EIB Investment Report 2024/2025: Innovation, integration and simplification in Europe

The European Union is a technology leader, but it needs to shore up its position if it is to face down increasingly fierce global competition. Three areas could help Europe to maintain its lead: large-scale investment in innovation and better financial support for young firms producing cutting-edge technologies; better integration of its diverse and somewhat fragmented single market; and simplified procedures and lighter bureaucracy.

Europe has enormous strengths: a strong industrial, research and trade base; its climate leadership; and a social model that protects people while helping them develop their skills. Europe is a trade and research powerhouse, with a solid industrial foundation. The rise of advanced digital technologies like artificial intelligence and big data analytics could be a boon for productivity. At the same time, Europe’s climate leadership is paying off through progress on the energy transition and its prominent position in the innovation and trade of green technologies.

To take advantage of these and other opportunities, the European Union needs significant and consistent investment. During the COVID-19 pandemic and the energy crisis, strong public support lifted private investment. Maintaining that support, however, will be difficult as individual countries feel pressure to pare debt and as EU fiscal rules come back into force. Maximising the impact of public funds will be crucial. Effectively using targeted instruments to attract private investment will also be important, as will coordinating efforts at the EU level. Only then, will the European economy pull in the investment needed to realise its enormous potential.

Investment remained surprisingly buoyant since the COVID-19 pandemic, largely because of strong policy support and direct EU funds provided through the €650 billion Recovery and Resilience Facility. Investment is now slowing, however. The latest data for 2024 shows an overall contraction in investment, in part due to lower investment by the private sector.

• Government investment rose 7.2%in the first half of 2024, compared with a year earlier, which helped offset a 2.5% decline in private investment.

The European Union needs to shift to structurally higher levels of investment if it is to tackle future challenges, like the green transition, the need to support innovation, the revolution in artificial intelligence, skills gaps and defence demands.

Somewhat encouragingly, when EU firms were surveyed in the summer of 2024, many expected to grow their investment, particularly those in high and mid-tech industries. But recent developments – uncertainty, trade tariffs and tighter budgets for EU members – are likely to weigh on investment. The end of the Recovery and Resilience Facility in late 2026 will add to these constraints.

Increasing the depth of the EU single market would help firms expand markets and provide incentives for them to invest, which would improve their ability to compete globally.

• 60% of exporting European firms – and 74% of innovators – say they face barriers in the form of different regulations and consumer protection standards when they export their products or try to do business in other EU countries.

At the same time, fragmentation of EU capital markets prevents Europe’s substantial savings from being effectively used to finance the investment needed. One example is equity issuance. Better integrating EU financial markets would increase their size and depth, making it easier for firms to finance innovative new ideas or technologies by issuing equity.

Analysis carried out for the EIB Investment Report suggests that the probability of firms issuing equity is not related to gross domestic product (GDP) per capita but rather to financial market size, integration and depth.

• Firms that can issue equity to finance new products or services have growth rates that are 7 percentage points higher than firms that do not have this possibility.
• These firms are also 13 percentage points more likely to be developing innovative products.

Europe has ambitious plans for green energy and innovation. Its goal of cutting emissions 55% by 2030, compared with 1990 levels, is fuelling investment across the continent.

Despite aggressive global competition, Europe is still a dominant producer of green technologies, and it is well positioned in global patenting networks. European companies continue to have a comparative advantage in greentech, and EU exports in low-carbon technologies are expanding rapidly.

• EU exports of green technologies rose 65% since 2017, compared with 79% for China and only 22% for the United States.

Although the European Union is still competitive in green technologies, it is falling behind in biotech, digital technologies and artificial intelligence, despite some areas of excellence. Looking at the adoption of innovations, the share of EU firms incorporating advanced digital technologies and artificial intelligence into their operations is rising in parallel with the trend in the United States, although Europe is still slightly behind.

Europe needs a business environment that encourages disruption and provides financing for young, innovative firms to grow. Improving the environment for innovation would encourage dynamic firms to stay in Europe instead of looking to the United States or Asia for the support they need to scale their operations.

• EU scale-up firms raise, on average, 50% less capital than their US counterparts in their first ten years.

Addressing funding gaps in Europe would spur innovation and provide support for inventive firms, particularly at later stages of development when they are ready to expand their activities and markets. Some solutions include reinforcing debt and equity-type products that target specific critical technologies and strengthening opportunities for young companies to be acquired, or to list on stock markets, which would improve returns for investors and mobilise more capital for startup and fast-growing firms.

Often taken for granted, Europe’s inclusive social model is one of its strengths. Rising labour market participation, particularly among women, and growing equality of opportunity have been a source of growth. Europe needs to think carefully, however, about how it can help people develop the skills of tomorrow.

• 51% of EU firms say the scarcity of skilled workers was a major barrier to investment in 2024, up from 39% in 2016. But this concern has not resulted in more firms offering training.

Continued social investment is critical, as it helps improve skills, encourages participation in the labour force and facilitates labour mobility. If female labour force participation in all EU countries were raised to the highest level in the European Union, overall GDP could increase by 4%. Adding 1.5 million places in childcare would reduce the male-female employment gap by 5%.

The affordability of housing is also a major concern. In Europe, construction has suffered from low productivity and insufficient innovation, adding to the cost and time of delivering housing projects. Other barriers have also limited the housing supply, such as regulatory obstacles, difficult permitting processes and a lack of workers with the right skills.

A dearth of affordable housing prevents people from moving to areas with thriving job markets, such as fast-growing cities. This in turn negatively affects growth and productivity. People relocating within the European Union also have lower home ownership rates than people who have never moved, which has prevented some people from building up the wealth created by home ownership in the recent decades.