COVID-19 and the Twin Transition: How the Recovery Can Boost Sustainable and Inclusive Growth

Forum DOI: 10.1007/s10272-020-0931-z End of previous Forum article Debora Revoltella COVID-19 and the Twin Transition: How the Recovery Can Boost Sustainable and Inclusive Growth The COVID-19 pandemic struck the EU economy hard. Economic activity fell dramatically in the first half of the year in the EU. Optimism for a quick turnaround in the third quarter of 2020 was replaced by renewed fears about the spread of the virus, and new lockdown measures were gradually put in place in autumn. Still in the mist of uncertainty, the EU economy is expected to return to growth at a slow pace. • medical – related to the timing for an effective vaccine development and deployment, successes in immunisation, etc. Uncertainty continues to impede forceful recovery. Uncertainty linked to the pandemic has three dimensions: • long-term implications – linked to possible structural changes induced by COVID-19, for example, changes in preferences, rethinking of the global value chains, emergence of new business and organisational models, as well as stronger role of the state in economic terms. © The Author(s) 2020. Open Access: This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (https://creativecommons.org/licenses/by/4.0/). Open Access funding provided by ZBW – Leibniz Information Centre for Economics. Debora Revoltella, European Investment Bank, Luxembourg. 352 • economic – second-round effects of the economic crisis, e.g. persistent shift in consumers’ attitude towards precautionary savings, potential round of delayed corporate bankruptcies or unemployment High levels of uncertainty pose major concerns to firms, leading many to postpone or cancel investment. Findings based on the latest European Investment Bank investment survey (EIB, 2020) show that uncertainty remains a key impediment to investment, cited as a constraint by 81% of EU firms. The coronavirus pandemic has strongly Intereconomics 2020 | 6 Forum Figure 1 COVID-19 impact on investment in the short term Figure 2 COVID-19 long-term impact points to a ‘new normal’ Share of firms Share of firms claiming COVID-19 will impact each factor % 100 % 60 EU US 50 80 40 60 30 40 20 20 0 10 US 2020 Invest less EU 2020 SME Broadly the same Large Invest more 0 Service or product portfolio Supply chain Increased use of digital technologies Permanent reduction in employment Note: Base: All firms who have invested in the last financial year (excluding do not know/refused responses). Q: What proportion of total investment was for (a) replacing existing buildings, machinery, equipment, IT; (b) expanding capacity for existing products/services; (c) developing or introducing new products, processes, services? Note: Base: All firms who have invested in the last financial year (excluding do not know/refused responses). Q: What proportion of total investment was for (a) replacing existing buildings, machinery, equipment, IT; (b) expanding capacity for existing products/services; (c) developing or introducing new products, processes, services? Source: IPSOS, 2020. Source: IPSOS, 2020. affected corporate investment across the EU. Almost half (45%) of firms intend to invest less in the current financial year due to the coronavirus (Figure 1). Among those that have investment plans in the current financial year, around one-third (35%) of firms say they will delay or abandon at least some of these plans due to COVID-19. Around onefifth (18%) expect to continue with their investment plans on a reduced scale. Uncertainty about the economic environment, leading to a ‘wait-and-see’ approach, is compounded by a more challenging financial situation for corporations. Notwithstanding exceptional policy support, closures or reduced activity have given rise to cumulative revenue losses ranging from 2%-3.5% of assets for large corporations up to 6%-10% for SMEs in the last six months. To re-absorb those losses at least partially, firms will have to review their future plans. With internal finance strongly constrained, a trade-off emerges between an attempt to preserve, at least in part, investment and mounting corporate leverage. Increasing digitisation The ‘new normal’ The EU Commission and the EU Parliament have reconfirmed the ambitious EU decarbonisation targets, requiring a prompt transformation of the EU economy. The majority of EU firms (58%) report that they already feel it has an impact on their business. With two-thirds reporting that they already invest in climate change or plan to do so, EU firms show greater responsiveness to the climate challenge than US peers (46%). Uncertainty about regula- A short-term drop in investment collides with enhanced long-term needs in order to adapt to a COVID-19 induced ‘new normal’. The EU economy will not revert to the ‘old normal’ in the aftermath of the pandemic. Digitalisation has received a boost over the last few months and is widely expected to shape the ‘new normal’ (Figure 2). ZBW – Leibniz Information Centre for Economics Firms across the EU need to step up the pace to maintain competitiveness in the post-pandemic environment shaped by increasing digitalisation. Almost four out of ten firms (37%) are still non-digital, i.e. have not adopted key digital technologies (EIB, 2019; EIB, 2020). Reasons for their slow adaptation include a lack of awareness about technologies available, their potential benefits and the urgency of the situation. Moreover, there are issues in firms’ operating environments that slow technology diffusion. Some 16% of EU firms find the (lack of) digital infrastructure to be a major impediment to digitalisation, i.e. three times more than in the US (5%). Innovation and revisiting the structure of the global value chains are other areas of potential structural change post-COVID-19. Climate change is here to stay 353 Forum tion and taxation, however, are key factors holding firms back to step up activities to tackle climate change and the risks related to it. Labour market impact The digital and the green transition are going to impact on EU labour markets. The transition’s effect will vary widely, depending on geography and labour market groups. Recent advances in digital technologies have tended to benefit high-skilled workers and those in less-routine occupations. At the same time, it has been associated with growing spatial disparities, with people and businesses increasingly clustering in favoured urban locations to live and work. The greening of EU economies needed to meet the EU’s goal of neutral carbon emissions will require major industrial transformation. Carbon-intensive activities are more prone to job loss during the green transition with risks spatially concentrated. Change caused by structural transformation and the risks to employment that come with it will have to be dealt with against the backdrop of a less favourable labour market situation in the immediate aftermath of the pandemic. In a worst (...truncated)