Executives have named Brexit as the number one risk to Europe’s attractiveness as an investment destination in the next three years, while EU political instability and the rise of populist and protectionist sentiment continue to rattle investment plans, according to an annual survey from professional services firm EY.

Undertaken in January and February 2019, EY’s Attractiveness Survey Europe 2019 of more than 500 global business leaders found that Brexit was their foremost concern, with 38% of respondents viewing it as a top three risk, marking an 8 percentage point increase on 2018. London’s relative fall in attractiveness epitomises Brexit worries, as just 25% of respondents rated it as one of the three most attractive European cities for investment, compared with 34% last year.

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Despite political concerns, however, western Europe and central and eastern Europe (CEE) were the two most cited regions by business leaders when asked to give their top three most attractive regions in which to establish operations, with scores of 56% and 41%, respectively. North America was the third most cited region in terms of attractiveness, with a score of 38%; however 50% of respondents are based in Europe, implying that their businesses might have more of a European focus.

Political instability and the rise in populist and protectionist sentiment were the second and third greatest concerns after Brexit, with 33% and 22% of respondents citing them, respectively, considering them as one of the main risks affecting the attractiveness of Europe in the next three years.

The heavy losses of traditionally dominant centre-ground political groups to the Greens and Liberals in the European Parliament elections in May 2019 exemplifies the changing political tides across the continent. Moreover, Eurosceptic and nationalist parties made gains, especially in the UK, France and Italy, indicating increased protectionist sentiment and the polarisation of national politics across the continent.

These political concerns have made investors cautious in the short run, as just 27% plan to establish or expand operations in Europe in 2019, marking a seven-year low following an 8 percentage point fall from 2018. Similarly, just 37% of surveyed businesses expect an improvement in Europe’s attractiveness in the next three years, a fall from the 50% last year.

Against a backdrop of an increasingly digital and technology-driven world, 52% of companies surveyed said the availability of a workforce with technology skills was “critically important” in shaping their investment decisions. “The availability of digital skills is ranked as the most critical factor on growth prospects and profitability. Europe needs to see this as an opportunity and create the environment to attract highly skilled digital talent,” said Andy Baldwin, Europe, Middle East, India and Africa area managing partner at EY.

Beyond digital talent, the stability of the tax regime is another crucial factor: 93% said it is at least an important factor in determining where they invest in Europe. “For Europe to continue to attract FDI it needs to play to its strengths: data privacy, its plans for a digital single market and stable tax regime. It also needs to continue to invest in technology and provide access to an agile and skilled workforce, which drives FDI,” said Mr Baldwin.