VoxEU Column COVID-19 Productivity and Innovation EU policies

EU firms and the COVID crisis: So far so good, but uncertainty, lack of skills, and pockets of vulnerability remain

The European economic policy response to the COVID-19 pandemic has ensured business continuity and shielded investment, but digital and green transitions are now ever more urgent. This column uses data on 12,000 European firms from the European Investment Bank Investment Survey to show that the pandemic spurred many firms to start accelerating transformation efforts. Policy should seek to support this momentum amid post-pandemic economic recovery.

The year 2021 was one in which many policymakers and economists breathed a sigh of relief. The pandemic is not over, but the worst of the economic fallout in advanced economies certainly seems to be. A significant rise in unemployment was avoided, thus mitigating fears that the crisis would have a large-scale scarring effect (Portes 2020, IMF 2021). Investment was relatively resilient and corporate bankruptcy rates even fell slightly.

Credit for these outcomes largely lies with the strength of the policy support deployed to keep businesses operating and prevent ripple effects through the economy and financial systems, as well as the sharp rebound in demand that comes with the lifting of lockdown measures (Djankov and Zhang 2021). 

The question remains, however, of how much these measures will have enabled firms to adjust to the emerging ‘new normal’ or how much they may have merely delayed problems, including by keeping resources tied up in what might otherwise be ‘zombie firms’.

Even with massive policy support, the impact of COVID-19 on the European economy was severe

The European Investment Bank Investment Survey (EIBIS)1 data reveal some of the impacts of what was a massive shock, albeit one felt asymmetrically across sectors and geographies. Some 49% of EU firms suffered a drop in sales due to the pandemic, compared to 21% with increased sales. Low (pre-crisis) productivity was a strong predictor of lost sales, and more digitally advanced firms proved to be slightly more resilient. 

Meanwhile, divergent effects by firms size and sector may fuel a degree of asymmetry across countries: compared with the pre-pandemic norm, the number of loss-making firms tripled in the hotels, restaurants, arts and recreation sectors, and doubled among transport firms, but other sectors were less affected. 

Small firms suffered a significant loss of sales (down at least 25%) more often than medium-sized and large firms; in the manufacturing sector, they were three times more likely to do so. Small and micro firms across sectors were also twice as likely to enter insolvency.

Impacted firms also delayed investment, to an extent. In 2020, the number of firms carrying out investment declined from 86% to 79%. Faced with declining sales, 23% of firms revised future investment plans downward, with only 3% planning to invest more. The greater the loss of sales in 2020, the less likely firms were to plan to invest more in the coming year than in the last.

Unsurprisingly, therefore, the process of transformation to a smarter and greener economy also slowed. The uptake of advanced digital technologies did not progress overall in 2020-2021, remaining constant at around 61% of EU firms. Meanwhile, COVID-19 seems to have led some firms to delay climate-related investment, with the share of firms carrying out investment to adapt to extreme weather events and to reduce carbon emissions decreasing slightly in 2021, from 45% to 43%.


Source: EIB Investment Survey 2021.

Policy support was lifesaving and helped to shield investment

Across the EU economy, some 56% of firms received some kind of policy support in the form of guaranteed credit, support for social security contributions, or delayed payments. According to the more detailed EIBIS Add-On Module, as many as 35% of European small and medium-sized enterprises (SMEs) in manufacturing and services would have faced an existential threat without the support they received. Moreover, the support was not indiscriminate but successfully directed towards firms that were more in need, being skewed towards firms facing a greater loss of revenue.

Where firms received some kind of policy support, the link between lost revenue and downgraded investment plans was significantly weaker: firms that received support were more likely to preserve their investment programmes. Investment in training also proved relatively stable, with European policy measures focused on allowing employees to remain in their jobs, although arguably it was not enough to keep pace with growing needs.

Looking forward, however, the pandemic has heightened the need for transformation…

The majority of European firms may have survived the pandemic relatively unscathed, but now they have to come to terms with a changed landscape. Just over a quarter of EU firms believe their pandemic will have a lasting effect on their supply chains, and 23% see a future impact on the product mix they need to offer, underlining the need for innovation. 

Another indicator that the cyclical rebound in activity is exacerbating supply-side constraints comes from firms’ views on obstacles to investment. Recovery has brought a marked uptick in firms seeing skills availability, energy costs, and transport infrastructure as constraints, while the impact of uncertainty has eased.

Meanwhile, the issue of digitalisation has come to the fore: 55% of firms see a greater need for digitalisation as a long-term result of the pandemic. The number of firms seeing digital infrastructure as a constraint to investment decisions has edged upwards to 45%.



Source: EIB Investment Survey 2021.

