How can Europe's investors turn resilience into growth?
Europe in 2015 remained under tension and mired in several crises: tense geopolitics with Russia and several foreign fronts, historically low confidence in EU institutions, terrorist attacks in France and Belgium, uncontrolled migration everywhere. Moreover, several economies remained in a dramatic state and on a very difficult recovery path.
"Destination Europe" nevertheless experienced a record year in terms of foreign direct investment. With 14% more projects, it hosted 5,083 international locations, creating 217,666 new jobs according to the EY's European Attractiveness survey launched today. And the European FDI story is also reinforced by the dynamics of mergers and acquisitions, up 68% from 2014.
EY Advisory, Global Lead Attractiveness and competitiveness
Improved macroeconomic and financial conditions despite a – timid but solid - growth of 1.5% in the Eurozone, better consumption patterns, low interest rates, falling oil prices and fiscal demand-side policies did what they could to maintain the confidence of multinationals, mid-size businesses and entrepreneurs from Europe, Asia and the US. Investors turned, for a moment, their attention away from China, Brazil or Africa, all providing disappointing growth and more difficulties. Despite an uncertain business environment and geo-political risks, investors continue to see Europe as a relatively safe haven, with 82% expecting investment prospects to improve or remain the same over the next three years. Europe's strengths are its digital and logistical infrastructure, skilled labor force and stable political, legal and regulatory environments. However, inflexible labor markets, high labor costs and complex corporate taxation regimes are relative investment turn-offs.
So what happens next?
Europe is indeed resilient even in the face of headwinds. However, geo-political and macroeconomic challenges are denting investor sentiment: our survey of 1,469 executives highlights that only 22% of the respondents have expansion plans for Europe in the immediate future.
Competition from other regions is fierce, and Europeans need to be convinced themselves and then convince others as to why Europe still deserves the close attention of corporations from around the world. Businesses are worried that they are operating in a fragile business and consumer environment with deflation weighing on market sentiment. The journey since the EU's inception has generally been a positive one but essential and strategic choices continue to loom ahead. Our conversations with multinationals and entrepreneurs point to some very clear, very urgent – yet very complex - areas of reform, to be tackled together by governments and businesses.
Simplify wherever possible: The general perception by the business community suggests a structure of layered governance and overregulation. To complete the tableau, some countries are in the Eurozone and some are outside; some are members of the European Union and other countries "in Europe" are not. In other words, the value proposition of Europe evokes a broad range of perceptions and misperceptions and makes the "selling of Europe" a very daunting task, a task made even more complicated by the fact that individual nations vie with one another for pole position to attract foreign capital and job creation.
Encourage innovation: A third of our respondents see digital industries as the preferred sector for Europe's growth in the coming years. Policy makers need to provide a more dynamic playing field for new market entrants. The role of governments is essential in incubating innovation in the region, investing in education and providing coordinated support for high-potential innovation. As the focus on innovation and digitization increase, businesses may need to alter their business models that encourage innovation. Businesses will also need to adopt multicultural approaches to increase participation and access to the right talent pool.
Maintain stability: Local, regional and global conflicts will test the resolve of Europe's governments and businesses to maintain core, stability and community principles. Recent security concerns across Europe highlight the urgent need to collectively and vigorously act to prevent further acts of terrorism at home and abroad. Nevertheless, history has endowed most of modern Europe with strong roots, anchored in a tradition of social justice, education, tolerance, and political freedom. Europe's value proposition needs to stay the course to continue to be the object of attention from business, investors and its own citizens.