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Funding energy projects could resume the positive investment trend in CEE

When speaking about these unprecedented times, the European Investment Bank (EIB) sees Europe as in front of a choice. The recovery from the coronavirus pandemic provides a unique opportunity to transform the European economy so it can thrive in a new, more digital world. Moreover, the massive public funds dedicated to the recovery could also be instrumental in limiting climate change and preparing for its impact.

“We have witnessed a massive economic shock and an impressive policy response,” said Debora Revoltella, EIB Chief Economist. “Investment was hit hard. Now it is crucial to adapt to the new normal and deal with pre-existing gaps, both in the public and in the private sector.”

She underlined that in the public sector, investment plans for 2021 show a positive dynamic. The challenge lies mostly in maximising impact and the capacity to absorb planned investment.

“The recovery of corporate investment will depend, in part, upon a concerted policy response that instils confidence in European businesses about the trajectory of the recovery,” she continued. “Equity financing and risk-sharing initiatives between the public and private sectors will be key to unlocking the private investment needed to keep the European Union competitive and drive its green and digital transformation.”

COVID-19 abruptly halted the positive investment trend in CEE

When it comes to the Central and Southern-Eastern European (CESEE) region, she notes that investment activities were developing well, surpassing, in real terms, the 2008 pre-crisis levels in mid-2018 and EU fund inflows played a crucial role in helping government investment to maintain a stable level. However, COVID-19 abruptly halted the positive investment trend.

“The results from our latest firm-level survey in the region show that businesses in the CESEE region are more likely to reduce investment in the coming year than to increase: around 44 per cent of CESEE firms say they expect to invest less in 2020,” she points out. “Only 5 per cent of the companies expect to invest more. This picture is broadly in line with the EU average.”

She explains that when asked about the long-term impact of COVID-19, firms in the CESEE region highlighted more – compared to the EU average – the impact on their service or product portfolio and their supply chain. Fewer firms believed there would be an increased use of digital technologies or that there would be a permanent reduction in employment due to COVID-19 than across the EU.

“Over half of firms in CESEE countries (56 per cent) have already invested or plan to invest in the next three years in measures to tackle the impact of weather events and reduction in carbon emissions,” she tells CEENERGYNEWS. “This is lower than the EU average (67 per cent). As the main long term barriers for investment in the region, companies cited uncertainty about the future (82 per cent) and the availability of skilled staff.”

Investments in digitalisation, innovation and climate more important than ever

According to the new edition of the EIB Investment Report 2020/2021 Building a smart and green Europe in the COVID-19 era, in the post-pandemic “new normal”, investments in digitalisation, innovation and climate will be more important than ever before. Without such investments, large sections of Europe’s economy risk falling behind.

In 2019, EU investment in climate change mitigation increased gradually: 2.7 per cent from a year earlier to 175 billion euros. However, according to the European Commission, also the gap between the European Union’s climate objectives and actual climate investment is growing. Investments in the continent’s energy system would need to rise from an average of 1.3 per cent of GDP per year over the last decade to 2.8 per cent of GDP over the next decade if the European Union is to meet its goal of cutting greenhouse gas emissions by 55 per cent by 2030. Adding investments in transport brings the total over the next decade up to 3.7 per cent of GDP per year.

Increases were registered in all areas except for energy efficiency. In particular, renewable energy investment, mainly wind and solar PV, increased 7.8 per cent as a result of project commitments made in previous years, but this rise also masked a slowdown in new commitments. For Europe to harness the full potential of decarbonised energy systems, investment is needed in more expensive and less mature clean energy technologies, such as hydrogen and carbon capture and storage.

The report finds also that investment needs set out in Member States climate plans are not sufficient to achieve EU climate objectives. The sum of the Member States’ investments is slightly below the 260 billion euros required annually to meet the 40 per cent emission reduction target. In line with the new target of 55 per cent, investments should be scaled up to around 340 billion euros a year.

In particular, investment needs are higher for Central and Eastern Europe (as a share of GDP) and for energy efficiency measures. Central and Eastern European countries started the decarbonisation process later than Western European countries and more effort is needed for them to catch up.

Challenges for the CEE region

“Policy actions at the European level need to address regional disparities and promote social cohesion,” underlines Mrs Revoltella. “Across Europe, differences in progress on digitalisation and climate-related investment are huge, while firms and municipalities in Western and Northern Europe are often very advanced and many cohesion regions are at risk of being left behind. At the same time, job losses through automation and decarbonisation will not be felt equally across regions, with the risks of this twin transition tending to concentrate in Central and Eastern Europe.”

Just looking at the energy sector, clean energy employment is set to increase to over 1.1 million jobs by 2030 in Europe, with about 60 per cent in highly skilled positions, emphasising the need for workforce training.

“You could now decide to concentrate on delaying the energy transformation and preserving the old jobs, or you could try to anticipate the creation of clean energy employment and retrain people to potentially enter into the market for these clean energy jobs,” Mrs Revoltella says. “That’s the kind of policy that we should try to push forward.”

According to her, there is a need if policies that actively foster social cohesion, such as measures to promote employment, facilitate the reallocation of workers, advance decent work and offer local opportunities for displaced workers.

“On the positive side, the most at-risk regions also tend to present some of the greatest needs and opportunities for investment for energy-efficiency improvements to buildings, other forms of decarbonisation and digitalisation,” she adds. “The adoption of digital technologies and infrastructure improvements, including at the municipal level, could provide the kind of counter-cyclical employment boost the economy needs. These are areas where the upcoming Invest EU and the Just Transition Fund can play an important role.”

She goes on saying that inclusion and cohesion will also depend on active support for re-training and the propagation of digital skills. The limited availability of skilled staff remains the second most important barrier to investment. With 42 per cent of the EU population lacking basic digital skills, reforms targeting adult learning programmes as well as broader participation are needed to deal with the risks of a growing gap in workers’ skills and further polarisation of the labour market. Online learning creates new opportunities, but it must be coupled with investment in quality education to address inequalities and provide a foundation for life-long learning.

“Another key challenge for the region will be its capacity to absorb investment and financing provided by EU and national support packages,” she concludes. “To successfully implement these public investments, you need proper planning, a good local administration and technical capacities. Cooperation with EU institutions and other partners will be key here.”

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