Political uncertainty considered top concern among European investors, says EY survey

Political instability, protectionism and Brexit are affecting foreign investment decisions in Europe, according to research from professional services firm EY.

EY’s Attractiveness Survey Europe 2018, which interviewed more than 500 worldwide corporate executives, found that nearly 39% of investors view geopolitical instability as the greatest risk facing European FDI projects.

Following geopolitical instability, corporate executives consider economic and political instability in the EU (excluding Brexit) and a rise in protectionist economic policies to be among the most challenging obstacles facing FDI in Europe. As with the US and UK, Europe has experienced its own populist political movements, which could have significant economic consequences for the continent as a whole.

Despite Emmanuel Macron’s victory over far-right candidate Marine Le Pen in France, other European countries, including Hungary, Austria and Germany have experienced a rise in populist and eurosceptic movements. Italy, the continent’s third largest economy, has recently formed a coalition government between two eurosceptic parties: the Five Star Movement and the League.

“Business leaders in Europe need to look at the geopolitical risks that can impact both their export potential as well as how they operate their supply chain across the region,” said Andy Baldwin, EY’s Europe, Middle East, India and Africa managing partner. “The optimism of 2017… has been replaced by new fears and uncertainty in Eastern Europe, secession risks in Spain and an expansionist macroeconomic agenda of the new Italian administration.”

Besides geopolitical uncertainty within the EU, a sizeable amount of investors (30%) believe Brexit will have an impact on their foreign investments into Europe, according to the report. While the survey categorised Brexit as its own field, other top investor concerns, including geopolitical uncertainty, protectionism and populism, are all inherently tied to the UK’s departure from the EU.

Despite public scrutiny and uncertainty, a majority of investors do not see Brexit as having an impact on their “current footprint or activities” within Europe, according to the survey. In fact, 65% of corporate executives said that Brexit would have no effect on their current operations in Europe.

“While some investment has been diverted away from the UK, so far there is little evidence of a big exodus of assets. Much will depend on the final outcome,” said Mats Persson, EY’s head of international trade for UK and Ireland.

In the face of these risks, the survey concluded that investor confidence in Europe has reached its highest level in the past three years. Most notably, 50% of business leaders believe that Europe’s attractiveness will increase over the next year, compared with just 25% of respondents in 2017, according to EY.

The survey demonstrates that investors remain confident in traditional European marketplaces, like Paris and London, but there is a growing trust among the emerging markets of central and eastern Europe (CEE).

In particular, when asked where corporate executives would move their operations following Brexit, 68% said that they would move their operations elsewhere in Europe, with 35% choosing western Europe and 33% selecting CEE as relocation destinations.

These results demonstrate that investors are becoming increasingly more confident in CEE marketplaces, as the region begins to offer more value-added jobs, according to the survey.

“Looking ahead, the attractiveness of CEE as an investment destination will depend on the region’s ability to increase labour productivity,” said Merek Rozkrut, chief economist at EY’s Poland office. “This can come from further capital deepening; from factors stimulating total factor productivity; or by shifting from less productive sectors, such as agriculture, to more productive ones, such as professional services.”