Overseas investments in Europe drop in 2009

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Foreign investment projects in Europe fell by 11% last year but larger Western European markets were still seen as safe havens in uncertain times, according to a new study.

Analysts describe the decline as "modest" given the economic turmoil that has engulfed Europe over the past two years.

The Ernst & Young European Attractiveness Survey, presented at the World Investment Forum in La Baule, France, found mixed results, with some industries displaying more confidence than others.

Investment-intensive sectors including automotive, mining and transport projects – which have traditionally gone to Central and Eastern Europe – fell significantly, along with business services and software projects.

Other areas have proven more "recession proof", including food, pharmaceuticals and electrical goods, which showed growth in the number of new investment initiatives.

The big European economies have held up relatively well in terms of their ability to attract inward investment, according to the report. Project numbers in the UK were down just 1%, while those in France, Italy and Germany actually rose by 1%, 4% and 7% respectively.

Other "winners" in terms of investment were Russia, Ukraine and Turkey.

The 4% decline in European GDP mean there were inevitably some losers in 2009. The Spanish and Irish economies, which have historically been particularly appealing to investors outside Europe, were hit hard last year. Both countries had enjoyed runaway construction booms which have now come to a shuddering halt.

The most dramatic impact, however, was felt in Poland, Hungary, Romania and the Czech Republic, where project numbers fell collectively by 40% as investors sought the stability of larger Western economies.

Who is investing?

The US continues to account for roughly a quarter of all investment projects in Europe but invested less last year. Germany, the UK, France and Japan also began fewer new projects but still account for another 25% of investment numbers.

China invested more in Europe in 2009 than 2008, with project numbers up by nearly 30%. Chinese projects were also responsible for the third highest number of jobs created across Europe last year.

Looking to the future, 800 executives surveyed as part of the study offered a modestly optimistic view. Just over half said they were unlikely to embark on major investment projects this year but still view Western Europe as an attractive region.

However, there are concerns about Central and Eastern Europe, with executives' confidence falling sharply compared to last year. In the longer term, however, investors continue to see Central and Eastern Europe as a priority, ranking it the third most attractive location for future investment, just behind China and India.

EU Internal Market Commissioner Michel Barnier said Europe must work to keep its place as a leader in the world economy.

"I don't want Europe to be a subcontractor to other great powers. Europe must be at the top table, leading, not lagging behind - shaping the global economy, not being shaped by it," Barnier said.

He said making it easier to do business in the EU and getting new financial regulations right is essential. Barnier also stressed the need to complete Europe's single market, which he said could add up to 1.5% to the rate of annual economic growth.

"In a world where competition is becoming ever more global and intense, the task is imperative and the need urgent. But so is the prize: greater prosperity, and a Europe that is both more competitive, and more attractive to investors," Barnier said.

European Council President Herman Van Rompuy said the results of the survey came as no surprise. "Western Europe
is perceived as the second most popular destination for Foreign Direct Investment (FDI), right after China. And Eastern Europe is perceived as more attractive than both India and the US/Canada. The message is clear: attractiveness is not just about low labour costs and taxation, no, it is also about stability, about a reliable legal framework, about a schooled population," he said.

Van Rompuy said access to a larger sophisticated market is also appealing to foreign investors.

"The latest economic and financial turmoil did not change these strong fundamentals. Nor did they undermine the strong will of European political leaders to work together," he said.

Marc Lhermitte, Ernst & Young advisory partner and author of the report, says safety has been a key factor for investors weighing the attractiveness of European economies.

"Investors, whether internally with Europe or externally from the US and the Far East, have focused on proven markets with scale. Central and Eastern Europe generally, and many of the smaller countries in Western Europe, have seen dramatic drops in project numbers as investors have flown to the safety of bigger, safer economies like the UK, France and Germany," he said.

Lhermitte said the fourth quarter of 2009 saw a "definite acceleration" in new project announcements and, notwithstanding the current problems in the euro zone, 2010 should see a "modest pickup" in project numbers.

Jay Nibbe, deputy area managing partner for Ernst & Young, said GDP growth across Europe will struggle to reach 1% in 2010 and even in the medium term "growth will be a pale shadow of that in the US and in development markets across the world".

He said European governments must put the challenge of remaining attractive to existing and new business to the top of their agendas and start thinking about ways to encourage enterprise and investment.

"Without concrete and real action Europe will face an even harder task to ensure sustainable and substantial economic growth," said Nibbe.

The economic crisis that began in 2008 has spooked investors across the globe. The knock-on effects will continue to be felt long after economies return to growth.

Last year's Ernst & Young European Attractiveness Survey found that foreign direct investment was surprisingly steady in 2008, but it suggested that a different picture would have emerged by the end of 2009.

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