Corporate investment was growing in Europe – then COVID-19 hit

By Atanas Kolev

For many European firms, life at the beginning of 2020 was looking up.

They had taken advantage of the previous economic upturn to shore up cash and reduce their debt. Higher profits along with low interest rates and plentiful finance helped them to grow their businesses. In the summer of 2020, 80% of the almost 12 500 European firms that participated in the European Investment Bank Investment Survey (EIBIS 2020) said the previous year had been profitable.

That rosy feeling quickly evaporated, however, as the pandemic took hold in March 2020. The lockdowns and social distancing imposed across Europe forced many businesses to close down almost overnight. Some businesses watched their revenues dry up completely, and they had to rely on their cash reserves to pay for hard-to-reduce costs such as real estate and staff.

On average, firms lost one-quarter of their gross income in the second quarter of 2020, according to the Investment Report 2020/2021: Building a smart and green Europe in the COVID-19 era, a comprehensive overview and analysis of investment across the European Union published annually by Economics Department of the European Investment Bank. The decline was significantly more severe than the drop that firms witnessed during the last two recessions – the global financial crisis in 2008 and the European sovereign debt crisis in 2010.

 

 

 

Government turns on the tap

Fearing that the income loss would turn the pandemic into full-blown financial crisis, national governments and the European Central Bank adopted strong policies to maintain the flow of credit.

As a result, borrowing costs remained low, and firms took on more debt to pay their bills while they waited for the pandemic to blow over.

The government intervention avoided a financial crisis, and many businesses were able to stay afloat. Overall investment declined as the economy contracted, but the drop-off was lower than initially feared. While the flow of credit helped some firms to stay on track with their business plans and investments, it had a cost: increased debt.

 

 

 

The bright spot of public spending

Vaccination drives in numerous countries give hope that the pandemic is coming to an end. But the toll lockdowns and restrictive measures have taken on firms will leave them wounded for some time. Firms’ shattered finances and broken confidence won’t be repaired overnight. Government policies need to address their weakened state and help firms regain their footing, for example by improving their financial outlook through capital increases and debt-restructuring programmes. The easy flow of credit to firms should also be maintained.

One economic bright spot is the massive spending planned by governments, whether coronavirus recovery programmes or  huge infrastructure investments needed to deal with climate change. However you slice it, government investment in the next three years is set to increase. Making sure that investments help build competitive, digital and climate resilient enterprises will be key to the COVID-19 recovery and to ensuring long-term growth.