Retooling Europe s Economy D. Revoltella European Investment Bank Bruegel Event, December 14 1
Agenda The European economy where we stand Weaknesses The cost of inaction Retooling Europe...in a socially and environmentally sustainable way 2
Investment is back and finance conditions remain accommodative Investment is back Real gross fixed capital formation, % GDP Cost of finance substantially reduced Average firms cost of credit (short and long term bank and bonds) 3 5.5 ca 4 bps decline 25 3.5 1.5 5 7 9 11 13 15 17 15 95 98 1 4 7 1 13 16 Periphery Cohesion Other EU Finance not a major obstacle % firms stating finance is a major obstacle to investment 5 4 3 1 EU Others Periphery Cohesion Source: AMECO (1), ECB (2) and EIBIS 18 (3) 16 17 18 3
Headwinds are strengthening and low long-term growth is a concern 3 Headwinds are strengthening Firms considering each factor supportive, minus firms considering it negative Low long-term growth Potential output growth EU 3 1 2-1 - 18 17 1-3 Internal Finance External Finance Sector Outlook Economic Climate Political and Regulatory Climate 97 1 5 9 13 17 Source: EIBIS 17 and EIBIS 18 (1), AMECO (2) 4
Agenda The European economy where we stand Weaknesses The cost of inaction Retooling Europe...in a socially and environmentally sustainable way 5
Manufacturing Services Manufacturing Services Europe lags in investment in machinery & equipment and in intangibles, causing concerns about technological transformation Investment gap EU vs US Investment in Machinery&Eq and in Intangibles, % GDP European firms invest less in intangibles % total firms investment 8 7 6 5 4 3 2 1 2 4 6 8 1 12 14 16 18 1 8 6 4 Intangible assets EU Machinery&Eq US Machinery&Eq EU Intangibles US Intangibles EU US Land Machinery&Eq R&D Software Training Organisation Source: AMECO (1) and EIBIS 18(2) 6
EU lacks leading innovators, particularly among young firms and new global leaders Europe has less leading innovators Innovation profiles by age of the firm 1 Europe has less new global leaders Share of top 2,5 R&D global spenders 5 8 4 6 3 4 1 Young Old (1+ years) Young Old (1+ years) EU US Japan China South Korea Others EU US Basic Adopting Active innovators 6 17 New to the club (after 11) Innovation profiles are defined based on firms spending on R&D and firms introduction of products and processes new to the firm, country or world. % firms in the top 25 R&D global spenders in 6 and 17 and % of new entrants to this group after 11 Source: EIBIS 18 (1) and EU Industrial R&D Investment Scoreboard (2) 7
EU lacks leading innovators, particularly among young firms and new global leaders 1 Europe has less leading innovators Innovation profiles by age of the firm Leading Innovators Europe has less new global leaders Share of top 2,5 R&D global spenders 5 8 4 6 3 4 1 Young Old (1+ years) Young Old (1+ years) EU US Japan China South Korea Others EU US Basic Adopting Active innovators 6 17 New to the club (after 11) Innovation profiles are defined based on firms spending on R&D and firms introduction of products and processes new to the firm, country or world. % firms in the top 25 R&D global spenders in 6 and 17 and % of new entrants to this group after 11 Source: EIBIS 18 (1) and EU Industrial R&D Investment Scoreboard (2) 8
Productivity Exporting FDI Growth of Sales Liquidity Leverage EBITDA Margin ROIC Financially Constrained Dissatisfaction with Collateral Requirement The EU financial sector is ill-suited to support innovation 8 6 4 Difference between innovating and non-innovating firms (% deviation from non-innovators, defined as non-patenting firms) - More productive/competitive In better financial health Firm Characteristics Financial Health Financially Constrained Constrained Source: EIBIS 18 9
77% of firms consider lack of skills an impediment to investment and more innovative firms are even more concerned Lack of staff with the right skills as an impediment to investment % firms Other EU 18 Other EU 17 Other EU 16. Lack of skills, by type of firms % firms Basic Cohesion 18 Cohesion 17 Cohesion 16 Adopting Periphery 18 Periphery 17 Periphery 16 4 6 8 1 Active innovators 7 75 8 85 73% of firms provide training; however 21% believe investment in training was insufficient Source: EIBIS 18 1
