In a surprising turn of events, the UK emerged from recession with growth of 0.6% in the first quarter of 2024, the fastest pace in two years. The country appears to be moving away from the rest of Europe, which, according to EY Europe Attractiveness Survey 2024 faces serious problems.
Our research shows that foreign direct investment (FDI) in Europe has fallen 4% since 2022 and is now 11% lower than before the pandemic. While the UK is defying this trend, the rest of Europe is in the midst of a real downturn, with France and Germany seeing their FDI-backed projects decline year-on-year in 2023, despite maintaining their status at the top of the European investment league table. . Given that foreign investment has increased in other parts of the world over the same period, these figures should worry European policymakers.
Despite the problems, Europe remains an attractive destination for investors. However, it is important to look at the reasons for the decline if we are to find ways for Europe to remain competitive in the global marketplace.
Europe faces challenges while technology and finance support UK
In 2023, Europe faces slow economic growth, soaring inflation, rising energy prices and an unstable geopolitical landscape. Foreign investment is essential for job creation, innovation, export growth and a strong economy, but investors are cautious.
France, the UK and Germany continue to attract around half of European FDI, maintaining their positions among the top three destinations. Although France became the leading market by leveraging its research and development (R&D) capabilities and attracting large banks post-Brexit, it still experienced a 5% decline in 2023. However, the number of jobs created by FDI increased by 4%, highlighting the continued benefits of business-friendly reforms and a relatively healthy economy compared to other European countries.
FDI into Germany fell by 12% in 2023, continuing a steady decline since the start of the pandemic. Industrial investors are being deterred by the recessionary environment, high energy prices and concerns about energy security. A complex bureaucracy and high labor costs also continue to limit Germany’s ability to attract more foreign businesses.
In contrast, the UK bucked the trend, posting FDI growth of 6% in 2023, although it remained well below pre-Brexit levels. After a 2022 marked by political uncertainty, high inflation and rising energy prices, investors sensed something of a return to stability in UK markets. Foreign software and IT suppliers have been particularly loyal to London, which has overtaken Paris to take the top spot as the No. 1 investment region in Europe. London’s attractiveness to the financial sector has also proven significant, with London seeing a 20% increase in financial services projects.
Unlocking Europe’s Potential
Despite the difficult situation in Europe, there is reason for optimism. In addition to analyzing FDI numbers, we asked business leaders about their plans for the future and 72% of them said they planned to expand or establish operations in Europe over the next year – up from 67% in 2022. This indicates that Europe is still a key territory in future business plans.
Our research also identified the key growth areas the business is focusing on. Innovation and customer services are key, with more than half (55%) of organizations telling us they intend to increase R&D and sales and marketing spend in Europe over the next three years. Manufacturing FDI remained stable, with an overall decline of just 1%, but significant growth was seen in Southern and Eastern Europe as organizations reorganized their supply chains. The tourism and culture sector saw a huge 130% increase in investment following the easing of pandemic restrictions. Europe’s leaders must build on these strengths and focus on where demand is to kick-start the recovery.
Conversely, investors have expressed concerns about a number of issues, including regulatory burdens, volatile energy prices and political instability. Investors believe that increased regulation could stifle business growth and innovation, and Europe must ensure that regulation, while important, does not become bureaucratic red tape. The energy crisis of the last two years continues to be a major concern, while uncertainty ahead of the European elections, as well as rising social tensions and political radicalism, are also spooking investors.
There is no room for complacency here. Europe faces increasingly tough competition from the US and Asia. European policymakers must take bold and decisive action now to boost the old continent’s business attractiveness and ensure the best chance of recovery.
Changing government policies across Europe will encourage foreign investors to invest more. Key questions remain: how to harmonize regulation, restore confidence in energy supplies, remove the most immediate barriers to investment and facilitate access to capital. To respond to them, Europe must develop a long-term industrial policy.
European leaders must prioritize these issues and build on the continent’s strengths if it is to remain competitive in the coming years.
Julie Lynn Teigland is EY’s EMEIA Managing Partner. The views expressed in this article are those of the author and do not necessarily reflect the views of the global EY organization or its member firms.
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