Boosting Europe’s appeal to investors

Julie Linn Teigland at EY EMEIA outlines the importance of getting it right on regulation and innovation 

 

The European Council’s strategic agenda for 2024-2029 prioritizes building a ‘prosperous and competitive Europe.’  This is no doubt a noble ambition, but making it happen will require a radical rethink by both the EU and non-member states. The current economic data tells a grim story; according to the latest analysis from EY, foreign direct investment (FDI) in Europe fell 4% annually in 2023 — the first decline since 2020. 

 

FDI is important. It forms the bedrock of strong economies by stimulating job creation, fostering innovation and creating export growth. We all hoped that European FDI would bounce back strongly after the COVID-19 pandemic, but in reality a cocktail of slow growth, spiraling inflation, soaring energy prices and geopolitical uncertainty have left a bitter taste in the mouths of investors.

 

This should serve as an urgent warning to European policymakers, European institutions and national governments alike. 

 

EY recently surveyed over 500 business leaders on the biggest risks and opportunities for European FDI, and two major themes emerged. First; the need to strike the right regulatory balance for business, and second; creating a fertile environment for innovative businesses, especially those focused on tech and AI. 

 

Decisive measures must be taken in both these areas alongside others if Europe is to achieve its ambitions and face up to increasingly fierce international competition from the likes of the US and China.

 

Striking the right regulatory balance

Europe prides itself on introducing regulation that protects citizens faster than anywhere else. But this approach runs the risk of negatively impacting FDI unless a truly pragmatic balance is struck. 

 

Business leaders told us that the increased regulatory burden is the #1 top risk to Europe’s investment attractiveness over the next three years. This is perhaps no surprise following the introduction of far-reaching new regulations such as the EU AI Act and Carbon Border Adjustment Mechanism. Investors also voice frustration with the growing disparity of regulation between and within European countries including non-EU members like the UK, Switzerland, and Turkey.

 

To ease the burden on business, policymakers should try to harmonize regulation both within the single market and with other European economies. In the EU, introducing new laws through regulation, rather than directives, would help by reducing the scope for Member States to diverge from EU law. And to limit regulatory divergence, they should also exert influence on jurisdictions outside the EU.

 

The pace of introducing new regulations should also be reconsidered. The EU is typically a first mover but the businesses we spoke to agreed that a more gradual approach would give nascent industries more time to mature and for risks to materialize. Equally, old laws must be repealed when new regulations are introduced, because businesses can be overwhelmed by the cost and complexity of complying with regulations that overlap.

 

A fertile environment for high-tech business

When asked where Europe should concentrate its efforts to boost investment, the business leaders we surveyed placed “support for high-tech industries and innovation” first. And they ranked the environment for AI development as one of the most important technology-related factor determining where they invest. 

 

Almost all European CEOs are making or planning significant investments in generative AI, but only 44% of executives we surveyed feel that Europe performs better than other regions on this.

 

One way policymakers can help Europe catch up is by doing everything they can to boost digital skills across the continent. Business leaders say that the availability of a workforce with tech skills is a key consideration for them in deciding where to invest, and Europe urgently needs programs that enhance existing capabilities in this area. Initiatives to plug future skills gaps must be prioritized and policymakers, businesses, and academic institutions must collaborate to identify and invest in future skills needs for businesses.

 

Skills are, however, only one piece of the puzzle. Policymakers must also prioritize hardware and tech infrastructure development, while reducing red tape bureaucracy and providing better access to EU funding for small and medium-sized AI and tech enterprises.

 

A prosperous and competitive Europe

If we are to once again establish Europe as prosperous and competitive, we need to be able to tell a progressive story that highlights the continent’s collective strengths, above and beyond the individual economic interests of nations, regions, or cities. Success will require collaboration between European countries and between politicians, businesses and institutions across the continent.

 

Getting the regulatory balance right and stimulating innovation must be top priorities but there are other areas that should be of concern too – from restoring confidence in energy prices and supply, to unlocking private investment with a full capital markets union and focusing on the economic benefits of sustainability.

 

EY recently published 9 key recommendations to boost investment and make Europe more competitive and as a new European parliament gets down to work, now is the time to take a close look at these if policymakers are serious about getting Europe firing on all cylinders again.

 

As global competition intensifies, we 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 — if we are going to restore Europe’s competitiveness on the world stage. 

 

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Julie Linn Teigland is the Managing Partner at EY EMEIA area. The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms. 

 

Main image courtesy of iStockPhoto.com and imaginima