EIB Investment Survey 2023: European Union overview

Corporate investment in the European Union is holding up better than expected, despite slowing economic growth, tightening credit and rising uncertainty. While conditions are difficult, firms realise they need to make up for a lack of investment over the past three years in critical areas like digitalisation, climate change and the green transition, according to the results of the most recent EIB Investment Survey.

Two factors have buoyed investment: Strong demand after the pandemic helped firms build up financial reserves, and government policies had protected many of them from the worst effects of lockdowns and other brakes on economic activity. As those financial buffers shrink, higher interest rates and more onerous credit conditions could threaten investment.

European businesses need to invest strongly to remain competitive at home and internationally. Firms are increasingly under pressure to transform their businesses in several key areas, such as digitalisation, energy efficiency and their ability to withstand trade shocks.

At the same time, climate change is a pressing problem. EU firms are taking steps to reduce greenhouse gas emissions and invest in climate change initiatives, but they still need support with innovation and finance. European companies were strongly buffeted by the energy shock caused by Russia’s invasion of Ukraine, and they have reacted by focusing on energy savings and energy efficiency improvements, while also seeking to pass higher costs onto customers.

The report’s analysis of the macroeconomic context, which includes a high level of uncertainty and tight monetary policy, suggests that corporate investment remains higher than expected considering the headwinds.

• The share of EU firms that invested in the past year (85%) has rebounded to pre-pandemic levels, and investment per employees is even higher.
• When they were interviewed in the spring of 2023, firms still had a positive outlook on investment, despite more difficult credit conditions and slower growth. The difference in the share of firms expecting to increase investment vs. those expecting to decrease investment in 2023 was 14%.

So far, investment has been buoyed by the strong finances of firms and policy support rolled out during the pandemic.

• In addition, 16% of European firms used government grants to finance investment, supporting 26% of their total investment. This support has fallen rapidly, from 21% of firms receiving grants the prior year.
• European firms remain positive about the availability of internal finance, with 7% more firms expecting an improvement rather than a decline in the next 12 months.

As companies spend down their financial reserves, they will be forced to look externally for funds. At that point, they will feel the bite of more expensive credit. The outlook of firms for the political and economic climate is also turning negative, with more EU companies expecting this to deteriorate in the next 12 months.

• The share of finance-constrained firms remains high at more than 6%. The share varies from 3% to 18%, depending on the EU country.
• The share of firms dissatisfied with the cost of finance has increased dramatically (to 14% from 5%). Looking forward, the share of firms that expect their  external financing conditions to deteriorate is 9 percentage points higher than the share of firms that expect it to improve, and small businesses are the most pessimistic.
• The harsher financial conditions are hitting innovation particularly hard. The most innovative, and therefore risky, firms are facing some of the harshest conditions.

The rapid evolution of digitalisation, high energy costs, and the green transition are pushing firms to invest to remain competitive. Along with tighter, more expensive credit, 81% of firms say they are having trouble finding employees with the skills needed to push forward investments. Firms are making progress, however, particularly in digitalisation and energy efficiency. 

• On digitalisation, EU firms are closing the gap with the United States. 70% of EU firms now use at least one advanced digital technology. But while EU firms have accelerated investment in advanced digital technologies, they still need to reap the benefits of those investments. EU firms also need to remain vigilant and continue investing in artificial intelligence, a key digital technology, to avoid falling behind US firms. (35% of firms in the United States use big data/artificial intelligence, vs. 29% in the European Union).
• Firms accelerated investment in energy efficiency. The share of EU firms investing in energy efficiency jumped 11 percentage points to 51%. Altogether, 78% of EU firms have responded to the developments in the energy markets with measures to save energy.
• Energy costs, however, rose for 83% of EU firms. 68% of EU firms saw energy prices rise more than 25%, compared with only 30% of US firms. Electricity prices in the European Union are, on average, triple those of the United States.

Nearly one-third (31%) of EU firms say that the climate transition and the ongoing switch to greener energy sources present a risk to their business. However, 29% of firms see the green transition as an opportunity.

• The share of European firms that say climate change is already affecting their business has jumped 7 percentage points since the previous survey. 64% of firms now say climate change is posing physical risks to their business.
• 36% of EU firms have taken action to address climate-change risks. Large firms tend to be more active. However, only 13% of firms have bought insurance to protect against physical risks like extreme weather.
• More than half of EU firms (56%) have invested in tackling the causes and effects of climate change, and 54% plan to invest in the next three years. That share is significantly higher than US levels, where 42% of firms have invested and 40% plan to invest.