Stimulus Plans Crucial in European Race to Lure Investors

A pair of Pariscoot public hire electric scooters stand near the Eiffel Tower in Paris, France, on Wednesday, May 27, 2020. President Emmanuel Macron’s plan includes incentives for the purchase of electric cars, cash-for-clunkers to encourage consumers to trade in older, more polluting cars and subsidies for struggling car-parts makers. Photographer: Adrienne Surprenant/Bloomberg , Bloomberg

William Horobin, Bloomberg News

May 27, 2020

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(Bloomberg) -- European fiscal stimulus programs will be key in determining how attractive individual economies are to foreign investors after the coronavirus pandemic, according to a report by EY.

Around 80% of executives taking investment decisions in Europe say the composition and size of economic stimulus will weigh on how they pick where to invest. Business leaders will be closely examining the effectiveness of short-term measures and if increased public debt will transform into higher taxes in the future.

“The competition over stimulus will really mark the rest of 2020,” said EY’s Marc Lhermite. “It is pivotal for decision making.”

The response of foreign investors is another risk factor for European governments struggling to repair their economies. Millions of jobs depend on inward investment, and their investment fuels exports and growth. The pandemic has already taken a toll, with an estimated 10% of projects announced last year canceled and another 25% delayed or strongly adjusted, EY said.

Having unveiled emergency spending measures to protect jobs and avoid bankruptcies, countries are now looking to a second phase of more proactive stimulus to recharge their economies.

France has already announced measures for tourism and the auto sector and one for the aircraft industry is expected next month. Germany is also working on a stimulus program.

Competitions to lure foreign investment will be even tougher in 2020 with huge uncertainty over the global economy. According to EY, 66% of investors in Europe expect to scale back their 2020 plans.

France topped EY’s 2019 ranking for the number of investment projects, ahead of Germany and the U.K. for the first time. Lhermite said France was helped by several years of reducing the tax burden on business and new labor-law flexibility.

But investors are watching closely whether the government stays that pro-business course.

“Above all, France must not start reintroducing exceptional taxes or setting conditions on employment,” Lhermitte said.

©2020 Bloomberg L.P.