How can Europe reset the investment agenda now to rebuild its future?

Nigel Moden

EY EMEIA FSO Banking & Capital Markets Leader

The European banking sector has responded proactively to the need for increased financial support to businesses of all shapes and sizes, as well as to individual consumers. This has taken the form of increased lending, both through the variety of government-backed stimulus schemes that have been launched across Europe and through existing product lines, and a range of forbearance measures, including mortgage payment holidays, interest-free overdrafts and preferential rates on credit card transactions.

The banking sector continues to be financially resilient and has thus far demonstrated that it has both the operational capacity and balance sheet strength to meet these increased demands. In this effort, they have been supported by European regulators, which have announced a range of measures designed to ease the burden on capital and enable banks to focus their energies on supporting their customers.

The experience of the past few weeks will encourage the sector to intensify its efforts to transform ways of working and customer engagement strategies, while accelerating the pace of automation and digitization. The agility demonstrated by our banks during the crisis will be an important retained asset as they respond to changing market dynamics.

Pamela Spence

EY Life Sciences Industry Leader

In the life sciences sector, future value equals innovation to the power of data. This means that you must unlock the power of data to fuel innovation, the success of which should be measured by the degree of levels of personalization and better health outcomes. COVID-19 has accelerated the need to do this, but it was already important.

To make this vision a reality, companies in this sector will have to partner and collaborate closely with nontraditional entities. Clusters such as Cambridge and Oxford in the UK have previously facilitated this. They create the serendipity that science has always relied on. Today, close proximity is, of course, not possible, but virtual collaboration is — and it is very much alive.

In the future, I think clusters will still be very important and an asset to attracting foreign investment. Coming out of the COVID-19 crisis, governments should really think about what industries they want to excel in, then encourage businesses in those sectors to invest.

Different countries’ response to COVID-19 has also raised questions at the government level about what is needed within the country. We may see some supply chains onshored at governments’ request.

Companies themselves may decide that they need more localized supply chains. Rather than a global supply chain, I can see companies deciding to have separate supply chains for the Americas, Europe and Asia, for example, that are not interdependent.

Mark Gregory

EY UK Chief Economist

The belief that agglomeration, concentrating people into city centers, generates higher growth and faster innovation through greater connectivity has dominated economic development policy in recent years. But this crisis has shown that city-based growth comes with costs as well as benefits.

Sharp declines in air pollution and carbon emissions have laid bare the burden cities place on the environment. At the same time, people have begun to realize that their lifestyle could be very different without a daily commute, not to mention how much money they can save.

This is not to say that face-to-face human interaction has no value. It remains very important in sectors such as business services, finance and advertising, but we can collaborate without being physically together every day. However, we have failed to challenge the assumption that all sectors are the same, when the reality is that work in other sectors can be distributed, thereby boosting growth and efficiency. In the UK, for example, two-thirds of all coding jobs are in the Southeast of England. Now, it really doesn’t seem that this has to be the case.

This doesn’t mean that cities won’t continue to grow. We should use the learnings from the current situation to initiate the rebalancing of economic activity from major capital cities to smaller cities, towns and rural areas.

The interesting question is therefore: how does your FDI policy need to adapt? What works for London will not work for a small town.

Fernando Medina

Mayor of Lisbon, Portugal

Like every global and interconnected city, Lisbon was strongly affected by the COVID-19 pandemic. Although the rate of contagion was controlled and the number of infected people was moderate compared with other countries, many services, namely in the tourism and hospitality sector, were forced to close during the lockdown. They now face a serious challenge to recover, even with the city’s and government’s support.

The tourism sector will have to turn its attention to the domestic market until the world regains confidence in international travel. The increase in unemployment demands a strong social response and accelerated reskilling to mitigate the already on-going impact of digitalization and automation, which was accelerated by COVID-19.

This new reality presents a new set of challenges and demands innovative policies and ideas, from both the public and private sector, with the EU assuming an important role. The recovery might take time, presenting a serious economic and social challenge in the short-term. But when the situation is contained, European cities will recover fast and strongly.

Lisbon will reinforce its commitment to a carbon-free future, with a more sustainable and green mobility system facilitated by a high level of investment in public transport. By doing this, the city will continue to attract investment and people to one of the oldest, yet most vibrant and dynamic capitals, of Europe.

Bernhard Lorentz

EY Managing Partner Markets - Germany, Switzerland & Austria, and Head of EYCarbon

Governments have rightly launched large-scale stimulus programs to mitigate the economic and social effects of COVID-19, but there’s a risk we will neglect another big crisis: climate change. There’s significant merit in tackling both, but the right approach is needed.

Last December, before the onset of COVID-19, Ursula von der Leyen, President of the European Commission, presented a plan that set the course for a climate-neutral future and called for EU Member States to support a European Green Deal.

This aims to transform the bloc from a high-carbon to a decarbonized economy. It proposes a far-reaching set of actions, including investing in sustainable technologies and supporting industry to innovate. This aligns well with the agreement by EU heads of state that Europe should become the first climate-neutral continent. By 2050 at the latest, Europe’s greenhouse gas emissions are set to be net zero.

To achieve this target, the plan calls for greenhouse gas emissions to be cut by at least 50%–55% by 2030 from 1990 levels, an increase on the current 40% reduction target.

If done well, Europe could become a global pioneer by establishing its own economic model and creating a powerful stimulus for innovation. 