Enabling infrastructure is crucial, but investment in infrastructure largely lags the recovery Infrastructure investment remains low Investment in infrastructure % GDP Public sector expenditure composition Difference between 17 and 1995-16 average in % of GDP 2.5 2 1.5 1.5 Non-PPP Project PPP Corporate 6 4 2-2 -4 5 6 7 8 9 1 11 12 13 14 15 16 17* Government Low investment in infrastructure is not due to a saturation effect Need to re-prioritise, enhance governance and technical capacity, and clarify incentives -6 Periphery Cohesion Other EU Capital expenditure Interest Current expenditure - * Provisional Source: EIBIS Infrastructure database (1) and AMECO (2) 11
Institutional framework is key In the EU: 66% of firms consider business regulation an impediment to investment 43% of municipalities with poor infrastructure say technical capacity is a major obstacle In regions with high quality institutions firms are 3x more likely to innovate 63% of firms consider labor market regulation an impediment to investment 9x more likely to introduce a patent Source: EIBIS 18 12
Agenda The European economy where we stand Weaknesses The cost of inaction Retooling Europe...in a socially and environmentally sustainable way 13
Digitalisation is the next challenge; EU delays come at a cost EU lagging in adoption, particularly in the service sector % firms adopting digital technologies, partially or fully Cost of delayed adoption % firms stating that sales would have been lower, had they not invested in digitalisation 9 8 7 6 5 9 8 7 6 5 4 4 3 3 1 1 EU US EU US EU US EU US Manufacturing Services Manfuacturing Services Partially Fully There is a cost in delayed digitalisation in terms of productivity, investment and innovation Source: EIBIS Digital and Skill Survey 18 14
Net balance of firms expecting an increase in market entry (in %) Bottom Quintile Quintile 2 Quintile 3 Quintile 4 Top Quintile Bottom Quintile Quintile 2 Quintile 3 Quintile 4 Top Quintile Winner takes all : the cost of delay for Europe might be long lasting Will digitalization increase competition? Expectations by productivity quintiles for fully and non fully digital firms 5 4 3 1-1 - -3 Not Fully Digital Fully Digital Firms are grouped by quintile in terms of Total factor Productivity. The graph shows the percentage of firms that expect digitalisation to increase competition minus those that expect competition to decrease (net value). Source: EIBIS Digital and Skills Survey 18 15
Agenda The European economy where we stand Weaknesses The cost of inaction Retooling Europe...in a socially and environmentally sustainable way 16
Retooling Europe s Economy Innovation, Digitalisation & Skills CMU Encourage European savings towards most productive use, beyond national bias Banking Union EU Instruments (EIB, EU budget) Scaling-up SMEs Green Finance & Energy Transition National Focus Strategic Infrastructure 17
Retooling Europe s Economy Encourage a dynamic, innovative business environment: Improve regulatory conditions for firm growth, and market entry and exit Address the EU equity gap and growth stage trap, on the demand and supply side Commit to market efficiency: Commit to further deepening the single market, particularly for services (crucial for digitalisation incentives) Work on creating the conditions for a true European digital market 18
Retooling Europe s Economy Unblock critical investment in infrastructure and innovation: Better infrastructure governance, complement finance with technical capacity Support innovation and adoption of new technologies, considering complementarities between asset classes and private/public investment Incentivise all intangibles, not only R&D Work together on skills: The technological skills gap can be an opportunity for win-win policies addressing at the same time competitiveness and social inclusion with potential for more EU coordinated action 19
Agenda The European economy where we stand Weaknesses The cost of inaction Retooling Europe...in a socially and environmentally sustainable way
The Retooling of Europe must be socially and environmentally sustainable 18% EU jobs at risk of automation Investment in energy efficiency has to increase fourfold to meet new EU targets 65% of EU firms expect further digitalisation to lead to more demand for high skilled staff, Big data regulation and ownership EU investment in climate change mitigation is vs 24% expecting more demand for low-skilled staff Cybersecurity 1.3% of GDP down from 1.6% in 12 Source: EIBIS 18 and Digital and Skills Survey 18 21