Though public and private investment survived the energy and inflation shocks following the pandemic, signs indicate that corporate investment has since weakened. This column presents the results of the 2024 European Investment Bank survey on investment finance. Despite pressing needs to step up investment in innovation and digitalisation, strengthen value chains and encourage climate action, the investment activity of EU firms has indeed softened. Risk-absorbing financial instruments are key to resolving the slowdown, but they must be accompanied by improvements in the business environment to ease barriers now hindering investment.
The new European Commission has set itself the mandate to become an “investment Commission” (von der Leyen 2024). At the same time, the Letta and Draghi Reports call for a new wave of investment in Europe to accelerate economic transformation and innovation, ensure the resilience of value chains and economic security, and adjust the economy to a sustainable green transition (Letta 2024, Draghi 2024).
This comes against an economic backdrop in which investment has been relatively strong but has lately shown signs of weakening. The policy response in recent years, particularly the Recovery and Resilience Facility, put investment and transformation at the centre of EU policymaking. Public investment was sustained through the pandemic and survived the waves of energy price and inflation shocks that followed. Private investment recovered relatively quickly from these shocks. Now, however, as the ECB seeks to engineer a soft landing for the European economy, there appears to be some cyclical weakening of investment.
Figure 1 Contributions to gross fixed capital formation growth in the EU by institutional sector (% change, year-on-year)
Source: Eurostat.
Note: EU without Ireland. Changes in biological resources and the calculated residual, contributing less than 0.02 percentage points to the change in the investment share, have been excluded.
Going forward, the investment needed to address important structural challenges will have to be managed in the context of the Recovery and Resilience Facility’s ending in 2026, the reinstatement of EU fiscal rules, and persistently tight financing conditions that may dampen the appetite for private sector investment. As investment needs are significant, the private and public sectors will have to cooperate. The private sector has an essential role to play, supported by a public sector that focuses on creating the conditions for investment to take place, be it via interventions to develop markets, promote the single market (to realise scale advantages), reduce policy uncertainty, or through the use of efficient and catalytic financial instruments.
In this context, the EIB Group Survey on Investment and Investment finance provides a unique viewpoint (EIB 2024). Just over 12,000 firms in the EU were surveyed over spring and summer 2024, along with a benchmark sample of 800 firms in the US, to better understand their investment decisions and priorities as well as the enablers of and barriers to investment.
Investment slowing despite large-scale investment needs
The EIB survey reveals that EU firms’ investment activity is softening, despite the pressing need to step up investment in innovation, digitalisation, the resilience of value chains, and climate action. In recent years, the corporate sector has weathered consecutive shocks relatively well. However, while the share of firms investing has risen steadily, the share of firms expecting to increase investment (net of those expecting decrease it) halved in 2024, from a net balance of 14% in 2023 to 7% in 2024 (Figure 2). Many EU firms are satisfied with their overall level of investment in the last three years, but a significant fraction report investment gaps (14%, versus 19% in the US). Looking ahead to the next three years, EU firms will still prioritise replacement investment, with only 26% prioritising over capacity expansion; in the US, by contrast, 47% of firms will prioritise capacity expansion. In recent years, EU firms have been relying heavily on internal finance. The share of finance-constrained firms in the EU has risen and is now elevated by historical standards, driven by concerns about the cost of credit and difficulties in obtaining sufficient funding. Overall, at the time of the EIB survey, financing conditions for firms remained tight.
Figure 2 Investment cycle and evolution of investment expectations
Note: For details on data used, see EIB (2024).
Fears over supply-chain resilience eased in early 2024
Economic security and the resilience of value chains are new imperatives for EU firms, with manufacturing and large firms standing out by virtue of their integration into global trade networks. This level of integration with global value chains explains why EU firms are concerned about growing geopolitical tensions and trade disruptions. Since the beginning of 2023, however, concerns about trade disruptions have eased in both the EU and the US. Disruption in logistics and transport, and compliance with new regulations, standards, and certifications are the key trade-related concerns for US and EU firms. Notably, regulatory concerns did not improve substantially over the year.