Robert O’Sullivan

Vice President of Finance, Kellogg’s Europe

In recent years, outside of people and food safety, which will always be the main priority, businesses such as ours have looked at their supply chains primarily through the lens of cost as an enabler to margin expansion. Post-COVID-19, there will be an additional lens front and center: resiliency. The challenge will be to find the right balance between the two. Those with a resilient supply chain have seen huge competitive advantage in the recent period of COVID-19, and I think this will continue in the longer term.

How can businesses ensure supply chain resiliency? Businesses in our sector will look at everything, but I don’t expect any knee-jerk reactions. There may be some relocations and nearshoring but, given that the main risk is security of supply, the immediate priority will be to change the KPIs when evaluating suppliers and doing everything possible to improve certainty. This could mean, for example, dual- or triple-sourcing to ensure security of supply.

Guillaume Alvarez

Senior Vice President, EMEA, Steelcase Inc., and Chairman of the European Executive Council

It may seem paradoxical, but Europe’s response to COVID-19 has been great, although with some complications. On the other hand, there has been a lack of coordination across Europe, and working out what the rules were in different countries sapped a lot of energy.

There may be close collaboration behind the scenes at the European level, but this hasn’t been obvious to the public or businesses, which creates uncertainty.

Europe now needs to turn its attention to supporting business and investment in the long term. As a starting point, it must revisit tax reform. Unfortunately, we expect that there will be a temptation to increase taxes, but there should be a way for us to keep cash in really productive investments.

Labor laws are also important. COVID-19 will result in some parts of business doing a lot better than others, so there needs to be greater flexibility to redeploy workers into growth industries and new jobs.

There also needs to be an ambitious policy to develop a technology sector in Europe.

Then there’s Brexit. We have to be pragmatic and maintain free circulation of goods and people as far as possible.

Finally, there needs to be a finalized European budget that accounts for the massive shock that we’ve just gone through and pays special attention to supporting mobility and sustainability.

This is the pathway to Europe’s recovery.

Caroline Jenner

Chief Operating Officer, JA Worldwide

The education sector was digitally transforming, but only at a modest pace. COVID-19 accelerated the shift to online learning platforms, and the education sector has achieved in two months what would have otherwise taken two years. Of course, we need to be careful that technology dependency does not entrench inequality.

When the pandemic recedes, I don’t expect consumers to want to go back to the ‘old ways.’ Instead, they will want blended learning based on a combination of digital and human interaction. Educators will want to improve how they assess a learner’s progress. This means that those that provide online education will only thrive if they focus on quality, impact and real-world relevance.

This will be driven by the younger generations, who are more tech savvy; they have already identified online alternatives to classroom teaching and are re-skilling themselves to remain relevant in the labor market in a post-COVID world. Competences such as entrepreneurship, so essential today, should be mainstreamed.

Companies should learn from this. Those that establish in-house digital training and development opportunities will be better positioned to attract and retain talent.

However the training is provided, meaningful partnerships are needed in the long term between government, business, civil society and local communities to create the education systems that will meet the needs of tomorrow’s youth and business

Alessandro Cenderello

EY Managing Partner for EU Institutions

There are often complaints about excess regulation and government intervention in the market in Europe, but when a crisis like this hits, you realize the importance of resilient institutions.

The EU has learned the lessons of the 2008–12 financial crisis, and our institutions are more equipped. With Europe at a crossroad, how can it attract the FDI that is critical to its recovery?

EU Member States have launched national programs, which differ country to country.

Europe is also driving global efforts to respond to COVID-19. The European Commission’s global initiative to raise €7.5 billion to develop a vaccine and treatments is a good example of how it is bringing organizations around the world together.

Will heightened government intervention continue? It should, and it will. Some nationalizations are already happening across Europe, so governments will certainly be more actively engaged in businesses and the economy after COVID-19.

But the more important issue is how governments will ensure resiliency in the long term. Improving resiliency will not only protect businesses and people, but also make Europe competitive and attractive to foreign investors, which will be needed to accelerate the recovery.

To take the uncertainty of H1 2020 events into account, EY enhanced its methodology for the Attractiveness program to include a three-pronged approach:

1. The ‘real attractiveness’ of Europe for foreign investors

Our evaluation of the reality of FDI in Europe is based on the EY European Investment Monitor (EIM), an EY proprietary database, produced in collaboration with OCO. This database tracks those FDI projects that have resulted in the creation of new facilities and new jobs. By excluding portfolio investments and M&A, it shows the reality of investment in manufacturing and services by foreign companies across the continent.

An investment in a company is normally included in FDI data if the foreign investor acquires more than 10% of the company’s equity. FDI includes equity capital, reinvested earnings, and intracompany loans.

2. The perceived attractiveness of Europe and its competitors by foreign investors

We define the attractiveness of a location as a combination of image, investors’ confidence and the perception of a country’s or area’s ability to provide the most competitive benefits for FDI. Field research was conducted by the CSA Institute in January and February 2020 via telephone interviews, based on a representative panel of 504 international decision-makers.

A second perception survey was conducted from 15 to 29 April 2020 to reflect decision-makers’ perception changes due to the COVID-19 crisis. This online survey was led by Euromoney, based on a representative panel of 113 international decision-makers.

3. Assessing the impact of COVID-19 on FDI in Europe

To estimate the share of FDI declared in 2019 that would remain secured in 2020 despite the COVID-19 crisis, EY combined data from three sources:

• A modelling exercise, to assess FDI vulnerability
• The Euromoney survey, based on 113 international decision-makers
• Webinars with 30 European investment promotion agencies, to collect field data

To view the full methodology for EY’s Attractiveness program, download the full EY Europe 2020 Attractiveness Survey (pdf).