Crises threaten the massive investment Europe needs to meet the climate emergency and build a digital economy

Europe confronted the pandemic at the height of the business and risk reduction cycles, just when it needed significant investment to meet the challenges of the digital and climate transition. Now the Russian aggression against Ukraine has increased uncertainty and led to a surge in energy and food prices.

These two challenges have endangered Europe’s ability to invest on the scale required to meet the climate emergency and to build a more digital economy. Europe needs innovation, flexibility and resilience – and this requires massive investment.

Public policies that foster investment are crucial for Europe’s strategic autonomy. The COVID 19 pandemic and the war in Ukraine have hampered the European economy’s ability to invest, transform and reform since 2020. Digitalisation, the green transition, an aging population and the growing risk of poverty are major challenges that have long been on the European agenda. Now the time to do or die has come.

Europe must channel enough resources to meet these challenges and to strengthen its leadership in digital technologies, maintain its advantage in clean tech and hit its net-zero emission target in 2050. When it comes to investment, however, Europe is being outspent by major international competitors. The European Union trails the United States in productive investment to the tune of 1.5% to 2% of EU GDP per year. This situation has persisted for at least a decade now. It cannot continue. We need to put our money where our gap is.

Getting money where it’s needed

Elevated energy and commodity prices are fuelling inflation and hurting confidence. In turn, in a context of the repricing of risk, this is weighing on investment. A much-needed normalisation of monetary policy is on its way after a decade of low interest rates and abundant liquidity, though real interest rates remain negative and are at a long-time low. The repricing of risk and the tightening of credit standards in a period of heightened uncertainty may hurt investment: this calls for public policy.

Europe is pioneering the green transition. What used to be a priority has now become an emergency. Eliminating Europe’s dependence on fossil fuels will boost competitiveness and promote our strategic autonomy. The war in Ukraine has made Europeans aware of our overreliance on imported fossil fuels. During the first six months of the Ukraine war, the European Union transferred 3.5% of its domestic income to oil and gas producers, including to Russian ones. At the same time, high oil prices have caused a major deterioration in the European Union’s terms of trade. This has driven a depreciation in the euro and resulted in imported inflation.

Employment remains at record levels in most of the European Union. Sheltering employment implies only moderate rises in nominal wages, which in the short run will not calm inflationary pressures on the supply side. Ensuring Europe’s strategic autonomy and targeting public policies to foster investment are key to promoting sustainable growth. That growth should enable real wages to be fully restored. Imported energy inflation risks tipping an additional 11 million of Europeans into poverty, according to the EIB Economics Department, which is releasing is Investment Report 2022/2023 on 28 February. We cannot allow that to happen.

A strong upsurge in public and private investment is key to innovating and disseminating technical progress. Europe still lacks the resources to ensure the green and digital transition. It is clear that public policies supporting investment in sustainable economic areas like digital and green innovation are the best way to protect Europe’s people and to create high-quality jobs. Good policies, proper incentives and a strong commitment to investment are needed. Policymakers must act with determination, work to prevent financial fragmentation and preserve the integrity of Europe’s internal market. Credit must flow to the most innovative and transformative projects in all sectors and regions of the European Union to ensure a just transition that leaves no one behind and supports cohesion and sustainable development.

Innovation today is mostly based on digital technologies. Policy coordination at the EU level is critical to channel the resources needed for success. Investment in the European Union is stifled by impediments that must be addressed immediately with the coordination of national policies and an active use of European regulatory, competition and monetary policy. The €700 billion-plus Recovery and Resilience Facility is playing a role in sustaining transformative public investment. But we need to do more with these funds and use them better. Public investment must be leveraged to attract private investment.

De-risking investment

In the current environment of risk repricing and an overall reluctance to take on risk, it is urgent that de-risking instruments are made available to encourage private investment. Well targeted risk-sharing instruments, through loans and guarantees put forward by EU institutions, may boost investment and crowd-in the necessary private sector resources to meet the investment gap, while preserving market integrity and a level-playing field across EU members.

The European Union’s response to the pandemic provides a blueprint for an efficient coordination of policies. In this context, more than providing grants, public resources should be used to bear some of the risk of investments in innovative digital and green technologies. The European Union knows how to spur investment. We have done it before. The European Fund for Strategic Investments mobilised financing of more than €500 billion, while the European Guarantee Fund leveraged a guarantee from Member States to attract €200 billion.

We can boost competitiveness, innovation and create high-quality jobs, while preserving the integrity of the internal market and a level playing field.

To be successful, however, EU members need once again to come together and act as one.