Economic shocks and the energy crisis are threatening the long-term investments that are essential to enable the green transition and economic growth.
Turbulence in the banking sector has further undermined investor confidence in an economic environment already shaken by repeated crises. Stress has spread to stock markets and most banking sectors around the world, and European banks have been affected even more, as Credit Suisse was subjected to intense market pressure.
The consequences of the banking sector's problems, as well as the changing economic environment and the impact of climate change and digitalisation, were the main topic at the latest Vienna Initiative forum organised by the National Bank of North Macedonia, which took place in Skopje this year.
Adapting to risk appetite
The European and Western Balkan banking sectors are based on a more traditional business model (deposits and lending to households and businesses), which is less exposed to interest rate hikes or rapid deposit outflows. However, pressure on banks is likely to lead to a stronger tightening of financial conditions and risk appetite. Credit conditions for longer-term or riskier positions (financing for innovation, intangible assets) will be particularly tight. This new shock requires an effective response to mitigate the long-term consequences. As former British Prime Minister Winston Churchill said before the end of the Second World War: “Never let a good crisis go to waste”.
The series of shocks in recent years may force governments to postpone some essential national investments in innovation, energy and digitalisation. We believe these investments are essential to enable the “green” transition, not least because they are, alongside education, the main drivers of long-term economic growth. Therefore, they should not be postponed.
The private sector is equally affected. From a 2022 survey by the European Investment Bank on Central, Eastern and South-Eastern Europe, it is clear that economic uncertainty, high energy costs and a lack of skills are the three main elements that continue to hinder long-term investment, particularly among small and medium-sized enterprises.
A just transition to climate neutrality
These constraints cannot be overcome by public resources alone, as they will never achieve a sufficient result. Governments must create the right incentives to boost private investment in these key areas. For example, offering simplified and digital administrative procedures to help households and businesses invest in renewable energy and energy efficiency is the right path forward. In short, sustainable investment expenditure from both the public and private sectors will remain the main driver of growth in Europe. This will prepare us for the future rather than making us dependent on old, energy-intensive technologies.
The European Investment Bank is active in all key sectors to provide this much-needed support, including for projects with high impact and sometimes higher risk. Following the European Investment Bank’s 2020 commitment to provide €1 trillion in green investment by 2030, the EIB Group has supported €222 billion of such investment, which is almost a quarter of the target set. In 2022, the EIB invested €36.5 billion in climate action and environmental sustainability projects, which accounted for 58% of the total lending volume last year.
As the bank that pioneered the purchase of green bonds in 2008, it supports innovative green projects, such as floating offshore wind turbines, battery storage and green hydrogen. At the same time, however, we are also clearly aware of the other side of the coin. The green transition will drive growth and job creation, but it will also affect the most vulnerable communities and regions. Therefore, the EIB’s approach to a just transition will include financial and advisory tools to protect more vulnerable regions and countries on their path to decarbonisation.
Expanding the scope beyond the European Union
Outside the borders of the European Union, the EIB’s cooperation with international partners is currently being expanded within the framework of the European Investment Bank Group’s division – EIB Global, which is dedicated to EIB operations around the world. Under this organisational structure, the European Investment Bank is on track to facilitate at least one-third of the €300 billion in investments under the new EU strategy to promote sustainable projects, Global Gateway. In addition, the Western Balkans will benefit from this strategy through the European Commission’s Economic and Investment Plan, which aims to mobilise up to €30 billion in investment to promote the EU accession process, the “green” and digital transition, connectivity, private sector growth and job creation. The plan also envisages combining EU investment grants and technical assistance to prepare and implement key projects.
The EIB’s task in the Western Balkans is to provide countries with access to further infrastructure development that is socially, economically and ecologically sustainable. In addition to financing, EIB project-related technical assistance improves the quality of lending operations and increases their development impact. Since 2009, more than €10 billion has been invested in infrastructure and private sector development in the region.
“Net zero” economy is growing
In the face of the energy crisis, climate goals must be reconciled with the need to ensure energy security and long-term security of supply. To support the European Commission’s REPowerEU plan, the EIB will support an additional €30 billion in clean energy investment over the next five years. This emergency measure will help the European Union end its dependence on fossil fuels, meet climate targets and boost decarbonisation. In 2022, the EIB financed a record €17 billion in energy investments in the European Union. Companies that have invested in energy efficiency in recent years have certainly acted wisely and may have earned significantly higher returns as a result than many other investments.
It seems that the net-zero economy will grow exponentially (very rapidly, in a way that can be described by geometric progression) over the next decade. According to the International Energy Agency, the investment needed by 2030 will reach €600 billion per year. This opens up huge opportunities for the European Union and other countries around the world.
To seize this opportunity, we must work together to ensure that our actions are complementary. Targeted cooperation will be crucial in the future to make our economy more resilient to shocks. Long-term investment in digitalisation, energy security, decarbonisation and innovation must go hand in hand with short-term measures in response to current disruptions. We need to provide large-scale support for green technologies and green production to meet our climate goals in Europe and maintain competitiveness and resilience. To address this huge challenge, the EIB, as the European Union’s bank, stands ready to work with the European Commission to develop a new instrument that would allow Europe to provide equity-type support for the future of its “green” industry.
Article first published in Bloomberg Adria.