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    This time was different. The pandemic gutted the European economy, causing the steepest drop in output since World War II. Bold policy action by the European Union and individual Member States, however, staved off an economic catastrophe.  

    By providing money and support to firms and individuals, governments largely shielded the economy, minimising the damage caused by lockdowns and restrictions on movement. Those efforts enabled businesses to gear back up quickly as economies reopened.

    The European Investment Bank’s Investment Report for 2021/2022 provides insights on how the pandemic disrupted economic activity, and the toll it took on firms across the European Union. Key takeaways:

    • Sales fell dramatically at many European firms. While lower sales hurt investment, the impact was less than originally feared.
    • Bold policy response from governments enabled businesses to continue operating and individuals to remain employed. Support went to firms that it needed it most.
    • Public support compensated for the loss of household income and helped to sustain demand.

    The European economy is recovering. However, new waves of the virus have hit countries in different ways, making the recovery more uneven and uncertain. Asymmetries are also emerging among sectors, regions and between larger and smaller firms, along with pockets of economic and social vulnerability.

    • The support helped preserve jobs and skills, but it couldn’t prevent a widening of social inequalities and a dip in investment in education and training.
    • The massive government intervention increased public debt, which poses potential risks, particularly for EU countries that were already heavily indebted.
    • Some firms are seizing the pandemic as an opportunity to transform, by increasing their digitalisation and climate preparedness.

    About the report

    The Investment Report, issued annually by the European Investment Bank, provides a comprehensive overview and analysis of investment and the financing of investment in the European Union. The report builds on a unique set of databases and survey data, including the EIBIS, an annual survey of 12 500 firms in Europe. It provides critical information for policy debates on the need for public action on investment and on the types of intervention that can have the greatest effect. The Key Findings provide a summary of the full report.


    Investment impact

    The COVID-19 crisis affected firms unevenly. Less productive firms tended to suffer more, while digital firms showed more resilience. Sales at small firms declined considerably, around 25%. Smaller firms were also more likely than medium or large ones to lose sales.

    • Some 49% of EU firms suffered a drop in sales due to the pandemic, compared with 21% that showed an increase.
    • The pandemic weighed on investment. The share of firms reporting they had invested in the previous year declined to 79% in the EIBIS 2021, compared with 86% in the previous year.

    Throughout Europe, real gross fixed capital formation — a measure of investment — declined substantially, but less than predicted. It took only two years for investment to recover from the pandemic shock, compared to more than a decade after the global financial crisis.

    • By the end of the second quarter of 2020, real investment in the European Union had fallen a dizzying 14.6% compared with the fourth quarter of 2019. It quickly rebounded, however, and returned to its 2019 level by the second quarter of 2021.
    • Government investment rose steadily, increasing 7% in 2020 in Southern and Central and Eastern Europe, and 1% in Western and Northern Europe, relative to the previous year.


    Economic risks

    Public support for firms was life-saving, and largely based on need. Because public support was tilted towards firms facing greater declines in revenue, it successfully helped otherwise healthy firms tackle short-term difficulties. That support also prevented some firms from trimming or entirely scrapping their investment programmes.

    • Across the European Union, 56% of firms received some kind of policy support in the form of guaranteed credit, support for social security contributions or deferred payments,
    • Up to 35% of European small and medium firms in manufacturing and services say they would have faced an existential threat had they not received support, according to a detailed add-on module of the EIBIS.

    Most firms managed to weather the crisis, but pockets of vulnerability have developed as the crisis hit some economic sectors – tourism, restaurants, entertainment – harder. The share of firms at risk of default or insolvency has also increased, and this vulnerability is more concentrated in certain sectors. While corporate bankruptcies have remained surprisingly low, they could still rise, despite the recovery.



    Widened gaps

    Support for firms helped preserve jobs and skills, but it could not prevent a widening of social inequalities and a loss of investment in education and training. It did, however, keep firms from shedding employees and then having to find new ones during the recovery.

    • In Europe, furlough and short-time work schemes kept unemployment in check. The policy efforts, however, did not prevent the labour market from deteriorating for young people and for those with less education.
    • School closures are likely to have accentuated social disparities, with a greater impact on children who were already at a disadvantage.
    • The pandemic caused investment in employee training to decline, which could affect firm productivity and competitiveness in the future.


    Digital divide

    The pandemic has accelerated structural economic change, and European firms increasingly understand the urgency of digitalisation. The divide between faster digitalising firms and those going more slowly also appears to be growing, with an effect on jobs and wages.

    • 55% of firms see a greater need for digitalisation because of the pandemic. An increasing number of firms, 45%, think that a lack of digital infrastructure in some parts of Europe is constraining investment.
    • While EU firms have been digitalising as a response to the COVID-19 crisis, they have been less active than their US peers. 46% of EU firms have responded to the pandemic by becoming more digital, vs. 58% in the United States.
    • In Europe, 26% of firms are neither digitally advanced nor taking steps to become more digital, compared with 18% in the United States.
    • The uptake of advanced digital technologies did not improve at all in Europe in 2020-2021, remaining constant at around 61% of EU firms.


    Green transformation

    Firms are increasingly incorporating climate action into their strategies, particularly in regions that have experienced weather extremes. EU firms are also starting to understand the risks associated with the transition to a net-zero carbon economy. This is true of firms that work in traditionally “brown,” or higher carbon emitting sectors, as well as those in “green” sectors. Smaller firms, however, tend to be less aware of the challenges ahead.

    • Around 58% of EU firms say they are affected by the physical risks of climate change.
    • The share of firms planning climate-related investment rose to 47% in the EIBIS 2021, from 41% the previous year.
    • 46% of EU firms are adopting monitoring targets for carbon emissions and energy consumption.

    Firms are likely to respond more strongly to climate transition risks as they face greater requirements to report their emissions, and as the financial sector is pushed to detail the risk climate change poses to investment portfolios. The European Union could encourage climate investment by providing a clear decarbonisation strategy and advice on the funding and financial support available.