EU firms are bolstering the resilience of their supply chains rather than reducing their reliance on international trade. In response to trade shocks, EU and US firms have adopted similar strategies to enhance the resilience of their supply chains, prioritising inventory build-ups, digital tracking, and diversifying import sources. Few firms have responded by reducing their reliance on international trade (by reducing the share of imported goods and services), and EU firms are less likely to do so than US firms (7% versus 14%).
Climate change: Adaptation lagging behind mitigation
EU firms continue to lead in investments aimed at tackling the impact of weather events or reducing carbon emissions compared to their US counterparts. One in three EU firms (34%) consider the transition to net-zero emissions a risk for their business over the next five years; 27% see it as an opportunity. The share of firms considering the net-zero transition a risk is higher in the US, at 42%. Around 90% of EU and US firms have taken action to reduce greenhouse gas emissions. Investment in waste reduction, recycling, and energy efficiency are key strategies adopted by firms in both regions. EU firms are more likely than US firms to have adopted sustainable transport modes, implemented renewable energy solutions, and set emissions targets.
Figure 3 Investment plans to deal with climate change impact
Note: For details on data used, see EIB (2024).
Firms in the EU are more likely to report exposure to the effects of climate change, such as extreme weather events (‘physical climate risk’), than their US counterparts, with 66% of EU firms directly impacted compared to 60% of firms in the US. However, the share of firms that implemented adaptation measures remains relatively low in both regions (less than 50%). In the EU, large firms were more likely to do so. Only 21% of EU firms were insured against climate risks, a proportion similar to that in the US (19%). As the impact of climate change increases, the lack of focus on adaptation investment and insurance coverage is a concern.
EU firms still lag on advanced digital technologies
Innovation and digitalisation are a key source of firm competitiveness. On aggregate, US companies maintain an edge in terms of innovation and the adoption of advanced digital technologies. There are, however, significant differences across EU member states. EU firms have accelerated the adoption of advanced digital technologies, with 74% now doing so, but the use of these technologies in the US stands at 81%. Larger firms and those in the manufacturing sector lead the way in digital adoption, while the construction sector lags behind.
Figure 4 Use of advanced digital technologies
Note: For details on data used, see EIB (2024).
Skills, uncertainty, and energy costs remain key concerns
The business environment remains a concern for firms in the EU and the US, with little improvement in recent years. The availability of people with the right skills and uncertainty about the future worry observers in both regions. Energy costs remain a major obstacle to investment for 46% of EU firms, a much higher share than in the US. The energy crisis led to a spike in energy costs, and although the crisis period has passed, energy prices in Europe have not returned to pre-crisis levels, leaving EU industries – particularly energy-intensive industries – at a competitive disadvantage. EU firms are also more likely to perceive business regulations and availability of finance as major obstacles compared to their US counterparts.
A closer look at regulatory issues and the functioning of the EU single market reveals new insights into its fragmentation. Firms were asked whether their key product is subject to differing regulatory requirements, standards, or consumer protection rules – such as technical norms, health and safety standards, or environmental standards for products – across EU member states. A majority (60%) of EU exporters report that they have to comply with different standards and consumer protection rules from one member state to another.
Figure 5 Obstacles to investment
Note: For details on data used, see EIB (2024).
An enabling business environment can maximise the impact of public support for investment
Overall, the EIB Investment Survey 2024 reveals a picture of European corporate investment that is undergoing a cyclical softening – in ways that contrast markedly with political calls for step-change in investment efforts to tackle long-term conditions – while structural crises challenge the EU.
As is often repeated, addressing these challenges cannot be a matter for public investment alone, but requires the private sector. The question is thus: what roles do public policy and public investment have to play in order to use public resources effectively and to catalyse an increase in private, corporate-sector investment activity targeted to address key challenges like climate change, digitalisation, and supply-chain resilience?
Risk-absorbing financial instruments are a key tool in this context, but they need to be used efficiently. In particular, they need to be accompanied by improvements in the business environment to ease some of the barriers holding back investment. Public investment in education and training is important in this regard, as are measures that encourage labour mobility. Better coordination of priorities and investment projects at the EU-level is also key to reducing the uncertainty that encourages a ‘wait and see’ strategy by private investors. Lastly is the need to tackle the remaining regulatory fragmentation within the EU, allowing European firms to benefit from economies of scale and to compete effectively at the global level.
Source : VOXeu
