greentech’ frontier in terms of patents issued and is well positioned at the centre of global patenting networks (Figure 6). Europe’s exports in low-carbon technologies are expanding, having grown by 65% since 2017, compared with 79% for China and only 22% for the US (Figure 7).
Figure 6 Co-patenting networks for green technologies, 2016-2022
Source: PCT patents (PATSTAT), calculated by ECOOM, KU Leuven.
Figure 7 Exports of low-carbon technologies (billion EUR)
Source: EIB staff based on UN Comtrade data.
While there is a need for regulatory simplification, it is also important not to throw the baby out with the bath water. In relation to climate, our analysis shows that stringent climate policies are important to ensure that firms have positive returns from investment in energy efficiency. In countries with less ambitious green policies, there have been few performance benefits from energy-efficiency investments, particularly for energy-intensive industries (Figure 8).
Figure 8 The effect of climate policy stringency on returns from energy efficiency investment efforts (predicted probabilities, %)
Source: EIB staff calculations based on EIBIS.
Note: Climate policy stringency refers to a normalised sub-indicator from the Climate Change Performance Index (CCPI). Results that are not statistically significant at the 95% confidence level are indicated with diagonal stripes. Bars represent the probability of different returns to firms from energy efficiency efforts, depending on specific determinants.
Europe’s social model is another enabler. Social investment brings economic return, and we see a need for more effective solutions for investment in skills, education, health, and affordable housing. 51% of EU firms reported the availability of skilled workers to be a major barrier to investment in 2024, up from 39% in 2016. This has not resulted in a higher share of firms investing in training, however. With an ageing population, the skills demanded by the green and digital transitions are set to exacerbate this issue, making continued social investment critical. It helps people develop skills and encourages participation in the labour force and labour mobility. If female labour force participation were raised in all EU countries to the highest EU level, for example, EU GDP could increase by 4%.
Rigidities in the supply of affordable housing, meanwhile, increase labour misallocation and negatively affect growth and productivity, particularly in fast-growing cities. This has an especially negative effect on younger people and those who relocate within Europe, who experience a long-term reduction in the likelihood of home ownership (Figure 9). In Europe, construction has suffered from low productivity and insufficient innovation, adding to the cost and time of delivering housing projects. Other supply-side barriers are also a concern, with regulatory obstacles, such as difficult permitting processes, and skills constraints holding back the sector.
Figure 9 Homeownership rates across different demographic groups, EU, 2021-2023 (average, %)
Source: EIB staff calculations based on EU-SILC.
Targeted instruments and EU coordination can help maximise the impact of public support for investment
Since the pandemic, investment has been supported by a strong European policy focus. In the first half of 2024, government investment grew by 7.2% year-on-year, helping to offset a 2.5% decline in private investment. As a share of GDP, public investment reached 3.5% in 2023. Over the same period, public subsidies for investment rose from 0.6% to 1.6% of GDP. The deployment of the Recovery and Resilience Facility and other EU funds contributed significantly to these trends.
Given the scale of the investment needs facing Europe, and with heightened uncertainty and trade disruptions likely to affect private sector investment, it is clear Europe needs to maintain its focus on policies that encourage investment. But as fiscal space is reduced and the Recovery and Resilience Facility comes to an end, EU members will face more difficult trade-offs. In this context, it will be critical to maximise the impact of scarce public resources with financial instruments and stronger EU coordination.
It will also be critical to focus on targeted incentives, focusing on well-defined policy objectives for economic and firm transformation. Using EIBIS data, we have quantified the response of firms to policy support, in the form of subsidies or finance at favourable conditions. Firms are shown to be more reactive to targeted policy support, with the probability for firms to transform much higher when the support is targeted (Figure 10). Taking a European approach to industrial policy also minimises distortions to the single market and enhances effectiveness. Our analysis shows that when policy support is allocated at the EU level, the market distortion effect is lower. This is particularly true in mid-tech sectors.
Figure 10 Impact of targeted versus non-targeted financial support on probability to invest in green transformation and innovation (percentage points)
Source: EIB staff calculations based on EIBIS 2024.
Note: Reference is no grants / no bank loans at favourable terms. Results that are not statistically significant at the 90% confidence level are indicated with diagonal stripes.
Conclusions
Europe needs large-scale investment in innovation, green transformation and security. To do this, we emphasise the importance of three pillars: unlocking business opportunities via market integration and simplification; consolidating and leveraging on European strengths, including its research base, green leadership and social model; and maximising impact of public sector interventions through a more targeted, coordinated, and European approach.
Source : VOXeu
