The EU’s Investment Problem

Imagine you’re wandering the streets of the EU quarter deciding where to spend your hard-earned Cheque-Repas for a sandwich. You pass one lunch spot that’s selling a sandwich for €4.00 and another place that is selling almost the exact same sandwich for €5.48 (37% more). If you’re like most people, you choose the €4.00 sandwich. Some people may still go for the more expensive option, but over time, the place selling the €5.48 sandwich will either have to find a way to lower their prices to be competitive or run the risk of going out of business.

This is an overly simplified example, but it’s a metaphor for the real problem that the EU faces today when it comes to competitiveness. With electricity prices in Europe now 37% higher than the US, the price of energy is clearly having an impact on European production and competitiveness. The results of a recent survey conducted by FleishmanHillard indicate that European business leaders are concerned, not just about the short-term implications, but also about the EU’s long-term international economic competitiveness and the impact this price disparity will have in investment in the EU.

While there are many factors like high labour costs contributing to the decline in industrial production in the EU, it is telling that 90% of the FH survey’s respondents identified energy sources and prices as very or somewhat important to their business. The majority of surveyed industry leaders (69%) identified the EU as the region where the cost of energy has had the most impact on their company’s current or future investment decisions. 62% of respondents believe recent increases in energy prices are already having a serious impact on their business while 34% believe that it will have a serious impact on businesses in the future.

What’s most worrisome is that high energy prices are having a real impact on investment decisions in the EU, as 40% of respondents identified this is currently having a serious impact, and 46% of respondents believe that energy prices will impact future EU investment. Global markets are a lot more complicated than buying a can of Coke, but global capital flows are driven by a similar logic to find the most cost-competitive operating environments.

This impact has played out across energy-intensive industries like the chemical, automotive and steel industries where energy makes up a larger percentage of costs and rising prices can have a real impact on margins. For example, several large European companies, including BMW, have recently announced plans to make large capital investments in manufacturing facilities outside Europe, specifically citing energy prices as a main factor in the decision. These long-term investment decisions suggest that EU-based corporations do not see energy cost competitiveness in the EU improving in the foreseeable future. Therefore, they are choosing to manufacture outside Europe, in places like the US, where a diverse energy mix coupled with new shale and oil reserves have kept down energy prices.

What’s interesting is that despite concerns about high energy prices, EU industry leaders are generally supportive of EU policies to tackle global warming. Respondents were almost unanimous (94%) in their personal belief that there will be serious impacts from global warming now or in the future. In line with the recognition that global warming will have a serious impact, 56% of respondents believe that EU global warming policies would help the EU economy while only 34% believe they would be harmful.

This response may appear counterintuitive given the contentious discussions surrounding the EU’s energy policy, but this reveals that EU industry leaders are receptive to policies that tackle global warming and view these policies as potentially positive economic drivers to unlock growth.

The challenge, however, is to develop a strong framework that can both address the high cost of energy in Europe while mitigating climate change.

Ideally climate policy should incentivise innovations and technologies that unlock economic growth. But, large-scale innovation requires large-scale investment, and to keep investment in Europe, stakeholders will need to work together to create stable, cost-competitive energy markets that are conducive to the type of long-term investment that can bring about these necessary innovations.

European business leaders are ready to contribute to the transition to a low-carbon economy, but industry and investors need to be confident in the stability and competitiveness of the EU and this includes confidence in the EU’s energy market. Without this confidence, Europe may continue to be a regulatory model, but the real investment and growth in new technologies will take place elsewhere.

So, it’s time for European leaders to work together to figure out how to bring down the price of that sandwich because going out of business is not an option.