The EU is heading for an investment crisis

• The EU is facing huge funding gaps to deliver on the pillars of its Strategic Agenda 2024-2029.
• Climate change alone will require the EU to invest between 5% and 10% of its GDP each year for the coming decades. 
• In today’s context of scarce public money, EU leaders are counting on capital markets to provide the necessary money, but capital markets may only be able to fund a third of those investments.
• Not making the necessary investments over the coming years would risk  economic disruption and the subsequent collapse of fiscal revenues, at a cost several times greater than the investments above.
• The report urges the European Commission to confirm the reality of this investment crisis: this could create the conditions for a new discussion about the financial architecture of the EU.

The European Union is heading for an investment crisis, Finance Watch has warned in a new report.

The public interest group said EU leaders are counting on capital markets to fund the EU’s investment needs. However, only around a third of the most essential investments needed are suitable for private financing, an aspect so far overlooked in the debate around Capital Markets Union. This means that two thirds of the EU’s essential strategic investments could be left unfunded.

The report calls on the European Commission to make its own assessment, by quantifying how much a fully successful capital markets union could contribute to the EU’s sustainability and strategic goals, so that any remaining investment gap can be evaluated.

The report warns that if global temperatures reach +3° C by the end of the century, as currently predicted, fiscal and social costs would soar to levels that could be unbearable for public finances. While some types of upfront investment, such as certain renewable energy projects, can be funded in capital markets, most of the upfront investments needed to reduce this danger would not produce a sufficient financial yield for private finance. They must either be funded publicly, which is currently not feasible, or risk being left unfunded. The situation calls for fresh thinking about how the EU can avoid creating a future fiscal timebomb caused by under-investment.

The report’s author, Finance Watch chief economist Thierry Philipponnat, said:

“With well targeted regulation and a lot of political will, we think capital markets can fund up to a third of the EU’s climate needs, in cases where the financial yield is sufficient. But if the other needs are not funded and the EU is exposed, among others, to unmitigated climate change, governments will face much higher fiscal costs in future.”

Amidst existential threats for Europe, EU leaders agreed last month a new EU Strategic Agenda for 2024-2029 calling for investments in green and digital transition, economic competitiveness and strategic autonomy among other things. This follows Mario Draghi’s earlier remark that the EU will need an “enormous amount of money in a relatively short time” and Enrico Letta’s recommendation to channel “all necessary public and private resources” towards a fair, green and digital transition.

Finance Watch Secretary General, Benoît Lallemand, said:

“Enrico Letta is right that investing in and financing this transition is not just a financial decision and that we must channel all necessary public and private resources towards it. To succeed, EU leaders will have to challenge their assumptions about how much capital markets can contribute.  If private finance will only cover 30%, as we fear, then it must be a top priority for incoming leaders of the European Commission and European Parliament to open a pragmatic discussion about the EU’s financial architecture so that their goals can be achieved.”

– ENDS –

Notes to editors:

• Former ECB president Mario Draghi made his remarks on the EU’s need for an “enormous amount of money in a relatively short time” to EU ministers at a meeting in Ghent on 24 February 2024 (Politico). He is due to report to the EU later this year on more ambitious proposals to boost the EU’s competitiveness.
• In April 2024, Enrico Letta’s report on the Single Market recommended “channelling all necessary public and private resources” towards the goal of making Europe’s industrial capacity compatible with the goals of the fair, green, and digital transition (report).
• The EU Strategic Agenda for 2024-2029 was affirmed by the European Council on 27 June 2024 (press release). As potential sources of funding, the strategy refers to capital markets, bank financing, and public investments including through the European Investment Bank. It does not comment on how much of the transition requirements would be suitable for funding from these sources.

Contact

To arrange an interview with Thierry Philipponnat, Chief Economist at Finance Watch, please contact Max Kretschmer, press officer at Finance Watch, at [email protected] or call on +44 (0) 7999926545