On paper, Europe should be a magnet for foreign direct investment (FDI). The world’s third-largest economy is home to 500 million consumers and boasts a well-diversified industrial base, robust infrastructure, and a highly skilled workforce.
Despite these advantages, our recent EY Europe Attractiveness Survey found that FDI actually fell by 4% in 2023 – the first decline since 2020. Despite hopes that FDI would bounce back post-pandemic, slow economic growth, spiraling inflation, soaring energy prices and geopolitical uncertainty have put a serious dent in Europe’s attractiveness to investors.
As the new European parliament looks to shape the policy agenda for the coming term, boosting the continent’s investment appeal must be a priority. EY teams have identified nine key areas of action based on insights from over 500 business leaders across Europe that will help make this a reality.
1. Strike the right regulatory balance between protection and innovation
41% of business leaders told us that the increased regulatory burden was a top risk to Europe’s attractiveness over the next three years. For businesses, achieving and demonstrating compliance can be complex and costly, and noncompliance with newly updated laws can lead to significant penalties. Policymakers can help here by finding the right regulatory balance. That means harmonizing regulations to minimize divergence, reconsidering the pace of new regulations to allow businesses time to comply effectively, and reviewing and repealing outdated laws to reduce potential confusion.
2. Maintain manufacturing competitiveness
Manufacturing investment remained resilient with only a 1% drop in 2023 – with the number of announced projects remaining higher than the annual average number between 2013 and 2022. However, policymakers must not become complacent about this. They must take steps to help businesses scale up to compete with US businesses, in addition to shoring up the supply of vital components like microchips and providing infrastructure for critical public goods like electricity and data.
3. Create a fertile environment for innovation
62% of executives EY teams surveyed noted that Europe outperforms others when it comes to the availability of a workforce with technology skills and when asked where Europe should focus, investors placed “support for high-tech industries and innovation” first. In the face of fierce competition from the US and Asia, Europe must prioritize nurturing digital skills in the workforce, supporting hardware and infrastructure development, and reducing bureaucracy for small- and medium-sized tech enterprises.
4. Restore confidence in energy prices and supply
Investors rank “volatile energy prices and energy supply issues” as the second greatest risk to Europe’s attractiveness. Competing destinations, such as the US, are less reliant on imported energy and have not experienced price increases that are comparable with Europe’s in the past two years. Policymakers can help restore confidence here by funding energy infrastructure, such as investing in energy grids and interconnectors to integrate European markets, while also investing in the green energy transition, which will require an estimated 600b Euros.
5. Unlock private investment with a full Capital Markets Union
Access to capital is now the most important factor in determining where businesses invest, with nearly a third of executives ranking liquidity of financial markets and availability of capital among the top three factors for country investment decisions. Creating a fully integrated Capital Markets Union would allow pension and insurance funds and other institutional investors to invest across Europe at scale.
6. Unify to respond rapidly to global trade wars
Executives rank “political instability in Europe” as equal second and geopolitical tensions fifth as threats to Europe’s investment appeal over the next three years. As geopolitical and global trade tensions intensify, Europe must be united on key issues, including which industries need to be protected and where the threats lie, while European policymakers must be equipped to respond rapidly and decisively.
7. Focus on the economic benefits of sustainability
Businesses consider “countries’ policy approach to climate change” as a top investment factor. Europe is already a sustainability leader with over two-thirds (67%) of executives reporting that Europe is better than other regions at helping their business achieve its sustainability goals. To ensure Europe’s continual sustainability success, funding must be released for sustainability projects and a balance must be struck between not stifling business or impeding strategic ambitions and environmental regulation.
8. Boost workforce productivity and promote Europe’s critical skills
When businesses planning to invest in Europe were asked about their motivations, “access to skills” came second. Europe performs well here and must maintain momentum with initiatives to plug future skills gaps. Policymakers, businesses, and academic institutions must collaborate to identify and invest in future skills needs for businesses.
9. Balance tax competitiveness and revenue growth
32% percent of executives surveyed cited the pragmatism and flexibility of the tax authorities as one of the most important tax-related factors when choosing where to invest, and half said that Europe already outperforms others on this. To maintain, and grow, Europe’s position, policymakers must avoid introducing severe tax measures while also ensuring cooperative compliance processes and providing help with discovering and understanding local rules.
As global competition intensifies, Europe must enhance its ability to adapt by addressing foreign investors’ concerns.
Success will require collaboration between European countries and politicians and business. They must harness the spirit of urgency and unity that Europe demonstrated in response to the two most recent crises — the COVID-19 pandemic and the war in Ukraine — to restore Europe’s competitiveness on the world stage.
Get it right, and Europe’s policymakers can send a powerful message that the continent is a thriving hub for growth and progressive investment for 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.
