A look at the newspaper is depressing at the moment: With the Russian army invading Ukraine, the horrors of war have returned to Europe.
The events are a cruel reminder of how valuable and fragile European peace is.
Our economy is also proving to be extremely fragile: the war has triggered volatility in the markets, further fueled inflation and pushed up commodity prices.
There are also fears of recession and stagflation, as well as concerns about a deglobalizing world and an increasingly polarized world order.
While the near-term outlook looks bleak, there is reason for long-term optimism. Yes, we are faced with a shocking and intolerable situation in Ukraine, which has serious economic consequences throughout Europe.
But on the other hand, there is also a great opportunity for the continent to emerge stronger from this crisis. I even believe that we are at the beginning of a new era that will be characterized by a tremendous wave of innovation.
The major geopolitical changes of the past few months will not paralyze Europe. On the contrary: they will even accelerate the transformation of the European economy.
Whether it is supply chain resilience, production localization and friend-shoring, energy security, decarbonization or digitalization, the emerging new world order will amplify all of these trends.
These multiple changes will fundamentally reshape our countries and societies – and they will further increase the need for long-term capital for sustainable investments and innovations.
Demographics, digitization and energy transition offer great potential
Let me highlight three of the trends where long-term capital can play a crucial role in fueling innovation:
Firstly, we are in the middle of a profound demographic change in Europe.
Our population is aging, which inevitably presents a number of challenges. Therefore, we not only have to create sustainable health systems, but also make do with a shrinking workforce.
High investments will be required in both areas, for example in the health tech industry and in companies that are looking for new solutions in the competition for skilled workers.
Second: We are only at the beginning of the digital revolution. At the moment, we are not yet making full use of the opportunities presented by digitization.
This backlog prevents both the private and public sectors from realizing their full potential. Many European companies depend on an outdated, inefficient and sometimes dilapidated infrastructure in order to be able to offer their products and services.
But there are first signs of change: Most companies (and also governments) want to spend more on digitization. It’s all about survival for them all.
After all, the core of Europe’s success lies in its industrial competence. And in today’s world, that competency increasingly consists of know-how in software, artificial intelligence, and computing.
It’s about digitizing industrial production by making our machines capable of communication and learning with the help of sensors, big data and artificial intelligence. Companies also have to spend a lot of money for this.
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Third we still have to catch up in another crucial area of transformation: emission-intensive industrial companies still form the backbone of many European economies.
Also because the European Union is striving for the goal of climate neutrality as part of the Green Deal, many companies are reducing their emissions with the highest priority.
However, the war in Ukraine has shown how dependent companies still are on fossil fuels and how dependent we have become on other countries as a result.
As a result, reducing emissions has become a national security issue, and the pressure to decarbonize has increased dramatically. Here, too, more and faster investments are urgently needed.
Private companies play a key role in the transformation
In addition to the challenges already mentioned, there are many more in Europe: Taxes and unemployment are higher than in other regions, GDP growth is weaker than in the USA or in many Asian countries, and the transport, housing and education infrastructure is in urgent need of repair be invested more.
In the short term, there is also a risk of a dangerous combination of uncontrolled inflation and an economic downturn.
But there’s no point burying your head in the sand. On the contrary: we must tackle these challenges and turn them into opportunities.
Otherwise we are jeopardizing the prosperity of Europe and ultimately the well-being of its people. Political actors and institutions have signaled their willingness to address these issues as a top priority.
However, it is the private sector that will enable, accelerate and drive the transition to a greener, healthier, more digital and more dynamic Europe.
Whichever way you look at it, companies need capital to change and reinvent themselves.
Coming back to the examples above, transforming infrastructure, driving digital transformation or decarbonizing industrial companies require significant upfront investments.
Governments, banks and investors must work hand-in-hand to enable companies to become more financially successful, have a positive impact and improve their performance on environmental, social and governance (ESG) issues.
Europe needs stronger and more resilient companies
But let’s be honest: simply providing capital is not enough. Businesses also need to build the right expertise and know-how, as well as a global network and technological resources.
Ultimately, it is about building stronger, more resilient companies that drive growth and change across Europe.
Governments will also have to play their part. In order to help Europe to deal with these diverse changes quickly and comprehensively, the state must set the right incentives and invest more money in infrastructure.
If both pursue the same goals, both the public sector and private investors will contribute to a better future.
I firmly believe that there has rarely been a time when it has been so important to invest in Europe, its companies and the opportunities that lie ahead.
And I also firmly believe that this will give us all the opportunity to create a more prosperous, more united and hopefully more peaceful Europe.
The author:
Philipp Freise is a partner and co-head of the European private equity business at financial investor KKR.
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