It is rare that an analysis of national accounts can stir up drama, but this time it is merited.
Adjusted for inflation, businesses in the European Union made investments for €705.1 billion in the second quarter of 2024. In the same quarter of 2023, they spent about €20 billion more on investments, namely €725.3 billion.
Both these numbers are in 2010 prices, which means they are adjusted for inflation. In other words, the loss of more than €20 billion worth of business investments is real—and the symptom of a troubling trend across Europe.
In the second quarter of this year, European businesses did not even reach their investment levels from Q2 of 2022. This elevates the stagnation and decline in capital formation in the EU to a real problem. In 15 of the union’s 27 member states, businesses invested less this year in Q2 than they did a year before.
However, the problem is not limited to just the second quarter. Business investments were contracting in 10 EU states in Q2 2023, and in 9 EU states in Q3 of that year. In the last quarter, the decline in capital formation had spread to 13 states; it reached 16 states by the first quarter of 2024.
Five EU states have experienced an investment decline in the past five quarters: Austria, Finland, Germany, Hungary, and Sweden. Another five have had the same experience in four out of the five last quarters: Denmark, Estonia, France, Ireland, and Luxembourg. While a half-dozen countries have not yet reached the point of declining capital formation, the trend is, as mentioned, not in their favor.
A prime example is Spain, where businesses have grown their investments in real terms in every one of the five last quarters. However, the trend is unfavorable:
- +3.4% in Q4 of 2023;
- +1.8% in Q1 of 2024;
- +1.6% in Q2 of 2024.
Since Spain is one of only four countries so far to have reported national accounts for the third quarter, we can add to this a mediocre +0.8% in Q3. In short, it is a safe bet that in 2025, Spanish businesses will reduce their capital formation in real terms.
Since we are on the third quarter numbers, let us look at the other three for which we have advance national accounts statistics.
- In the Netherlands, after three consecutive quarters of significant decreases in capital formation, the annual capital-formation rate was unchanged from Q2 to Q3;
- In France, businesses cut back on investments for the fifth consecutive quarter; since its peak in the last quarter of 2022, capital formation in France has fallen by 12%;
- In Slovenia, business investments fell by a whopping 8.2% in Q3 this year; this decline follows a 1.5% decrease in the second quarter.
This overall negative trend is not being helped by the fact that business bankruptcies are on the rise.
So why are businesses losing faith in Europe? Part of the answer is that they find the U.S. economy to be more attractive, a point I made last week and others are starting to pick up on. But the strength of the U.S. economy is only part of the answer—it does not explain what is wrong with Europe per se.
We can get some good insights from looking at the ten countries with declining capital formation in four or five recent quarters. This group includes economically dominant Germany and France, as well as the three Nordic EU members Denmark, Finland, and Sweden. These five countries have two things in common: they have gone to great lengths to regulate their economies into the so-called green energy transition, and they continuously lavishly spend taxpayers’ money on large welfare states.
The green transition has jacked up energy prices and made the energy supply less reliable. The welfare state demands consistently high taxes; it is no coincidence that these five countries are among the highest-taxed in the world.
By sustaining a combination of costly, unreliable energy and high taxes, the governments in these European countries send a signal to the private sector that their interests are subordinated to those of the government. The German economic stagnation is the prime example here, underscored by the fact that their inflation-adjusted GDP is smaller now than it was two years ago.
Sweden is in the same category. Like Denmark, Finland, France, and several other European countries, Sweden has a government that has shown no serious interest in even discussing the problems with the nation’s stagnant economy. Therefore, the chances of a debate over how to reignite business investments are also dim.
However, all is not lost in Europe. Hungary, one of the countries with five consecutive quarters of declining business investments, has a positive economic outlook to boast about. Behold a report from the Budapest Business Journal:
The Hungarian economy is forecast to grow at a pace exceeding 3% in 2025, according to the latest macroeconomic analysis from CIB Bank. … Inflation is expected to continue declining following a temporary rise at the end of 2024, while real wages could increase by about 5%.
To attain a GDP growth rate of 3%, the Journal explains, Hungary needs a boost in export demand. The near-term economic future of Hungary is “intertwined with developments in the eurozone.”
This is correct, but given the tepid performance of Europe’s main economies, I would not expect much export demand for Hungary from the EU. However, if real wages actually rise by 5% in 2025, private consumption will receive a major boost. Given that its multiplier effects on the rest of the economy are both strong and durable, this bodes well for Hungary’s families, workers, and businesses.
