VoxEU Column COVID-19 Productivity and Innovation

Thriving in a post-pandemic economy

The Covid-19 pandemic poses severe risks for Europe’s economy, but it also presents opportunities. The sharp short-term shock will be followed by large structural changes to the global economy in the long term. This column sheds light on the challenges ahead using data from the European Investment Bank Investment Survey. Large sectors of Europe’s economy, particularly SMEs, need to innovate and adopt digital technologies to avoid falling behind. Policy support needs to evolve from liquidity provision to a more targeted push for structural transformation. 

Despite the massive policy stimulus in the EU, both on the monetary and fiscal front, real GDP is contracting by levels unrivalled since WWII. An investment slump is underway. Aggregate investment contracted by 19% year-on-year in 2020 Q2, with all components of investment affected (IMF 2020, EIB 2021 forthcoming). The COVID-19 crisis will lead to structural changes in the global economy and most aspects of human life (Jorda et al. 2020, Brookings 2020). In this column, we present the results of the 2020 European Investment Bank (EIB) investment survey, detailing the impact of the crisis as felt by European and US corporates at the end of the first wave of the virus. 

The EIB Investment Survey sheds light on the crisis impact on EU firms 

The EIB Investment Survey (EIBIS) is an annual survey, targeting 13,000 EU and US firms. It is built to be representative for each EU member state, for firms’ size and sector. The 5th edition was administrated during the summer of 2020, just at the end of the first wave of lockdowns. 

According to EIBIS, in the first half of 2020, 55% of EU firms reduced employment in some ways – via layoffs, redundancies, temporarily leaves, and working hours – due to Covid-19. Sentiment indicators reveal a substantial deterioration in the economic environment, the regulatory environment, and the business prospects (Figure 1). Firms have experienced deteriorating internal finance, while external finance remains more muted. This is mostly associated with debt, with liquidity secured via massive public sector guarantee schemes and liquidity provisions to banks (Altavilla et al. 2020).

Figure 1 Sentiment indicators, 2020

Covid-19 is a shock in the short term and a game changer in the medium/long term

In such circumstances, 45% of EU firms say they are investing less due to the pandemic, with investment plans either delayed or abandoned. More importantly, however, the Covid-19 crisis is a game-changer in the medium to long term (Figure 2). Firms foresee the need to adapt to a ‘new normal’ post Covid-19 – 50% of EU firms say that more investment in digitalisation will be needed because of the pandemic; 40% of firms see a long-term need to adapt their product/services portfolio because of the pandemic; 40% predict an impact on their supply chain. The discrepancy between reducing investment today and need to invest to adapt to the new normal is a clear source of concern.

Figure 2 Short-term and long-term impacts of Covid-19

Source: EBIS 2020       

Compared to US firms, EU firms – particularly SMEs – innovate less and lag in digitalisation 

According to EIBIS 2020, 37% of EU firms have not adopted any digital technology, compared with only 26% in the US (Figure 3). However, innovation and digital adoption has been expanding over time, with the share of firms which have introduced innovations or implemented at least one digital technology increasing both in the EU and in the US relative to EIBIS 2019. Larger firms have higher rates of digital adoption than smaller firms. Only 52% of SMEs in the EU have adopted at least one digital technology, compared with 75% among the large firms. The status of digitalisation in the EU parallels that of innovation: 51% of EU firms did not introduce any innovations (products, processes, or services) as part of their investment activities versus 41% in the US. Larger firms are also more likely to innovate than smaller firms (55% versus 43%). 

Figure 3 Digitalisation and innovation by firm size in the EU and US

Source: EBIS 2020

EU firms risk being left behind

With investment collapsing, many firms – particularly smaller ones – may fail to adapt to the new normal, becoming ever less competitive. Non-digital firms invest less, innovate less, and grow less. There is a growing knowledge gap in digitalisation. Firms that haven’t yet invested in digital technology fail to perceive the urgency. Diffusion of digitalisation requires awareness of the opportunity and investing in the background infrastructure. By failing to invest, those firms will also be left exposed to the risks posed by the climate transition. 

Uncertainty, skills, and finance present critical constraints to investment

  • 81% of firms say uncertainty is as an obstacle to investment (Figure 4). 50% of firms say it is now a major impediment, a substantial increase since last year. 
  • Lack of skills still blocks investment, particularly in the adoption of digital technology. It remains the second most cited barrier to investment and is particularly a concern for firms that have actually adopted digitalisation. 
  • Availability of finance is a major constraint only for 20% of EU firms. However, long-term and higher-risk investments in innovation, digitalisation, and climate face financial constraints, given internal finance drain and the policy focus on working capital needs. 

Figure 4 Long-term barriers to investment

Source: EIBIS 2020

Action is needed at a critical juncture 

  • Concerted European action is needed to overcome uncertainty. Digitalisation, Innovation, climate change, and energy transition all call for a supportive framework. 
  • Investment is needed, with EU coordination, to maximise spillovers (Beetsma et al. 2020).
  • Policy needs to shift gradually from indiscriminate short-term finance to targeted investment finance, including equity-type finance. Weakening internal finance and the nature of the required investment call for long-term patient investors – combining equity and patient debt instruments.
  • As traditional SMEs often lack the skills to innovate, more technical assistance and/or advisory is needed to accompany financial incentives and accelerate re-skilling. 


Altavilla, C, F Barbiero, M Boucinha and L Burlon (2020), “The COVID-19 policy response and bank lending”,, 3 October.

Beetsma, R, L Codogno and P van den Noord (2020), “Next Generation EU: Europe needs pan-European investment”,, 9 November.

Brookings (2020), “Reimagining the global economy: Building back better in a post-COVID-19 world”.

EIB (2021), “Investment Report 2021/2021: Towards a Smart and Green Europe, in the Covid-19 era”, European Investment Bank, Luxembourg (forthcoming).

IMF (2020), Global Prospects and Policies, Washington: International Monetary Fund.

Jorda, O, S R Singh and A M Taylor (2020), "Longer-Run Economic Consequences of Pandemics", Federal Reserve Bank of San Francisco Working Paper 2020-09.

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