Vive la France and long live Europe

It’s official. Foreign investors rate Paris as the most desirable European city to invest in. That finding, from our latest European Attractiveness Survey, might not seem so surprising given the political events of the past couple of years, but actually it’s quite a game-changer for London. The British capital has claimed the top spot in the ranking of investors’ favourite European cities since the survey began in 2003. 

Of course, the popularity of Paris is linked to the overall increase in the attractiveness of France as an investment destination. Our survey found that a resurgent France benefitted from a staggering 31% increase in foreign direct investment (FDI) projects in 2017, with its total number of projects stacking up at 1,019 – only around 100 projects fewer than Germany, which had 1,124. 

While investor sentiment is rising for Paris and France, the UK perhaps unexpectedly still retains its top position as Europe’s hottest investment market, with 1,205 projects in total. The fact that the UK can hold its own in FDI during such a politically turbulent time should perhaps give the British some comfort on how the country will fare in a post-Brexit world. Just look at financial services where there is some ‘certainty’ due to Brexit: in this sector the UK has seen cross-border investments increase by 93% - driven by Brexit contingency plans to retain EU ‘passporting.’ Perhaps we will see a FDI ‘bounce back’ once the dust has settled and differences are resolved on other aspects of Brexit.

I’m sure it’s no coincidence between France’s rise in FDI and its new positioning as a tech champion. After all, digital and business services accounted for 31% of all FDI projects in Europe during 2017. France’s diverse economy and robust infrastructure have always appealed to investors, but it’s only with a new reformist administration and its new charismatic and dynamic leader, that companies are taking serious note. European governments should take note.

On the surface, the vitality of France may appear to be in stark contrast to what’s happening in the UK at present. Here we are edging towards Brexit, although the terms on which we will leave the EU are still uncertain. 

It is a tribute to the strength of the UK economy, however, that despite the ongoing uncertainty and political stalemate, it still attracted more FDI investment in 2017 than any other European country. Much of this is to do with the UK’s burgeoning expertise in the tech space: London is home to the most tech unicorns (start-ups valued at $1 billion or more) in Europe. Also, the UK’s labour laws, legal system, sector expertise and time zone make it attractive to investors, while the devaluation of its currency in the wake of Brexit may have boosted its appeal further. Having said that, it is clear from our survey that some investment is moving from the UK to continental Europe.

European FDI investment has traditionally been a three-horse race between the UK, Germany and France. So what happened to Germany in 2017? In light of Brexit, we might have reasonably assumed that Germany would overtake the UK as Europe’s biggest FDI destination last year. It didn’t happen. The strong growth in project numbers, which was a feature of recent years, slowed down in 2017. This could have a lot to do with the nature of the German labour market. Unemployment is low, wages are rising and there is an ongoing skills shortage. German workers also enjoy a lot of protection under employment law, which reduces the flexibility of employers. Other possible limitations on growth are Germany’s strict data protection and privacy laws and its lack of a global city on the scale of London or Paris. In addition, Brexit itself may have impacted negatively on Germany by reducing the perceived attractiveness of Europe overall. 

If FDI growth in Germany was muted in 2017, it’s hard to see that it will take a great leap forward in 2018, either. The country’s significant trade surplus is clearly in the cross hairs of the Trump administration and the impact of any potential trade war will by asymmetric on Germany. However, if Germany doesn’t benefit from more investment this year, that will have a knock-on impact on the rest of Europe since Germany is the biggest source of FDI on the continent, after the US. 

Essentially, the German situation epitomises the fact that the global investment landscape is in flux right now as a number of factors converge to influence investor behaviours with regard to Europe. These factors include Brexit, political uncertainty in countries such as Italy and Spain, the prospect of trade wars, corporate tax cuts in the US, and the Base Erosion and Profit Shifting (BEPS) initiative, which aims to prevent companies from moving their profits from high-tax to low-tax jurisdictions. 

Europe clearly remains alluring to investors – the investors that we surveyed still ranked Western Europe as the most attractive region in the world, with Central & Eastern Europe taking third place, just behind China. Yet the fluid economic and political environment is invoking caution. Hence the overall year-on-year increase in European FDI was just 10% last year, in contrast with a 19% year-on-year increase in 2016.

With so much uncertainty, it’s not hard to see why an investor that previously regarded Europe as the ideal export platform for going global might choose to press the ‘pause’ button on that investment decision right now. With China moving up four points to take the number two spot when looking at regions, it’s worth remembering that Europe needs to remain united and attractive as a region. It’s not a zero sum game and if our key countries in Europe lose their FDI attraction, investment may well go elsewhere in the world. Whatever shape the European Union takes in the future, let’s keep the big picture in mind.