Amid global competition for investment, what more can Europe do?

1. Find a regulatory balance between protection and innovation

In our survey, businesses say that an increased regulatory burden is the top risk to Europe’s attractiveness over the next three years. Forty-one percent rank this as a top three risk, which is significantly more than the 33% who mention energy and political instability, which are a joint second. Businesses in the high-tech and industrial sectors are most at risk.

Concerns about new regulation are increasing because of the introduction of new laws such as the Carbon Border Adjustment Mechanism, the EU AI Act, FDI screening and product regulation in specific sectors. Investors are also likely to be frustrated by the growing disparity of regulation between and within European countries.  

“Europe prides itself on introducing regulation that protects citizens faster than anywhere else,” says Marc Lhermitte, Partner, EY Consulting, Global Lead FDI & Attractiveness. “This is a positive, but businesses are calling out for a more pragmatic balance between protecting citizens and help enabling investment and innovation.” 

How can European policymakers alleviate these concerns? 

• Harmonize regulation: Policymakers should try to harmonize regulation within the single market. Introducing new laws through regulation, rather than through directives, would reduce the scope for Member States to diverge from EU law. To limit regulatory divergence, they should also exert their influence on jurisdictions outside the EU.
• Reconsider the pace of introducing new regulation: The EU is typically a first mover in regulating areas such as data protection, AI and sustainability. A more gradual approach may be better, because it gives nascent industries more time to mature and for risks to materialize. Surveyed businesses agree. When asked where Europe should concentrate its efforts in order to maintain its competitive position in the global economy, they rank “allowing regulation to keep pace with technological and other disruptions” fourth in a list of 15 initiatives.
• Repeal old laws: Old laws must be repealed when new regulations are introduced. When this does not happen, businesses can be overwhelmed by the need to comply with regulations that appear to overlap.

2. Maintain manufacturing competitiveness

FDI in manufacturing projects in Europe is proving resilient. The number of announced projects in 2023 was only down 1% from 2022 and 2% from 2020, but it was still higher than the annual average number between 2013 and 2022. 

However, there is no room for complacency. Domestic demand for manufactured products could decrease due to demographic changes. And another spike in energy prices would raise manufacturing costs. Europe is particularly vulnerable to these shocks because European countries export more of their manufactured goods than other countries do.  

The sheer scale of industrial stimulus policies around the world means that Europe must expand on its own policies that encourage manufacturing, such as the Net-Zero Industry Act. Policymakers could also boost European manufacturing in the following ways:  

• Shore up supply of vital components: Whether it is microchips used for advanced digital products or rare earth materials used in electric vehicle batteries, there is a global shortage of the materials and components needed to support high-growth industries. For many years, China has invested in ensuring its businesses have access to vital materials and components. More recently, the US has taken steps to protect its chip industry with the CHIPS and Science Act. Europe has responded with its Critical Raw Materials Act, which sets out targets for the domestic mining, recycling and processing of specific raw materials. But Europe will still need to import large quantities of vital raw materials, so it needs a new, long-term strategy — especially when every non-European major industrialized country is doing the same. 
• Allow businesses to scale up to global relevance: Policymakers must remove the barriers to the creation of large, Europe-wide businesses that can rival the scale of those in the US and Asia. Relaxing competition laws to allow mergers would help, as would harmonizing regulation across European countries. 

3. Create a fertile environment for innovation

Asked where Europe should concentrate its efforts to maintain its competitive position in the global economy, investors place “support high-tech industries and innovation” first.

4. Restore confidence in energy prices and supply  

Investors’ second-biggest risk to Europe’s attractiveness over the next three years is “volatile energy prices and energy supply issues.” But energy prices have decreased drastically since their peak in 2022 and, in some countries, are now lower than pre-pandemic levels. So why are investors worried? 

One reason could be future shocks that could plunge Europe into another energy crisis. This dents confidence in Europe’s attractiveness because competing destinations, such as the US, are less reliant on imported energy and have not experienced price increases that are comparable with Europe’s in the past two years. And Europe’s need to reduce its reliance on imported energy and to decarbonize energy generation might impact future prices.  

The EU and individual countries have already taken drastic action. EU energy subsidies rose from €177 billion in 2015 to €216 billion in 2021 and to €390 billion in 2022. There has also been a series of initiatives designed to accelerate the low-carbon transition of Europe’s energy sector — most notably, the EU Fit For 55 package.

