Look beyond the current political narrative: Europe is on a roll

How does the rest of the world perceive Europe right now? Maybe as a continent that is buffeted by one political crisis after another, forced to defend its long-standing liberal identity from the forces of populism, put on the back-foot by the protectionist trade rhetoric from the US, and with some EU markets seemingly fighting continuous struggles against rising sovereign debt.

Looked at in that light, Europe’s circumstances could seem quite bleak. Yet is that really a fair depiction of the continent? I personally feel the focus on the current political narrative is a distraction from Europe’s more positive economic picture.

Let’s look at the statistics. Europe boasts four of the world’s 10 largest economies –Germany, France, the UK and Italy – with Germany having the world’s largest current account surplus. The European Commission predicts strong growth of 2.1% this year and 2% next year in both the EU and the euro area, on the assumption that a status quo remains in terms of trading relations between the EU27 and the UK. It cites improving labor market conditions, declining household debt, high consumer confidence and supportive monetary policy as the reasons for its positive outlook. 

Nearly two thirds of European middle market companies are targeting high single digit growth between 6-10% and a further 29% expect to see double-digit growth.  

Our own European Attractiveness research, which I have written about previously, also underlines the fact that Europe is in robust economic health, enjoying the strongest growth since the financial crash a decade ago. We continue to see Western Europe remaining the world’s most attractive investment destination for foreign investors, with Central and Eastern Europe coming third, just behind China. And, for middle market companies the picture in Europe is even rosier, as our European Growth Barometer recently found. Nearly two thirds of European middle market companies are targeting high single digit growth between 6-10% and a further 29% expect to see double-digit growth.  

So at a time when Europe undoubtedly faces considerable political challenges, why is its economy still managing to power ahead? Strong global growth is a major factor since the European market is very export-led. European goods and services are sought after all over the world. This is a big boost to European businesses and explains why Europe secured a record 6,653 foreign direct investment projects in 2017 and why mid-market European companies are more confident than their peers anywhere else in the world. 

In particular, digital and business services are booming in Europe, with the sector having accounted for almost a third (31%) of all European FDI jobs projects last year, helping to create more than 63,000 jobs. The financial services and pharmaceutical sectors are also thriving. Every sector benefits from the geographical compactness of Europe, however, and the ease with which people and goods can currently move around. In fact, it is this ease that makes European businesses so willing to do business cross-border and to build or buy assets in other markets.

Europe’s economy might be strong today, but how can we ensure that it continues to perform well in future? Europe is already rightly recognized as a manufacturing leader, but going forward its success will increasingly rest on its ability to assume a leadership role in technology and innovation, as well. This is why I believe that Europe needs to have a technological strategy and blueprint to forge ahead with establishing the Single Digital Market. With these pillars in place, it will be setting itself up for two to three decades of success and creating an environment that is conducive to producing the next tech giant. 

 The right immigration policies will also play a role in Europe’s success in future. Governments will need to balance their desire to attract key skills with growing sensitivities around immigration, particularly low-wage immigration, which is seen as suppressing salary growth. Here, there are lessons that Europe can learn from the approach to immigration that is taken by Asian countries, such as China and Singapore.

 Brexit is a short-term hurdle that Europe must overcome although, interestingly, in our research, investors only rated it as their fourth-biggest worry.

Of course, Brexit is a short-term hurdle that Europe must overcome although, interestingly, in our research, investors only rated it as their fourth-biggest worry. The reality is that the negotiations between the EU and the UK are either likely to go down to the 11th hour or from current news reports, we may well wind up with extensions a couple years from now. 

One thing for sure: the one certain consequence of Brexit has been uncertainty for many. For businesses it’s important to look at what you had pre-Brexit, what you’re losing and determine what you need. The reality is companies across a broad range of sectors are already gearing up for Brexit and making practical preparations to enable their businesses to withstand a cliff-edge departure. We’ve seen financial services firms understand this better than most and hence seeing financial institutions establishing the capitalized subsidiaries in the EU that enable them to operate. But with other industries, like automotive, things are more complicated. Just consider manufacturing, components, assembly – the many elements of the supply chain. This could trigger a dampening effect in the short-term post Brexit.

Of course, the EU itself will also be a different proposition without the UK in it, which could affect how it evolves in future. For example, the UK was a major driver in the EU’s proposed Capital Markets Union, a project most people believe to have now stalled. So where will the capital come from that enables European businesses to grow in future? If there’s a squeeze on capital, could there be a squeeze on corporate optimism, too? Will that then result in a slowdown in European growth?

From a political perspective a huge amount remains unknown, but what we do know is that despite all the headwinds it faces, the European economy is growing today. And as it grows, jobs are being created, wages are rising and, for many people, standards of living are getting higher. All round there is much to be positive about, but we should never lose sight of the political backdrop and the need to ensure that we pursue inclusive growth – growth that narrows, rather than broadens, the social equality gap.