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How is uncertainty reframing the future of investment in Europe?

Following EY's 2020 Europe Attractiveness survey, executives were gauged in October on their sentiment on Europe's post-COVID-19 prospects.

In brief

  • Investors appear more upbeat about Europe’s attractiveness as an investment destination in the next three years, compared to the data collected in April.
  • Half the executives surveyed are expecting volatile swings over the next three years, while the remaining half are predicting a return to “business as usual.”
  • For Europe’s economy to return to pre-COVID-19 levels, stronger consumer confidence, increased access to capital and accelerated digital enhancements must be met.

According to the European Commission, 45% of the EU’s gross domestic product (GDP) depends on foreign investment. Across Europe, 30%–50% of corporate research and development stems from inbound investment. It is vital, therefore, to understand what drives multinationals’ investment and location choices.

The EY organization published its 19th annual European Attractiveness Survey six months ago, indicating that 9 out of 10 executives expected to decrease or delay investment plans in 2020. Businesses were also contemplating massive adjustments to their supply chains, research priorities and, in the most impacted sectors, their continued presence in Europe.

Six months later, we are again gauging executives’ sentiment on Europe’s longer-term prospects in a post-COVID-19 world. Are operations moving toward or outside Europe to secure more sustainable supply chains? Are innovation and environmental plans slowing or accelerating? What megatrends and operational factors could influence their investment decisions across Europe?

Foreign investors are more hopeful about Europe than they were six months ago

Interviews with 109 global executives across 14 industries in October yielded six clear takeaways:

  1. Foreign investment will understandably fall in 2020 and 2021, given the difficulty in evaluating and executing on projects through volatile markets and complex day-to-day conditions.
  2. Investors appear more upbeat about Europe’s attractiveness in the next three years than they were in April.
  3. Executives are equally split between those expecting volatile swings over the next three years and those predicting a return to “business as usual.”
  4. However, a full European recovery will require stark improvements in consumer demand, capital availability and digitalization.
  5. Multinationals are less likely to commence rapid and massive adjustments in supply chains to reduce single source country dependence.
  6. As multinationals prepare for a post-COVID-19 Europe, they are increasingly building sustainability and social responsibility initiatives, while launching technologies that allow for enhanced customer interactions.

We see a major shift in foreign investments, as global supply chains are redesigned, impacting future investment decisions.

1. In 2020, new foreign investment flows will shift, as companies reprioritize supply chains, cost enhancements and sustainability
Economic uncertainty caused by the COVID-19 outbreak means companies are reconsidering whether manufacturing, research and support services projects remain financially viable. 

In October, fewer international executives expected a net decrease in investment plans than in April 2020 (42% vs. 66%). Simultaneously, more companies will now likely delay their 2020 investment plans than in April (31% vs. 23%). On a slightly more positive note, more executives see investments either increasing in 2020 (10% vs. 0% in April) or holding (17% vs. 11%).

While we still need to determine the pandemic’s full impact on Europe’s economy, a significant drop in foreign investment is expected (after a record 6,412 projects in 2019), with the potential to impact vast amounts of jobs across the continent.

2. Prospects in Europe are improving, but stimulus packages are insufficient for a full recovery

Our data indicates a clear threefold increase in investors believing Europe will be a more favorable investment destination post-COVID-19 (from 8% in April to 21% in October). We ascertain that, after a slow start, the European Commission is seen as a pillar of stability in a volatile global economy, following the approval and implementation of recovery plans.

There is a strong link between countries adopting credible and investment-friendly recovery plans, and countries deemed attractive to investors. Germany, France and the UK are ranked as the three countries with the most credible plans and, to some extent, this drives their attractiveness. While countries take different approaches to managing the pandemic, balancing the need to save health systems against economic recovery requirements, collective European efforts may prove more effective than stand-alone national strategies at winning foreign investment.

3. Multinationals seem less inclined to implement major supply chain changes

In April, a mere 2% of executives were not planning any changes to their supply chains. In October, we saw this rise sharply to one-third. Mirroring this shift of sentiment, significantly fewer companies are contemplating reshoring or nearshoring (37% from 83% in April). The desire to move manufacturing from dominant source countries (previously 61%) has fallen 24 percentage points since April. 


Many companies would prefer to avoid disruptive and costly reorganizations right now. Asia is showing early signs of recovery, and multinationals will maintain that presence for now. Even so, some may relocate selected critical activities to Europe, mitigating future disruption risks, but it will take time and incentives before this drives mass investments in Europe.


4. To drive investment decisions, executives cite immediate “back-to-business” priorities 

Interestingly, far fewer foreign investors think that national stimulus plans alone will be a major factor in shaping their future decisions. This is in sharp contrast to the previous survey (32% in October vs. 80% in April).


Investors are now concerned with ensuring that work safety is first and foremost secured; this is particularly the case for sectors where employees are most vulnerable. 


There is an attraction toward countries that have both the scale and capital market strength to secure new investment opportunities. This is corroborated by the three largest economies in Europe (Germany, France and the UK) being the most sought-after investment destinations.


5. There is a more measured view regarding COVID-19’s medium- to longer-term impact on the business climate

Looking ahead 36 months, fewer companies anticipate volatile swings than during the pandemic’s initial outbreak (from 55% to 41%).


And far more companies are expecting that business as usual will resume once economies reboot (nearly doubling from 24% to 41% in the six months from April to October).


There is also a slightly less pessimistic view from respondents expecting a fundamental, negative change in the global business climate (from 21% to 17%). 


This more upbeat sentiment is in line with the International Monetary Fund’s latest 2020 growth forecasts, revised from -8.5% in June to -7.0%, at least partially driven by stronger Asian growth (led by China) and more optimism about growth prospects once economies emerge from lockdowns. 


6. Investors are consistent on the megatrends driving a post-COVID-19 world 

October’s data remains in line with previous sentiments on key initiatives: enhancing digital platforms for customer experience improvements (63%) and sustainability and climate change (60%). 


Sustainability agendas will prioritize social priorities (61%), in line with the social impact of falling employment levels and increased vulnerability in communities as welfare needs rise. In addressing this, executives see a greater need for government to intervene in their economies to address these societal needs (43% vs. 25% in April).


Although de-globalization is deemed less urgent now (from 56% to 37%), executives cite a major rise in escalating geopolitical tensions (up sevenfold from 3% to 21%). This is undoubtedly fueled by Brexit, the US political climate, and escalating regional tensions between Europe and China, and in the Eastern Mediterranean.


In conclusion, much uncertainty remains across the global economy as a new surge in COVID-19 cases hit Europe. Although the latest survey results appear more upbeat than they were in April, current developments may yet see that optimism fade. Having just survived an extensive global slowdown in the past six months, companies may have to accelerate their transformation as they seek to thrive in an emerging post-COVID-19 world order.

The perception survey was conducted from 15 to 30 October 2020 to reflect global executives’ perception changes due to the COVID-19 crisis six months after our last Europe Attractiveness Survey published in May 2020. This online survey was led by Euromoney, based on a representative panel of 109 international decision-makers across 14 industries.


Following on from the EY 2020 Europe Attractiveness Survey, EY conducted a “pulse survey” in October 2020 to update on the sentiment of executives regarding Europe’s longer-term prospects in a post-COVID-19 world.