By Marc Lhermitte | 9 December 2014
Although Europe is regaining strength after years of recession and austerity, more needs to be done to safeguard continuing foreign investment, says EY’s Marc Lhermitte.
“Old” Europe, “New” Europe, “Continental” Europe... That so many variants exist is testament to the huge diversity and contrasting strengths and weaknesses that exist within Europe’s borders. But in recent years at least, it could be argued that only “One” Europe has existed, a Europe that has struggled to emerge from the long shadow of financial crisis and subsequent recession. But this is now changing.
With the Eurozone now growing, businesses reaping profits, consumer spending increasing and employment in many countries on the rise once again, European policymakers and business leaders could excuse themselves for breathing a big sigh of relief. But while it appears that the recovery is taking firmer root, the mixed messages coming from EY’s latest European attractiveness survey should, at the very least, prompt some pause for thought.
First, the good news. The report – which combines an analysis of international investment over the last year with a survey of more than 800 global executives on the “perceived” attractiveness of Europe and its competitors — found that a foreign direct investment (FDI) record was set in Europe in 2013. Foreign investment decisions in the continent reached an all-time high of 3,955 projects, up 4% from the previous year and 17% from the pre-crisis average. The two heavyweights — the UK and Germany — registered an increase in FDI projects and continued their battle for the top spot. Meanwhile France, Europe’s third-largest economy, seems to have halted its decline as an investment destination.
Such results, together with other positive data such as rising exports, are likely, in time, to lead to a restoration of the “feel-good factor” that has been so sorely lacking across Europe in recent years. Although the recent European Union parliamentary elections gave expression to those who have turned against Europe for a variety of reasons, economic recovery gives hope that the tide may soon be turned — particularly as voter turnout for the elections remained well below 50%.
However, there is little doubt of the deep damage wrought by the financial crisis. Our survey also found that Europe’s share of global FDI inflows has declined significantly and the continent has lost its long-lasting leadership: from over 50% of the world’s FDI inflow in 2002, Europe captured only 20% of all global investment in 2013. Investment sizes were also substantially smaller than in pre-crisis years: average job creation from FDI projects declined 22% during the recession. So, with this in mind, how can Europe strengthen its competitiveness and safeguard sustainable growth in our ever-shifting global economy?
Numbers count
European policymakers and business leaders are now operating on an economic map that differs greatly from that of the pre-crisis years. While some countries struggled to regain investor confidence, others took advantage of the crisis to improve their competitiveness, become stronger and more attractive to FDI. The continent’s midsize markets, such as Spain, Belgium, the Netherlands and Ireland, showed resilience. By contrast, Central and Eastern Europe struggled with a decline in FDI decisions when, for example, the crisis reduced the number of projects by Western European automotive companies or shared services outsourcers.
These varying performances are reflected in the numbers. Although Europe’s emergence from recession was seen in its record FDI performance last year, over the same period job creation by FDI projects was down 2%, still 15% below pre-crisis levels (195,000 jobs). In 2013, an FDI project created 42 jobs on average, compared with 60 jobs per project in the pre-crisis years.
Interestingly, sales and marketing activities dominated project numbers last year, making up almost half of the total FDI projects in Europe — although they declined by 2% over the course of the year. The UK (25%) and Germany (23%) together accounted for nearly half of these activities. France was the third-largest recipient, but registered a decline of 6%. While manufacturing attracted 26% of the total FDI projects, it accounted for more than half of the jobs created on the continent.
And Europe’s R&D continues to be a key strength, with an investment increase of 23% last year, together with a 64% surge in job creation, underlining the vast potential. Investors also see Europe as a center for their research and innovation activities, with 45% of respondents to our survey identifying R&D as a key driver for Europe’s FDI activities in the coming years.
During the year, approximately one in three R&D-oriented FDI projects in Europe were from a US multinational. However, companies from emerging markets are also increasingly investing in Europe to exploit the continent’s strength in scientific development. R&D-oriented FDI projects in Europe from India and China more than doubled in 2013, reaching 13 and 20 projects respectively.
Horizon scanning
But what of the future? European businesses have, for some years now, been competing on a global playing field, but some of the megatrends currently unfolding across borders are poised to further transform the world around us. Different patterns of labor markets, capital flows and consumer markets are globalizing faster and deeper than ever before. Governments, too, are far more connected, which means that policymakers need to manage this new reality of interconnectivity while at the same time responding to the demands of some citizens who want to return to old models of local or domestic interest.
Another trend is the shift from west to east which is resulting in a completely different economic and political balance in the world. For example, by 2030, Asia is expected to surpass North America and Europe combined in terms of global power (based on GDP, population size, military spending and technological investment). At the same time, global corporations are becoming increasingly powerful. They are influencing international relations and policies on a range of issues, including the environment, labor laws, tax, trade and financial rules.
In this global context, and despite these huge changes under way, Europe’s outlook has brightened in the past year.
With boardrooms echoing to the sound of profits and sales rather than recession and austerity, investors believe that competitiveness remains the key to sustainable growth. Some 54% of survey respondents believe that Europe’s attractiveness as an investment destination will continue to improve in the next three years — a significant improvement (+15 percentage points) on last year’s report. Only 12% have a pessimistic view and 33% were neutral. Asian investors are even more upbeat about Europe’s prospects, with 60% forecasting an improvement over the next three years.
Our respondents emphasized innovation and technology (18%, +4 points) as the first step for Europe to improve its long-term prospects.
They suggested an enhanced focus on education and training (11%) as the next step. This is well illustrated by the increasing integration of European industries into global value chains, which will help to strengthen the region’s industrial base. Open and connected product and service markets, investment in research and innovation, and a workforce with appropriate qualifications are all required to encourage Europe’s economy to kick on. Thankfully, stabilizing economic governance and reducing debt — both of which topped the investor suggestions in our last survey — have seen noticeable progress over the past year.
Such findings confirm that Europe is a region on the move (in the right direction) once again. Certainly, in my discussions with government and business leaders across the continent, there is now a new sense of hope and confidence that has been missing in recent years. But while the scars of the financial crisis have begun to heal, it is equally evident that this will be a long-term process. As the global economy continues to shift and transform, Europe will need to stay ahead of these changes to secure its long-term prosperity.
While this is no easy task, the inherent strengths and qualities of Europe’s people, businesses and leaders mean this is an ambition edging ever closer to reality.
This feature was first published in the August edition of EY's Citizen Today magazine