…and firms are waking up to the urgency of the climate transition

Around 58% of EU firms see themselves as affected by physical climate-change risks. More do so in regions that have experienced weather extremes. EU firms are also starting to internalise the risks associated with the transition to net-zero. This is particularly the case in ‘brown’ sectors (where risks are mostly seen on the downside) and in ‘green’ sectors (where firms are more likely to perceive opportunities). 

The internalisation of climate-related risks is likely to increase rapidly, with growing obligations for firms to report on emissions and for the financial sector to report on portfolio risk exposure.


Source: EIB Investment Survey 2021.

The good news is that the pandemic has spurred many firms to start accelerating transformation efforts

According to the EIBIS Add-On Module, 30% of European manufacturing and service-sector SMEs say they have used the crisis as an opportunity to accelerate planned transformation. Some 46% of EU firms say they have become more digital, and among firms that do not yet use advanced digital technologies, 34% took the crisis as an opportunity to start their digitalisation journey. 

There is also some evidence that many firms facing significant lost sales invested more in developing or introducing new products compared to firms facing no change in sales. Of course, it is hard to say whether these efforts will be enough to counter the challenges facing firms. It also raises questions about how many firms were unable, or unwilling, to accelerate changes in the face of a changing landscape, and how these are distributed across regions and sectors. Nonetheless, it is positive that a large share of EU firms were able to respond in this way.

Also with regard to the climate transition, efforts have picked up again in 2021 and EU leadership on climate show signs of paying off. The share of firms planning climate-related investment has now risen from 41% to 47%, after delays in 2020. In the US on the other hand, only 28% of firms have already invested and only 40% are planning climate-related investment.

The regulatory push for accountability on carbon emissions and exposure to climate risk appears to be having an effect, with 46% of EU firms using monitoring targets for carbon emissions and energy consumption, a factor that is associated with investment. Firms are more likely to invest when they perceive an opportunity in the climate transition; by contrast, exposure to negative risks appears not yet to be fully internalised or priced-in.


Source: EIB Investment Survey 2021.

Amid the easing of economic conditions, policy needs to focus on keeping up and accelerating the momentum for transformative investment

With the recovery beating expectations and market conditions easing, European firms expect to increase investment this year. On balance, they are also optimistic about investment conditions in the coming year, with EIBIS sentiment indicators for the economic climate and internal finance availability switching back to positive as the recovery is felt.

While there is still uncertainty about the extent of lasting damage to corporate balance sheets, policy support does appear to have averted the threat of widespread scarring. It has meant that the share of finance-constrained firms has remained limited (6% of SMEs and 3% of large firms). 

Nonetheless, concerns remain about potential pockets of instability, including severely affected firms in specific sectors and regions. In Southern Europe, for example, the share of firms happy to rely on internal finance has nearly halved.

Therefore, there is likely to be an increasing need for well-targeted support. Targeted financial incentives have proved very relevant in promoting transformative investment, both with regard to climate and digitalisation. European firms that received such incentives for digitalisation in the last three years were almost twice as likely to invest more in digitalisation as a response to the pandemic.


Source: EIB Investment Survey 2021, Add-On Module.

It is also critical to keep a focus on non-financial barriers to transformative investment. The scarcity of workers with the right skills persists as a top barrier to long-term investment, a factor cited by 79% of European firms. Infrastructure also matters, with access to digital and transport infrastructure, as well as energy costs, all rising as constraints on investment in Europe.

With regard to climate-related investment, uncertainty about the regulatory environment and taxation are reported to be the main barriers. Firms name the setting out of a clear decarbonisation pathway, advice on financial support, and technical support as interventions that would most help to advance such investment.

The main barriers to investment in digital technologies are the cost of investment activities and availability of staff with the right skills to identify and implement the investment. Firms name technical support, advice on funding, and regulatory consistency across Europe as interventions that would best support digitalisation.


Source: EIB Investment Survey 2021, Add-On Module.


International Monetary Fund (2021), Regional economic outlook for Europe, October 2021.

Djankov, S, E (Y) Zhang (2021), “As COVID rages, bankruptcy cases fall”,, 4 February. 

Portes, J (2020), “The lasting scars of the Covid-19 crisis: Channels and impacts”,, 1 June. 


1 The European Investment Bank Investment Survey (EIBIS) is a survey of 12,000 firms in the EU, with representative comparator samples of 800 firms in the US and 600 in the UK, administered by the EIB Economics Department. The EIBIS 2021 Add-On Module covers SMEs in manufacturing and services to gain further insights on COVID-19 impacts, digitalisation and climate-related investment, barriers to investment and policy support. Unless otherwise stated data is from the EIBIS main module.

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