Capital is on the move and Europe must respond

 

 

A difficult year…

 

2012 was a very difficult year for Europe in attracting inward investment according to Ernst & Young’s European Investment Monitor (EIM), the most comprehensive analysis of inward investment projects in Europe, with a 2.8% decline in FDI projects across Europe. This was a relatively minor decline compared to Europe’s performance across all investment – according UNCTAD’s analysis, Europe’s share of total global investment, fell from 28% in 2011 to 22% in 2012.

 

Germany continued its strong recent performance with a rise of 4.8% in projects and the UK grew by 2.7% and there were bright spots in the growth of 22% in projects in Poland and 16% in Serbia, reflecting the strength of these two countries as manufacturing destinations. By contrast, investment project numbers fell by 25% in Italy, 13% in France and nearly 6% in the Netherlands.

 

 

…indicative of how the providers of capitalare reacting tot he Eurozone situation.

When we consider the European data in the global context there is real cause for concern as to the extent of the damage that the European economic crisis is causing to the long term economic potential of the continent. The EIM survey results are from respondents from an investor sample representative of current investors in Europe. These results paint a picture of a challenging environment, but one in which Germany and the UK are ranked in the top 8 global destinations for investment and in which there are moderately positive views of the future for Europe. However, when, as we do in the Ernst & Young Capital Confidence Barometer, we survey global investors in a sample selected independent of where they currently invest, the results are very different and no European country features in the top 15 target destinations.

 

These results are reconcilable if we consider the profile of the survey respondents. Around 55% of all inward investment in Europe is from other Europeans compared to only 6.5% from the BRICs. Europe is living off its historic relationships and heavily reliant on investors already in the region and it is these investors who view Europe relatively favourably. When we analyse the global market for investment, it is clear capital is once again on the move and in search of locations which have either strong demand or which offer very competitive production cost bases.  Europe in general today offers neither of these, quite the opposite in fact in real contrast to the top 5 destinations: America, Brazil, Canada, China and India.

 

Even Europe’s core base is now starting to feel the pressure. The EIM results for 2012 confirmed that capital is on the move in response to the economic crisis in Europe. Outbound investment volumes grew by 39% from Ireland, 34% from Spain and 9% from Italy as investors in these countries went in search of more attractive returns for their capital. The UK was a major beneficiary with investment from France increasing 87% in 2012.

 

…but labour is a challenge too

Europe clearly has challenges in maintaining its attractiveness as a destination for capital but the current economic policies may be compounding the problem by damaging labour as well. Unemployment in many countries is at record levels, over 25% in Spain and Greece according to the latest figures. Youth employment is an even more significant problem with levels of over 50% being reported in some of the peripheral economies.  On my recent trip to Detroit, US manufacturers expressed their unhappiness with the labour markets in Europe and especially the lack of flexibility and the high cost of labour. Europe ought to be an attractive location with a highly educated, relatively underemployed workforce but its labour market proposition is uncompetitive relative to the USA and many other locations. This position could potentially become much worse if it creates a long term unemployed generation that fails to acquire the experience and skills required of a modern workforce.

 

The wrong policy priorities

Attention amongst European policy makers has been on avoiding the collapse of the Eurozone. However the focus on macroeconomic stability is distracting attention from the real crisis: the ongoing decline in Europe’s competitiveness and attractiveness. The Eurozone may well eventually emerge with a reformed banking sector and a new fiscal regime but this could be an economy with an unskilled, unemployed workforce with a lack of productive capital. To the outside investor, Europe offers weak demand and low productivity –  a potentially disastrous combination.

 

The world is not going to wait for Europe to reform its real economy. On my recent trip to Detroit the countries that feature prominently in the top 15 destinations amongst global investors such as the BRICs, Indonesia and Columbia were at the heart of every discussion. By contrast, Europe was seen as a problem not an opportunity. Europe needs to look outside of its internal economic challenges and see what is happening in the rest of the world: the reshoring of manufacturing: the emergence of new growth sectors; and the relentless improvements in productivity.

 

The current approach is destroying capability and potential. Europe needs to stimulate demand and reform its economy. These changes are not mutually exclusive and can be achieved in tandem if Europe is to stand a chance of retaining its position in the global economy. With other regions showing positive momentum, Europe cannot afford to continue to look inwards and pursue austerity and neglect the changes in the world economy. A longer term strategy is required which includes short term initiatives to stimulate growth and to attract investment in key sectors.

 

 

 

 


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