The Elettra Sincrotrone center in Trieste, Italy, is one of Europe’s top research centres, specializing in next-generation light. The EIB says Europe has to do more to promote such innovation. (Copyright, Elettra Sincrotrone)

November 23, 2017

4 steps to rebuild Europe’s economy

The EIB Investment Report sees a strengthening Europe, but more investment is needed for small firms and infrastructure. Here’s what the EU bank’s economists say we need to do.

Good roads, bridges, sewers, electrical grids and telecommunications are essential to help an economy grow and let businesses prosper. But it’s also important to have solid social infrastructure, such as good education and health care systems.

Investment in these areas has been neglected in Europe since the financial crisis a decade ago. The European Investment Bank’s annual Investment Survey highlights infrastructure as one of the key elements that needs much higher financing to make the continent’s current recovery sustainable.

“Corporate investment is recovering, and that’s good news,” says Debora Revoltella, head of the EIB’s Economics Department. “The bad news is that we have been underinvesting for so long. Other global companies are investing more, and if we delay and don’t catch up quickly, there are long-term consequences. We have to go faster, we have to quickly accelerate.”

Europe’s economy is on the mend, with investment growing at a rate of 3.2%, beating the average growth rate of about 2.75% before the European economic crisis began in 2009. But infrastructure investment has fallen to 1.8% of EU gross domestic product, down from 2.2% in 2009, when the economic crisis started. That undermines long-term economic potential, the EIB report says.

 

  

Four areas for attention

Besides infrastructure, four other areas that need attention in Europe are:

  • intangible investments, such as competitiveness, innovation and skills
  • access to finance
  • the business environment
  • climate action

“For many companies hit by the financial crisis, gaining access to financing is difficult,” says Philipp-Bastian Brutscher, an EIB economist. “Businesses in Greece find it a lot harder to finance a project than those in Austria. If you rely heavily on machines, it’s easier to get loans, but if you invest heavily in things that you can’t touch, like the Internet, it is much harder to get financing.”

Barriers to Investment in the EU (2017) graphic

The EIB sees a window of opportunity to address Europe’s investment needs. The investment report suggests making several targeted interventions:

  • Prioritise public infrastructure investment and support it with better planning and alternative investment opportunities.
  • Pay more attention to innovation and skills development. The EU is falling behind peer economies in these areas.
  • Climate change mitigation needs to increase substantially to meet environmental targets.
  • More diversity in business finance. More equity financing is required as well as an easing of constraints for small and innovative firms, including credit guarantees.

Revoltella says the EIB hopes the report’s findings help keep the issue of investment on the radars of economists and policymakers.

“Investment is coming back in Europe, we are in an economic recovery,” Revoltella says.” So the question is, ‘OK, are we doing enough?’ And the answer is no.”

Did firms invest too much, too little or the right amounts in the last three years? (graphic)

An economic survey of investment

The EIB, with the help of dozens of academics, practitioners and policymakers, surveyed 12,500 firms and 500 big cities across Europe to find out what is driving or holding back investment. One of the main problems occurs in the sphere of innovative small companies.

“The small companies in Europe lack the financing they need to grow,” says Atanas Kolev, a senior economist at the EIB who worked on the survey. “They are subject to a very stringent business environment. Many European countries have too few young and leading innovators. We just don’t have the Googles and Amazons.”

The EIB is releasing its Investment Report today at its annual Economics Conference. The event brings together policymakers, economists and leading market players to discuss today’s top topics in investment, like how to strengthen the financial sector, how to ensure that innovative firms get financing and how to address the deficit in skills that is holding back private sector growth.

23 November 2017

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