Why Europe will emerge stronger from the current crisis
Reading the news these days can be a depressing experience: With the Russian invasion of Ukraine, the horrors of war have come back to Europe, serving as a horrid and stark reminder of both the value and the fragility of European peace. Looking at our economy, the war has triggered market volatility, further stoked inflation, raised commodity prices, prompted recession and “stagflation” fears as well as worries about deglobalisation and an increasingly polarized world order. A scenario that the US economist Kenneth Rogoff has aptly described as a “perfect storm”.
While the short-term outlook seems bleak, there is also reason for long-term optimism. Yes, we are facing a shocking and unbearable situation in Ukraine as well as grave economic consequences across Europe. But there is an enormous chance for Europe to emerge stronger from this terrible crisis. In my mind, we are even facing the dawn of a new era, one that is characterized by a strong wave of innovation.
Europe is a continent in urgent need of transformation
The major geopolitical shifts of the past few months will not paralyse Europe. Quite the opposite: They will turbocharge the transformation of the European economy. Supply chain resiliency, localisation of production and “friend-shoring”, energy security, decarbonisation, digitalisation – the emerging new world order will accelerate all these trends.
These multiple transitions will change our countries and societies in fundamental ways. And they will further boost the need for long-term capital to drive sustainable investments and innovation.
Let me highlight three of those transformational trends where long-term capital can play a pivotal role in boosting innovation: Firstly, we are in the middle of a massive and disruptive demographical change in Europe. Our population is ageing and will continue to do so, inexorably posing an array of challenges. Consequently, we not only need to create sustainable health care systems, but we also need to offset a shrinking workforce. In both areas, a lot of investment will be needed, for example into the health-tech sector and companies that find new solutions in the quest for talent.
Secondly, we are still only at the beginning of the digital revolution. Right now, we are failing to take full advantage of the opportunities that digitization presents. We must admit that this backlog prevents private business and the public sector alike from seizing their full potential. Many European businesses depend on outdated, inefficient, sometimes crumbling infrastructure to offer their goods and services. However, change is afoot: Most companies (as well as governments) are looking to accelerate spending in the digital space. For all of them, it is a question of survival. After all, the core of Europe’s success is its industrial competence. And in today’s world, that competence increasingly means knowhow in software, artificial intelligence and data usage. What we thus need to do is to digitize industrial production by making our machines capable of communication and learning with the help of sensors, big data and artificial intelligence. Once again, companies will need to invest a lot of money to make this happen.
Thirdly, we still need to catch up in yet another crucial area of transformation: Emission-intense industrial players still form the backbone for many European economies. The need to curb corporate emissions has already become a top priority for many of them amid the EU’s climate neutrality goal as part of its Green Deal. But the Ukrainian war has laid bare just how reliant companies still are on fossil fuels and how dependent this makes us on other countries. And, by turning the question of emission-reduction into one of national security, the pressure to decarbonize has massively increased. This is another area where more and faster investments are badly needed.
Private businesses play a key role in the transformation
Europe clearly has many other challenges beyond those that were already mentioned: It has higher taxes and higher unemployment levels than other regions, its GDP growth rates are weaker than in the US or in many Asian countries and its transport, housing and education infrastructure is in urgent need of more investment. And in the short run, it is also facing the prospect of a toxic mix of runaway inflation coupled with an economic downturn.
But there is no benefit in burying one’s head in the sand. Quite the opposite: We need to embrace these challenges and turn them into opportunities. Otherwise, we will risk the prosperity of Europe, and most of all the well-being of its people. Political actors and institutions have already shown their willingness to make these issues and the search for solutions a top priority. However, it will be the private economy that will enable, accelerate and drive the transformation towards a greener, healthier, more digital and more dynamic Europe.
Whichever way you look at it, what businesses need to transform and reinvent themselves is capital. Coming back to the examples mentioned above: Rebuilding infrastructure, driving the digital transformation, or decarbonizing industrial firms requires significant upfront investments. Governments, banks and investment firms will need to work hand in hand to enable businesses to achieve greater financial success, make a positive impact, and improve their performance in environmental, social and governance (ESG) issues.
But let’s be clear: The mere provision of capital won’t do the trick. Companies also need to build up the right kind of expertise and know-how as well as a global network and technological resources. Ultimately, the aim is to build stronger, more resilient businesses that support growth and transformation across Europe.
Turning challenges into opportunities
Governments will need to play their part, too. To enable Europe to weather those multiple transformations in a non-disruptive way, the state will need to set the right incentives and invest more money into infrastructure. If they work towards the same goals, the public sector and private investors will each do their part in contributing to a better tomorrow.
I firmly believe that there has rarely been a time when it has been so crucial to invest in Europe, its companies and the opportunities that lie ahead. And I am equally convinced that by doing so, we will all have the chance to build a more prosperous, unified, and hopefully peaceful Europe.
Originally featured in Handelsblatt in June 2022.
