Following a year of slow economic growth, soaring inflation, surging energy costs and an ongoing precarious geopolitical landscape, Europe has just recorded its first decline in foreign direct investment (FDI) since the pandemic.
This perfect storm has created a climate of caution among investors, with the recent EY Europe Attractiveness Survey finding that European FDI dropped by 4% in 2023 compared with the previous year, with FDI levels now 11% lower than in 2019, just before the pandemic struck.
Looking at individual countries, France secured the most investment despite a 5% annual decline in the number of projects, the UK ranked second, bucking the overall downward trend with a 6% increase in FDI projects. Germany came third following a 12% fall in investment.
Given that foreign investment increased in other parts of the world during the same period, these figures should worry European policymakers. Foreign investment helps the economy by creating jobs, stimulating innovation and boosting exports. Policymakers and businesses must therefore urgently prioritize working together to create the conditions where investment can flourish and Europe thrives.
A mixed picture across sectors
The number of FDI projects in software and IT services and business and professional services — traditionally and still Europe’s largest sectors for investment — fell by 19% and 27% respectively. Both are suffering from the effects of purse-tightening on the part of their clients and a general decline in outsourcing.
Our survey did find some bright spots. Investment in tourism and culture, the 17th largest sector for investment, increased by 130% in 2023. The sector continues to rebound as consumers return to spending on leisure and travel, free from pandemic-induced restrictions.
Investment in manufacturing also proved resilient, declining 1%. Businesses maintained manufacturing investment to ensure they can meet future consumer demand, which is expected to rise. Ongoing efforts to reorganize supply chains and relocate production bases to Europe also helped maintain manufacturing investment levels.
Foreign investment could surge, but risks remain
Despite the challenges, there is cause for optimism about the future. The survey found that 72% of businesses plan to expand or establish operations in Europe within the next year, up from 67% in 2022. A similar proportion (75%) are optimistic about Europe’s prospects over the next three years. Europe clearly still matters in current and future business plans.
Expectations of recovery are partly driven by pent-up demand for projects after a long period of low investment and difficult economic conditions. Whether it’s the war in Ukraine, soaring inflation or difficult financing conditions, the past three years have been marked by shock after shock. These challenges have not gone away, but they have eased to the extent that organizations now feel ready to invest again.
However, serious risks remain, and they need to be addressed. Our survey identified the top three threats to Europe’s attractiveness over the next three years:
- The increased regulatory burden: Europe has pioneered new regulatory initiatives in areas including carbon disclosure, supply chain due diligence, data protection and the safe use of artificial intelligence (AI). Regulation is important for helping build trust and accountability in business. But investors are worried that an expanding regulatory framework could stifle European business growth and agility.
- Energy prices and supply issues: These represent the second biggest threats to Europe’s attractiveness, reflecting concerns about the energy crisis of the past two years.
- Political instability in Europe: Executives are concerned about uncertainty in the run-up to the European elections and rising social tensions and political radicalism.
Securing the recovery
There is no room for complacency on any of these issues. The reality is that Europe is facing increasingly stiff competition from the US and Asia, so policymakers must take bold and decisive action now.
A change in public policies at the European and local level would encourage foreign investors to invest more. That means addressing a number of key questions, including how to harmonize regulation, restore confidence in the energy supply, alleviate the most immediate barriers to investment, facilitate access to capital and design long-term industrial policies.
European leaders must prioritize these questions and lean into the continent’s strengths to boost its FDI attractiveness and remain competitive in the years to come.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.
About the Author
With nearly three decades of experience in professional services for international clients, Julie Linn Teigland‘s focus is on transformation processes, in particular on the challenges of digital transformation, and is committed to the sustainable development of capital markets and their framework conditions. Julie has served as lead partner for several Fortune 500 clients
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