Want to Invest in the EU? Here’s What You Should Know About the European Union Economy

What’s the third-largest of its kind, worth an estimated €13 trillion? Nope, it’s not North Korea’s nukes or Trump’s toupees. We’re talking about the European Union economy. With 27 member states and a gross domestic product (GDP) of just over €13 trillion, the EU economy represents about 15% of the global pieWhether you’re looking to diversify your investments, move your business, or apply for an innovation grant in Europe, it’s only wise to take a look at the current economic trends. Here’s what you should know about the European Union economy.

The European Union Economy Model

The economy of the European Union operates the European Single Market, allowing for free movement of labor, services, goods, and capital. Besides the 27 member states, EEA countries (Lichtenstein, Norway, and Iceland) and Switzerland (with certain exceptions) participate in this internal market. The EU economy consists of “mixed economies” of which no single all-encompassing definition exists. Generally, though, a mixed economy is an economic system blending elements of either:

  • A market economy with principles of a planned economy
  • Markets with state interventionism 
  • Public enterprise with private enterprise

Essentially, the European Union economy comprises a single market made up of various mixed economies based on:

  • Free Market Model: A system where buyers and sellers negotiate in an open market and self-regulate the prices of goods and services.
  • European Social Model: An advanced social model broadly characterized by democracy, social inclusion, social protection of citizens, and the political responsibility for conditions of employment. 

EU welfare states typically share common elements like::

  • Free higher education
  • Universal health care
  • Robust labor regulations and protections
  • Generous welfare programs in areas like retirement pensions, public housing, and unemployment insurance 

Still, some significant disparities in purchasing power parity (PPP) GDP exist among EU countries.

Curiouser and Curiouser

According to Statista, Germany has the biggest economy in the European Union (since the 80s) with a GDP of €3.3 trillion in 2020. The UK, France, and Italy ranked second, third, and fourth, with GDPs of €2.2 trillion, €2.2 trillion, and €1.6 trillion, respectively. Spain, the Netherlands, and Switzerland came in fifth, sixth, and seventh with respective GDPs of €1.1 trillion, €798 billion, and €655 billion. In stark contrast, Luxembourg, Cyprus, and Malta had respective GDPs of €64 billion, €20 billion, and €12 billion. Nonetheless, income distribution in the European Union is more egalitarian than the global average. The EU scored 30.2 (out of 100) in the Gini Coefficient Index according to Eurostat. A lower figure indicates more equality, and a higher figure, less equality. For comparison, the United States scored 41.4, while China scored 38.5, South Africa 63, Slovenia 24.6, and Denmark 28.2 according to the World Bank

Quick Stats

Here are a few quick European Union economy statistics on subjects like inflation, labor, and business according to Statista’s latest available data.

The EU Labor Market

Spain has the highest unemployment rate in the EU, while Iceland has the highest employment rate. Moreover:

  • The manufacturing industry employs the most people (32.2 million), followed by wholesale and retail trade, human health and social work, and education. 
  • An estimated 19.2 million self-employed people work in the EU. 
  • In 2020, Iceland’s average annual salary was highest at around $67,000. Meanwhile, Slovakians earned an average annual wage of just over $23,600.

EU Business

As of 2021, the number of small and medium enterprises (SMEs) in the EU total 22.6 million, employing around 84 million people. The majority are micro-firms with less than nine employees. Meanwhile:

  • A further 1.3 million small enterprises employ up to 49 people, and 201,000 companies have 50–249 employees. 
  • SMEs contributed an estimated €3.5 trillion to the European Union economy in 2020. Micro enterprises accounted for just over €1.25 trillion. 
  • German car manufacturer Volkswagen raked in $253,97 billion in 2021, more than any other European company. BP came in second at $183.2 billion, and Royal Dutch Shell came third with a revenue of $183.2 billion. 
  • In 2021, Portugal had the highest tax rate of nearly 31.5%, followed by Germany with 29.94%. Meanwhile, Hungary’s tax rate of just 9% was the lowest combined corporate income tax rate.

Business registrations increased by 0.3% in 2021’s first quarter. On the contrary, declarations of bankruptcy shot up by 5.9% compared to 2020.

EU Inflation Rates

As the economy rapidly reopens, a rebound in energy prices along with supply-chain bottlenecks are increasing global inflation rates. Meanwhile:

  • The EU’s collective inflation rate peaked at 5.3% in December 2021—the highest recorded rate during the period.
  • EU energy prices rose by around 24.6% in December 2021, while food prices increased by 3.9% in January 2022. Non-energy industrial goods prices rose by 3.1%, and the cost of services increased by 2.9% (compared to 2020).
  • Transport took the top spot for the highest annual inflation rate among EU sectors at 11%, with housing, electricity, water, gas, and other fuels rising by 9.8% in December 2021. 
  • Meanwhile, the health, communications, and education sectors saw the lowest inflation rates, at 1.3%, 0.8%, and 0.3%, respectively. 

EU Economy Projections

Experts project the European Union economy’s global GDP share (15%) to decrease to around 13.99% by 2026, largely due to the stagnant growth of EU economies compared to other countries. Still, the Euro Area’s GDP grew by 5.2% amidst lockdowns, closed businesses, and other restrictions in 2021 (according to the OECD). The Organization for Economic Co-operation and Development also projects the EA’s economic activity to grow by 4.3% this year and 2.5% in 2023. Increased consumption and higher investments are set to support such growth. The EA’s unemployment rate is also projected to drop to pre-pandemic levels. Despite rising inflation and a varied inflation dynamic across the EU, rates are projected to drop below the ECB objective by the time Christmas comes around again.

