href="#u046ce0d1-b341-5e95-b379-4a5aec5a46f8">Chapter 6 points out that investor interest is gradually shifting towards companies with clearly defined sustainability goals, but many issues remain. For instance, the uncertainty surrounding the true green content of financial assets reduces investors’ ability to assess their merits. Enhanced information and the development of simple and transparent standards should alleviate major impediments to stronger growth. The important role played by banks in the European Union will require enhanced disclosure about the exposure of bank assets to climate risks.
The digital transformation is taking centre stage, affecting virtually all sectors of the economy. The global innovation landscape is changing rapidly due to the growing importance of digital technologies and the emergence of China. Chapter 7 notes how European firms are lagging when it comes to innovation in the fast-growing digital sectors such as software and computer services, which may create challenges for long-term competitiveness. Furthermore, European firms are not only trailing in digital innovation, but also in digital adoption. In the European Union, 37% of firms remain non-digital, compared with 26% in the United States. Firms say that access to digital infrastructure is more restricted in the European Union compared with the United States. Higher rates of digital innovation and adoption are linked to greater job creation and resilience, but also to higher investment in climate change mitigation and adaptation – investment that is crucial for achieving ambitious European climate targets.
Innovation in green technologies will play a key part in the transition to a carbon-neutral economy. Current technologies are insufficient for meeting the climate goal without significant disruptions to lifestyles in advanced economies or development in emerging economies. Hence, innovation is essential to producing the clean technologies needed for a smooth transition. Chapter 8 builds on an analysis of patent data and the results of the online survey with Ipsos on green innovation to study the important symbiosis between digital and green technologies. The authors stress that technological advances will need to permeate every aspect of our lives, from energy systems to materials and land use, if we are to successfully navigate the transition to carbon neutrality. Digital technologies are expected to make a major contribution to these innovations.
The European Union is currently leading the way in the joint development of green and digital technologies. The transition will require more than creating knowledge. That knowledge will also have to be shared and adopted. The European Union also seems to excel in knowledge diffusion compared to global peers, but this diffusion tends to remain within national borders.
Efforts by cities and municipalities will be instrumental in building a digital and green future. Chapter 9 shows that local government investment in green and digital infrastructure is important for pulling in private investment in climate measures. Gaps in green and digital infrastructure vary across the European Union and exacerbate regional inequality.
The report concludes by studying the impact of digitalisation and the green transition on social cohesion. Chapter 10 looks at how digitalisation and the green transition will create and destroy jobs – while at the same time changing the relative importance of occupations. That upheaval will cause significant shifts in demand for labour, with profound social and economic consequences. This shift is likely to affect regions and countries in the European Union differently, with some parts at greater risk. Dealing with these risks will require strong local governments that can identify future job opportunities, provide adequate support for individuals and devise strategies to transform and revitalise local economies. Providing workers with the necessary skills is essential to managing the disruptions of the twin green and digital transition and to maximising its benefits.
Throughout the report, EU countries are often grouped into three regions with common features. Central and Eastern Europe contains the countries that have joined the European Union since 2004 and that rely substantially on EU cohesion and structural funds. Cyprus, Greece, Italy, Malta, Portugal and Spain form the Southern Europe group. The remaining EU countries are in Western and Northern Europe. While geographical location defines the groups, the countries within each group share many common structural economic characteristics, thereby justifying the regions’ usefulness in economic analysis.
Chapter 1
The macroeconomic environment
The measures taken to fight the coronavirus pandemic have severely disrupted the global economy. Trade and investment channels have been interrupted, the movement of people has been seriously restricted, and businesses have been forced to operate at reduced capacity or to temporarily abandon their operations. Confidence levels have fallen markedly and labour markets have frozen. Prior to the second lockdown, the International Monetary Fund (IMF) and other institutions were already expecting gross domestic product (GDP) in the European Union to shrink by 6% to 8%, a fall unrivalled since the Great Depression.
In Europe, the policy response has been swift and unprecedented. Monetary policy, national fiscal policies and European economic policy have all contributed to circumventing the economic fallout. The response from EU institutions, Member State governments and the European Central Bank (ECB) was quick and comprehensive. To some extent, the magnitude and nature of the action are a game-changer for Europe. An obvious example is the joint issuance of debt securities by Europeans – a crisis response that was very well received by the markets.
Subsequent virus waves remind us that pandemic concerns will dwarf most of the other policy issues until a vaccine is widely distributed, which won’t be until well into 2021. Policy measures were designed in emergency situations, but second lockdowns around Europe illustrate that a series of waves cannot be ruled out. Because the side-effects of the lockdown measures might be expected to intensify as the crisis becomes more protracted, there is good reason to revisit policy measures to fine-tune the balance between short-term support and longer-term programmes. In addition to shoring up short-term demand, the policy package can become truly instrumental in ensuring the success of the three pillars of the recovery: resilience – greening – digitalisation.
Introduction
In 2019, the European economy was gradually slowing down after six years of relatively weak expansion. The slowdown could be traced back to more sluggish international trade resulting from tensions between the United States and some of its main trading partners. Just as the export-oriented engines of European growth were running out of steam, the coronavirus pandemic broke out. The virus spread quickly around the globe, forcing governments to take sweeping measures in an attempt to arrest it. The associated restrictions brought whole swathes of the EU economy to a near complete standstill with severe implications for consumer spending, investment and overall economic activity. The ECB deployed a major policy package in response, and this time, domestic fiscal policies and European policy also joined forces to safeguard the European ecosystem during the lockdowns imposed in the various countries.
This chapter sets the stage for the analysis provided throughout this report by giving an overview of the economic situation at the outbreak of the pandemic. The first section outlines the macroeconomic environment in Europe and the world in the first half of 2020, focusing on the link between EU economies, global growth and international trade. The second section details the latest developments in real GDP growth and labour markets in the European Union. Four boxes provide further detail. Box A quantifies the likely effects on GDP of the re-introduction of government restrictions in the fourth quarter of 2020. Box B frames the economic shock due to the pandemic in a historical perspective.