Beyond Brexit: This is what Europe really needs to be successful

In this Brexit series, professionals discuss how the business community should navigate the UK's departure from the EU. See the stories here, then write your own (use #Article50 in the body of the piece). 

Political stability and predictability alongside single market access have underpinned the appeal of Europe for foreign direct investment for the last 20 years. We are now at a critical point in time in which a global political, economic and investment landscape in flux is meeting a technological and innovation revolution.

We are now at a critical point in time in which a global political, economic and investment landscape in flux is meeting a technological and innovation revolution.

What does this combination mean for cross-border investments and how can it provide a constructive pathway to more jobs and growth in Europe?

We recently found that 71% of foreign investors have already felt some impact following the UK’s referendum on EU membership, particularly on operating margins, cost of purchase and sales. Despite this impact, foreign direct investment in existing operations appears stable. Currently, 86% of the investors that are active in the UK are not planning any changes to their strategy despite the upsurge in uncertainty across Europe. This suggests that the majority of existing investment in factories, jobs and infrastructure is secure – for the moment. 

Political risk is emerging as an increasingly important consideration for investors alongside the traditional economic factors behind investment decisions. For decades, the single market has created a level of supply chain interconnectivity between businesses across Europe. We have encouraged organizations to source the best components and the best talent wherever found in the single market and beyond.

Political risk is emerging as an increasingly important consideration for investors alongside the traditional economic factors behind investment decisions.

While politics and politicians come and go and policies change, investors understand the need to take a long-term or multiyear view of investments. In these changing times, that thinking now needs to go one step further. Investment decisions must be based on longer-term fundamentals, such as access to deep pools of expertise and talent; access to the single market overall, or large domestic markets and; clustering and network effects of technology and knowledge.

The focus for governments and regulators needs to be engaging with those sectors most impacted by the loss of single market access. The risks and financial impact of Brexit on investors will not be confined to the British Isles alone.

Today’s economy in the UK and mainland Europe is services based, and increasingly knowledge-based. There is a clustering and a “multiplier effect” of key industries around certain countries or geographic areas, like engineering in Germany; technology around Berlin; FinTech in London; computing in the Silicon Fen area around South East England; biopharmaceuticals around Brussels; ceramics in Sassuolo, Italy and so on.

These clusters take years to build, and will remain a source of competitive advantage – provided that the right social and economic support continues to remain in place. Post-Brexit this will be as much a challenge for the British Government as it is for European policymakers.

Technology and knowledge increasingly do not recognize national boundaries, but seek out the benefits of global markets. Europe, including the UK, need to think beyond the immediate challenges presented by the Brexit negotiations to develop a more comprehensive approach to technology and to retain and sustain the vital links between Europe’s companies, clusters and knowledge centers whether in the European Union or not. 

Certainly a more effective and efficient European capital market would certainly help to provide much needed access to the necessary investment and funding. Today, Europe continues to have the highest level of dependency on funding from the banking system. The lack of available, accessible funding is holding back Europe’s tech companies and start-ups.

Certainly a more effective and efficient European capital market would certainly help to provide much needed access to the necessary investment and funding.

When reports suggest that 65% of children entering primary school today will end up working in a job that doesn’t exist yet due to technological advancement, it is clear that we must focus on securing Europe’s high-tech future, and access to capital is part of this. There can be no doubt that what we really need to support jobs and growth are more hybrid, more diverse, richer sources of capital – whether the UK is part of the single market or not.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.