Europe Turning Less Competitive, Losing Business to North America, Says Survey

A new Formentor car by SEAT Cupra on the factory assembly line in Martorell, near Barcelona, Spain, on Sept. 29, 2020. (Albert Gea/Reuters)

Europe’s competitiveness is weakening and many firms are considering moving operations to North America, a survey of business leaders from the region has found.

The survey (pdf), published by the European Round Table for Industry (ERT) on May 23, found that 84 percent of CEOs and Chairs believe Europe’s competitiveness is weakening, with 16 percent saying that it is “weakening significantly.” Just seven percent consider Europe as maintaining its competitive position. Among participants, 57 percent expect their companies to move investments and/or operations to North America while 32 percent see it shifting to Asia, excluding China.

Only seven percent of survey respondents said they intend to shift operations and/or investments to China, with 77 percent not expecting such a development.

“The US Inflation Reduction Act (IRA) is seen by policymakers in Europe as posing a major challenge to the region’s efforts to regain its competitiveness,” the report said.

“Aiming at spurring investments in renewable energy and green technologies through massive subsidies worth nearly $400 billion, concerns that the Act could lure investments away from Europe have risen.”

A provision in the IRA offers tax credits for electric vehicles if a percentage of the materials used for batteries is sourced from North America or nations with whom the United States has a free trade agreement.

The Act has been a point of conflict between the two regions as the European Union and the United States do not have a free trade agreement. The EU has insisted that the IRA penalizes its member nations while European carmakers warn leaders that the region is falling behind in developing battery-producing gigafactories.

“Today, the battery business is led by Asian companies. And while the United States [is] catching up thanks to the Inflation Reduction Act, Europe is more and more lagging behind,” Volkswagen Group Components Board of Management Chair Thomas Schmall wrote in a social media post.

“The conditions of the IRA are so attractive that Europe risks to lose the race for billions of investments that will be decided in the coming months and years.”

Top Risks For EU

Geopolitical tensions were ranked as the “number one risk to their company’s business competitiveness” by 45 percent of participants, according to the ERT report.

“Such tensions translate into heightened uncertainty and volatility along many dimensions, posing challenges to business models and forward planning.”

Inflation was seen as the second biggest risk, followed by energy prices in the third spot. The report pointed out that even though regional natural gas prices have declined in recent months, it still is three times higher than the 2015–20 average, and over five times higher than in the United States.

“We can still turn this around—if our institutions and governments take up this challenge,” said Martin Brudermuller, Chair of ERT’s Committee on Competitiveness & Innovation, while speaking about Europe’s competitiveness, according to a May 23 post.

“The next survey will take place in the autumn—when the European Commission’s proposals to simplify and reduce reporting requirements by 25 percent are due to be announced—a step which will hopefully bring more optimism and make it easier for Europe to attract investment and jobs in all-important emerging sectors.”

Struggling Firms, Flat Investments

Businesses in the EU region have been struggling in recent months, with 53 percent of firms across Europe shifting their focus away from growth to cost cutting, according to a study by credit management services provider Intrum.

The May 23 study, which features the opinions of over 10,000 companies across 29 European nations, found that 51 percent of businesses see inflation as limiting their ability to grow while 68 percent expect high inflation rates to last for another year.

Facing a tough financial environment, businesses are choosing to cut down costs, with 56 percent becoming more cautious about their spending and borrowing plans.

Foreign investments into the region are already stalling. The EY European Attractiveness Survey 2023 found that foreign direct investment into Europe rose by just 1 percent in 2022 compared to 2021 and continues to remain 7 percent below the 2019 level, the period before the COVID-19 pandemic.