How can policymakers help restore confidence in energy?

• Fund and develop infrastructure: Assets such as grids and interconnectors could be funded at the European level. Interconnectors are crucial to integrating Europe’s energy market, which will reduce costs and improve resilience. Interconnectors need coordinated planning and financing, which is too complex for a single country to manage alone.  
• Invest in Europe’s energy transition: An estimated €600 billion is required for Europe’s energy transition. This increases the importance of completing the capital markets union.

5. Unlock private investment with a full capital markets union

For investors, access to capital is vital. Thirty-two percent of executives say that “liquidity of financial markets and availability of capital” is one of the top three factors that determine where they invest — an increase from 28% in 2023 and 25% in 2022.  

European policymakers need to be aware that there are trade-offs between de-risking from countries such as China, achieving net-zero targets and restoring economic competitiveness. For example, restricting imports of clean technology from China will reduce economic dependence, but potentially raise prices and therefore slow the rate of energy transition.

As geopolitical and global trade tensions intensify, European policymakers need to be able to respond decisively. This means the Member States must align on key areas. Which industries need to be protected? Which countries represent a strategic threat? The attractiveness of individual Member States relies in part on the attractiveness of the entire continent.  

 “Amid increasing division and discord around the world, policymakers need to act with unity and urgency to boost Europe’s attractiveness to foreign investors,” says Hanne Jesca Bax, EY EMEIA Markets and Accounts leader. 

7. Focus on the economic benefits of sustainability 

Countries’ approach to sustainability can help them to secure investment. Businesses rank “countries’ policy approach to climate change” as the fifth most important factor influencing where they invest.

Europe is already a sustainability leader: 67% of investors say that Europe is better than other regions at helping its businesses achieve their sustainability plans. They say that, within Europe, Switzerland, France and Germany are best equipped to do this. And investors want Europe to keep up this momentum. They rank “encouraging environmental policies and attitudes” as the sixth most important way to improve Europe’s attractiveness. 

How can policymakers retain Europe’s status as a sustainability leader?  

• Release funding for sustainability projects: Just 42% of surveyed executives say that Europe outperforms other regions on the level of funding for sustainability projects. 
• Balance environmental regulation with ease of doing business: Policymakers will need to be careful that any new regulation does not stifle business activity and impede Europe’s other strategic ambitions.

8. Boost workforce productivity and promote Europe’s critical skills  

The presence of a highly skilled workforce is a major factor in determining where businesses locate operations. When we asked businesses that are planning to invest in Europe this year about their motivations, “access skills” came second only to “reduce costs.” And investors ranked “skills and availability of the workforce” fourth in a list of 15 factors influencing where they invest.

Europe is doing well here. For example, 62% of investors say that Europe outperforms competitors on the availability of technology skills such as science, engineering and data analysis. But it cannot be complacent. Reports by the European Centre for the Development of Vocational Training and the European Labour Authority show that the continent has shortages of specific skills in the health care, software, construction, hospitality and engineering sectors. 

The EU has made a start, with initiatives to fill future skills gaps that include its Pact for Skills and the Skills and Talent Mobility package. It is vital that policymakers, businesses and academic institutions continue to collaborate to identify the types of skills that businesses need in the future.

9. Balance tax competitiveness and revenue growth 

European governments are attempting to raise revenue for increased expenditure while maintaining competitive tax rates. That is a difficult balancing act.

Tax is only one of many factors that influence where businesses locate their operations, but authorities should resist draconian measures that could harm Europe’s attractiveness. Investors in the survey say that tax authorities’ flexibility and pragmatism is one of the most important tax-related factors influencing where they invest. In particular, they value cooperative compliance processes and help with discovering and understanding local rules.

Europe’s introduction of a 15% global minimum tax on companies with more than €750 million in revenue will inevitably see jurisdictions compete to find new ways of offering tax breaks to companies. Countries such as Ireland, Luxembourg and Switzerland, which historically had lower rates of corporation tax, are signed up to the new rate. But the position of other major economies such as the US is less clear, which could give them an advantage — particularly if a Trump administration opts out.     

Although the revenue implications of the global minimum tax remain to be seen, experts expect the reforms to shift tax competition between jurisdictions to credits, grants and subsidies. Last year, the OECD confirmed that it will provide more favorable treatment for certain tax credits such as those contained in the US’s Inflation Reduction Act.