(Bloomberg) -- The European Investment Bank joined European Central Bank President Christine Lagarde in urging the region’s governments to invest to nurture competitiveness and shore up economic expansion.
In its annual investment report released on Tuesday, the European Union lender zeroed in on glaring gaps across the 28-nation bloc -- from infrastructure and climate change to workers’ skills -- that are holding back growth. It warned that an increasing number of companies are preparing to cut spending, adding urgency for governments to respond.
“The large-scale public investment needed to support infrastructure digitization and the zero-carbon transition will require comprehensive and detailed medium-term planning,” the Luxembourg-based lender said. “Given weak growth and very low long-term interest rates, governments with available fiscal space should consider front-loading this investment as much as possible through increased borrowing.”
The EU’s lending arm can claim to be the world’s biggest multilateral financial institution, with more than half a trillion dollars in outstanding loans. It attracted headlines this month when announcing a new climate-change strategy intended to stop its funding of fossil-fuel energy products.
The EIB study follows repeated calls by the ECB for more spending by governments with the space to do so. Lagarde picked up on that theme in her first major speech as president on Friday, calling for a new “policy mix” that would make full use of its potential to unlock stronger domestic demand.
The report on Tuesday drew on a survey of 12,500 European companies that showed growing pessimistic about the political, regulatory and economic environment. The number of manufacturing firms that plan to cut investment has risen for the first time in four years.
Meanwhile, infrastructure investment in Europe is now at a 15-year low of 1.6% of economic output, according to the EIB, which listed a number of examples where spending has lagged behind its two biggest global rivals.
European companies make up only 13% of those that have joined the group of top spenders on research and development since 2014, compared with 34% for the U.S. and 26% for China. Even investment in climate-change mitigation -- at 1.2% of economic output -- is less than in the U.S. and represents a little over one-third of what China is spending.
To achieve a net zero-carbon economy by 2050, the EU must raise investmentin its energy system and related infrastructure to more than 3% of economic output from around 2%, the EIB said. The private sector will need to help, it said.
In the meantime, a lack of staff with appropriate skills remain the most severe obstacle to investment, according to 77% of companies in the survey. Removing this constraint “could theoretically raise EU productivity,” the EIB said.