Explaining the weakness in investment

Following the global financial crisis, investment growth across OECD countries remained lacklustre, with total volumes trailing some 20% below pre-crisis trends. Corporate investment—which typically accounts for around 60% of total investment—has been a significant contributing factor. Subdued demand and elevated uncertainty together explain roughly half of this decline. Despite historically low financing costs, companies have largely opted to bolster cash reserves, undertake share buybacks, or acquire existing assets, rather than invest in new productive capacity.

 

Transition to a digital economy

In recent years, however, we have witnessed a clear transition towards a knowledge-driven digital economy: investment in software has tripled, while expenditure on IT hardware and Research & Development (R&D) has nearly doubled since 2008. Nevertheless, this increased allocation to digital assets has not fully offset the weakness in investment in machinery and physical infrastructure. Demographic ageing, labour shortages, and a slowdown in business dynamism have presented further headwinds.

Reorientation of investment flows

These challenges are now accelerating a fundamental transformation: labour shortages are driving automation, uncertainty is prompting a more prudent and localised allocation of capital, and ageing infrastructure is necessitating substantial refurbishment. Artificial intelligence is at the heart of this evolution, with global expenditure projected to reach 2–3 trillion dollars by the end of the decade.

 

The rise of AI

The rapid ascent of AI is fuelling demand for electricity and exposing vulnerabilities in existing networks. The theme of sustainability is channelling significant capital towards renewable alternatives, infrastructure development, and storage capacity. China is leading on the global stage, underpinned by robust policy support and a dominant position in green technology manufacturing.

In addition to AI and sustainable energy, defence spending is also rising sharply, extending to cyber applications, space, and supply chain security. The so-called “peace dividend” is now clearly a thing of the past.

 

Draghi’s call for reform

What does this mean for Europe? Mario Draghi estimates that Europe will require nearly 1.2 trillion euros per annum until 2031 to address current economic and geopolitical challenges. One year on from the publication of his landmark report, his message remains resonant: Europe must bridge its innovation and productivity gap. The real weakness lies in private sector R&D budgets. While public R&D expenditure is broadly in line with the United States, private investment remains markedly lower. Without a decisive change in direction, Europe risks remaining mired in a cycle of sluggish productivity growth, diminished competitiveness, and reduced strategic autonomy.
 

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