The International Monetary Fund (IMF) and financial services giant EY are the latest organisations to release warnings about the state of the European economy.
The IMF published its Concluding Statement of the 2024 Mission on Common Policies for Member Countries in the same week EY released a nine-point action plan it said reflected the views of European business leaders.
EY said action plan came after foreign direct investment (FDI) into Europe declined in 2023, falling by 4% compared with 2022, and dropping to 11% lower than in 2019, just before the COVID-19 pandemic hit.
Despite hopes that FDI into Europe would bounce back post-pandemic, it added, slow economic growth, spiralling inflation, soaring energy prices, and a “febrile geopolitical environment” had caused the first downturn in European FDI since 2020.
EY therefore set out nine recommendations to help Europe remain competitive and attractive to investors, including: find the right regulatory balance between protection and innovation; maintain manufacturing competitiveness; create a fertile environment for innovation; and restore confidence in energy prices and supply
The plan also recommended that Europe work to: unlock private investment with a full Capital Markets Union; unify to respond rapidly to global trade wars; focus on the economic benefits of sustainability; boost workforce productivity and promote Europe’s critical skills; balance tax competitiveness and revenue growth.
‘Magnet for FDI’
The authors of the accompanying report went on to say: “Europe should be a magnet for FDI. It is home to 500 million consumers and is the world’s third-largest economy behind China and the US. It has a well-diversified industrial base, robust infrastructure, some of the world’s leading academic and research institutions, and a highly educated and skilled workforce.”
They added, however: “But more and more data shows that Europe needs to rethink the way it stimulates economic growth and attracts FDI. Europe’s share of global industrial output declined from 21% to less than 15% between 2001 and 2021. More recently, the United Nations Conference on Trade and Development (UNCTAD) estimates the value of greenfield FDI in Europe declined by 20% in 2023. In the same period, investment increased by 2% in the US, 8% in China and 17% across Asia.”
‘Challenging’ medium term
For its part, the IMF said the continent was gradually recovering after the pandemic and Russia’s invasion of Ukraine and subsequent actions. Inflation, it added, was declining towards target. It also remained optimistic, noting a “modest pick-up” was expected for this year even as the medium-term looked challenging. It also believed that inflation would return to target in the second half of next year, while risks to growth were on the decline but remain “two-sided” for inflation.
There were warnings from the IMF, however, that the continent needed further market integration and deepening. Not doing so, it warned, would cause it to fall short of its “transformative goals of energy security, climate change mitigation, and digital transition” and also risk it falling behind global peers.
