Finance and Europe

Executive summary

Investment and Investment Finance in Europe responds to the need for a better understanding of the

impact that the crisis has had on investment in Europe, and of what can be done to put Europe back

on to a sustainable growth path. By undertaking our own research and working with leading academic

institutions, we assess how the crisis has impacted investment across the non-financial sector,

in small and medium-sized enterprises (SMEs), in infrastructure, and in research and development and

innovation. We explain why and where investment has declined, looking at the impact of structural

imbalances, policy uncertainty, new capital requirements for banks and the fragmentation of Europe's

financial markets. In terms of policy options, we warn against poorly targeted responses and provide,

instead, support for key policy interventions at the European level.

Europe faces an ongoing investment crisis

Data reveal that the economic crisis caused a historically unprecedented collapse in fixed capital

investment in the EU. Nearly six years after the beginning of the financial crisis and the recession,

investment levels are about 17 per cent below their peak in 2008. Investment continues to be depressed,

particularly in the most crisis-hit old Member States – Greece, Ireland, Portugal and Spain.

What went wrong?

Large misallocations of investment across economic sectors and countries at the heart of the problem

In the run-up to the crisis some countries saw an unsustainable expansion of borrowing from both

domestic and foreign sources, which led to excess consumption and overinvestment in sectors such

as real estate. Overcapacity contributed to low return expectations, discouraging investment. From

the start of 2010 expectations of low demand continued to be an important driver of the decline in

investment but only in a group of countries that included the old Member States in crisis and some

new Member States. Investment by the...