According to Eurostat data, the EU’s combined share of GDP used for gross investments (in household, business, and government sectors) amounted to 22% in 2021. EU government intervention to rebuild the European Union economy in response to COVID-19 presents unique opportunities to deal with climate change effectively and improve digital competitiveness of both firms and individuals. The European Investment Bank’s (EIB) Investment Report 2021-2022 painted a positive outlook after aggressive pandemic response recovery policies were implemented. Here are some key findings:

 

COVID-19 Caused the Steepest Decline in Output in Europe’s Post-War History

The European Union economy’s real GDP had dropped by 14% from the previous year by mid-2020. Meanwhile, corporate turnover decreased substantially, with manufacturing revenue dropping by 30% since early 2020. Because the virus impacts countries differently, recovery has been uncertain and uneven. Asymmetries are now emerging across regions, among sectors, and between large and small firms.

 

Real Gross Fixed Capital Formation Dropped Substantially (But Less than Predicted)

Real investment in the EU fell by 14.6% by the end of 2020’s second quarter. However, it quickly rebounded, returning to pre-pandemic levels by 2021’s second quarter.

  • In 2020, government investment had increased by 7% in Southern, Central, and Eastern Europe and 1% in Northern Europe.
  • While household investment declined, housing price developments and government action supported and protected disposable income and jobs. 
  • In contrast, corporate investment was still 0.22% below its 2019 level by the end of 2020’s second quarter. Machinery and equipment investment declined the most and recovered at a slower pace than other asset types.

 

Investment Recovery is Uneven Among Member States

While the pandemic was largely indiscriminate and affected all EU countries, it’s now apparent the impact is uneven, with investment recovering at varying speeds. Real gross fixed capital formation rose above pre-pandemic levels by the second quarter of 2021. But only in 20 EU member states. Seven countries had below pre-crisis levels.

A Dramatic Drop in Sales Triggered Investment Cuts

According to EIB data, 49% of EU firms experienced a drop in sales due to the COVID-19 crisis, while only 21% showed an increase. Low pre-pandemic productivity proved a reliable predictor of lost sales, although digital firms showed more resilience (albeit only slightly). Sales at small firms decreased by at least 25% compared to medium-sized firms. Meanwhile, the share of firms with a decrease in sales ranged from 60% in Malta to less than 40% in Sweden and Denmark. Investment delays were also prominent, with the share of firms reporting investment activities (86%) in 2020 dropping considerably (to 79%) in 2021. 23% of firms revised their investment plans, with only 3% anticipating more investments.

Timely and Impactful EU Policy Responses Ensured Business Continuity

With already-low interest rates, three pivotal measures at the EU level enabled member state governments to launch an effective pandemic response:

  • Suspension of deficit and debt rules set out in the Stability and Growth Pact, which allowed for coordinated fiscal responses at national levels.
  • Government grants and subsidized lending facilities offered to individuals and firms, further enhanced with crisis responses by the European Guarantee Fund, the SURE Job Protection facility, and the European Stability Mechanism.
  • The large-scale purchase of Euro Area government bonds by the European Central Bank allows for sovereign funding costs to remain low or decline despite rising debt levels. 

In the second half of 2020, firms also cut investment and issued debt to build up cash buffers, facilitating a swift rebound in investment.

EU Member States Must Act

Swift and bold policy action has mitigated an economic depression, but coordinated efforts are still required by member states. To increase long-term growth prospects while preventing asymmetric recovery, the EU should:

  • Ensure maximum implementation and impact of the Recovery and Resilience Facility while maintaining steady public investments and avoiding abrupt fiscal adjustments.
  • Mitigate macroeconomic uncertainty by catalyzing private investment through risk-sharing instruments.
  • Introduce targeted incentives (instead of generalized support) for transformation, particularly for climate transition and digitalization.
  • Accelerate digital transformation of the EU economy with a focus on the public sector, supportive infrastructure, data security and governance, and training and skills.
  • Reinforce and implement climate policy guidance and regulatory proposals to reach goals set out in the EU’s decarbonization strategy, including the further integration of energy markets and plans for the energy transition.

Provide compelling incentives to capitalize on EU leadership in climate-related

The European Union Economy: Resilient and Ready for Investment

Europe pic 2

Now you know everything about the European Union economy, from its model and relevant statistics to pandemic effects, policy responses, and finally, projections and trends. While COVID-19 devastated the world, the EU and its member states remained steadfast in their recovery efforts. Business continuity was protected, investment dropped but recovered better than expected, and economic activity is projected to increase in 2022. Areas of vulnerability across regions and sectors still persist, but overall, the European Union economy has shown true resilience. If you’re looking at investment options, moving your business abroad, or expanding your franchise, then Innovation Park is here to help! 

Book your paid consultation today and find out about your custom global expansion strategy designed with our business immigration, international wealth management, and tax optimization expertise. 

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Sources: Statista, Eurostat, World Bank, OECD, EIB, European Commission 

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