Turmoil in the banking sector has further shaken investor confidence in an economic landscape already scarred by recurrent crises. The stress has spread to the stock markets and to most banking sectors globally, with European banks even more affected since Credit Suisse came under severe market pressure.
The consequences of the challenges in the banking sector, combined with the changing economic landscape and the implications of climate change and digitalisation, were the focus of the recent Vienna Initiative Forum hosted by the National Bank of North Macedonia, which took place from 22 to 24 March in Skopje.
Adapting to the risk-off attitude
The banking sector in Europe and the Western Balkans is based on a more traditional business model (collecting deposits and lending to households and companies) that is less exposed to increases in interest rates or rapid deposit outflows. However, the pressure on banks is likely to trigger a stronger tightening of financial conditions and a risk-off attitude. Credit conditions will be tightened particularly for longer-term or riskier positions (financing of innovation, intangibles). This new shock calls for an effective response to mitigate the longer-term consequences. As former British Prime Minister Winston Churchill said before the end of the Second World War, “Never let a good crisis go to waste.”
The succession of shocks in recent years might force governments to postpone some crucial public investments in the areas of innovation, energy and digitalisation. We believe these investments are key to making the green transformation possible, especially as they are the main drivers of economic growth in the long term, along with education. This is why they must not be delayed.
The private sector is equally affected. It is clear from the 2022 EIB Investment Survey for Central, Eastern and South-Eastern Europe that economic uncertainty, high energy costs and insufficient skills are the three main elements that continue to impede long-term investment, especially among small and medium businesses.
Just transition to climate neutrality
These constraints cannot be addressed with public resources alone, as they would never go far enough. Governments need to set the right incentives to foster private investment in these key areas. Offering simplified and digital administrative procedures to help households and firms make renewable energy and energy efficiency investments, for instance, is the right way forward. In a nutshell, sustainable investment spending, both from public and private entities, will remain the key engine for growth in Europe. It will prepare us for the future, rather than leaving us dependent on old and energy-intensive technologies.
The EIB is actively working in all vital sectors to deliver this much-needed support, including for high-impact projects with a sometimes higher risk. Following our 2020 commitment to enable €1 trillion of green investment by 2030, the EIB Group has supported a total of €222 billion of this kind of investment, almost a quarter of our target. In 2022, we invested €36.5 billion in climate action and environmental sustainability projects, accounting for 58% of our total lending volume last year.
As the bank that pioneered green bonds in 2008, we are supporting innovative green projects such as floating offshore wind, battery storage and green hydrogen. But we are also well aware of the other side of the coin. The green transition will spur growth and job creation, but will simultaneously affect the most vulnerable communities and regions. This is why the EIB’s approach to the just transition will include financial and advisory instruments to protect fragile regions and countries on their path to decarbonisation.
Extending our reach beyond the European Union
Outside the European Union, we are now expanding our cooperation with international partners under the arm of the European Investment Bank Group devoted to our activities worldwide — EIB Global. Under this organisational structure, the European Investment Bank is well on track to facilitate at least one-third of the €300 billion of investment under the Global Gateway, the new EU strategy for boosting sustainable projects. The Western Balkans will also benefit from this strategy through the European Commission’s Economic and Investment Plan, which aims to mobilise up to €30 billion of investment to promote the EU accession process, the green and digital transition, connectivity, private sector growth and job creation. The plan also entails a combination of EU investment grants and technical assistance to prepare and implement flagship projects.
Our role in the Western Balkans is to enable countries to access opportunities for further infrastructure development that is socially, economically and environmentally sustainable. On top of our financing, EIB project-related technical assistance improves the quality of lending operations and enhances their development impact. Since 2009, we have invested over €10 billion in the development of infrastructure and the private sector in the region.
Net-zero economy on the rise
Amid the energy crisis, climate goals need to be aligned with the need for energy security and the long-term stability of supply. The EIB will support €30 billion of additional clean energy investment over the next five years to support the European Commission’s REPowerEU plan. This extraordinary measure will help the European Union end its dependence on fossil fuels, meet its climate goals and contribute to decarbonisation. The EIB financed a record €17 billion worth of energy investments in the European Union in 2022. Companies that have invested in energy efficiency in recent years were certainly wise to do so, and have probably generated significantly higher returns as a result than for many other investments.
It appears that the net-zero economy will grow exponentially over the coming decade. By 2030, investment needs will have reached €600 billion annually, according to the International Energy Agency. This presents a huge opportunity for the European Union and other countries across the globe.
To take advantage of this opportunity, we need to work together to ensure our actions are complementary. Targeted cooperation will be vital going forward to make our economies more resilient to shocks. Longer-term investments in digitalisation, energy security, decarbonisation and innovation must go hand in hand with short-term measures in response to current disruptions. We need to provide large-scale support for green tech and green manufacturing to reach our climate targets in Europe and remain competitive and resilient. To address this huge challenge, the EIB, as the bank of the European Union, stands ready to work with the European Commission to create a new vehicle for Europe to provide equity-type support for its green industrial future.
This article was first published in Bloomberg Adria.