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.

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.

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.