How the North addresses Europe’s challenges

Article is written by Ville Mälkönen, NIB Senior Economist

Two fundamental challenges shape the economic landscape of EU and NIB’s member countries: a significant decline in workforce growth; and an urgent need for decarbonisation. The increase in the availability of cheap and renewable energy and electrification have shown that the tools to fight the latter challenge exist. The other challenge, which we often fail to recognise, is more complex.

Mario Draghi’s “The future of European competitiveness” report, published in 2024, addresses these concerns and contains proposals for the way forward. The report recognises the urgent need to decarbonise economies. Basic arithmetic, however, shows that if the EU maintains its current productivity growth rate, it would only be enough to keep GDP constant until 2050. This is hardly sufficient to boost decarbonisation investments while sustaining the EU’s inclusive social model.

Balancing act between energy and economic resilience?

The first set of proposals involves closing the innovation and digitalisation gap between the EU and other developed economies. The gap is especially wide between the EU and the US. EU companies invest half as much in R&D as their US counterparts. This has slowed industrial dynamics in the region, which is now the home of only four of the world’s fifty largest tech companies. To close this innovation gap, the report suggests a comprehensive transformation of the EU innovation ecosystem. In addition to significant updates in institutional frameworks and funding mechanisms, the report suggests strengthening research institutions and developing better financing mechanisms for innovative companies.

According to the report, the EU should balance climate ambitions with economic competitiveness. Industrial energy costs are higher in the EU than in other developed economies. Moreover, the commitment to transition comes with substantial investment needs. To address this challenge, the report proposes a comprehensive approach that combines energy market reforms, accelerated clean energy deployment and targeted industrial support. Key measures include decoupling renewable energy prices from fossil fuels, streamlining permitting processes, strengthening the cross-border grid infrastructure and providing strategic support to energy-intensive industries. The goal is to transform the EU’s energy system in a way that reduces costs for end users, maintains industrial competitiveness and achieves climate objectives simultaneously.

Recent geopolitical developments, especially Russia’s invasion of Ukraine, have emphasised the importance of economic resilience. Energy markets have seen a rapid change due to the reduction of natural gas imports from Russia, and weaker geopolitical stability means the EU can no longer rely on others for its security. These realities call for a novel approach to the EU’s economic resilience in areas such as critical raw materials, advanced technologies and the defence industry.

Driving the region’s resilience with strategic financing

Our region is well positioned to implement the report’s proposals. The region is already advanced in digitalisation and has strong research institutions, providing a solid foundation for the innovation agenda. Countries like Sweden, Denmark and Finland rank among the EU’s innovation leaders, though there are still opportunities for improvement. NIB has played a role in closing the innovation gap by providing financing for digital infrastructure projects for client’s such as Valoo, EcoDC, Valokuitunen. Our lending supports both public and private investments in research (for example loans to Nokia, Ericsson, SEEL, RISE) and digitalisation in companies (Falck). Additionally, NIB has helped the scale up of innovative local companies such as Celltechna in Lithuania and FinVector in Finland.

With abundant renewable energy resources and an advanced energy system, NIB’s member countries are ready to take the next steps in decarbonisation, involving the electrification of existing operations and attracting new energy-intensive operations to the region. The financing of renewable energy and energy infrastructure in the Nordic-Baltic region has long been one of NIB’s priorities. NIB also recognises that the massive increase in renewable energy capacity should be followed by the electrification of energy-intensive industries. The Bank has therefore supported investments in electricity-intensive activities in the member countries.

Securing our future

The security and resilience aspects of the Draghi report are highly relevant given the region’s geographical location. NIB has taken significant steps to strengthen energy security in the Baltic countries with loans to for example KN energies and UAB LT Energija in Lithuania, and supported critical infrastructure development with several loans in the recent years. Investments in the defence sector are also on the rise in the region. To accommodate potential financing needs in the sector, NIB updated its Sustainability Policy in 2024 to allow financing e.g. to dual-use equipment and projects— those with both military and civilian applications—and facilities, services, technology and other defence equipment, still excluding weapons and ammunition.

NIB’s operations supporting the development of the Nordic-Baltic region exemplify how international financial institutions can boost the implementation of the proposals in the Draghi report. The countries’ advanced digital infrastructure, strong research institutions and effective utilisation of renewable energy resources show that the region has already made significant advances in innovation and decarbonisation. NIB’s support for its clients across various sectors thus demonstrates the region’s commitment to building a competitive, sustainable and resilient economy.