Despite the narrative of Europe’s declining competitiveness, Firstly, the future of the multilateral trading system looks bleak. Emerging economies tend to thrive in times of global free trade, when it doesn’t matter how many borders you have to cross. Now this era looks like it’s drawing to a close. 

The old continent’s prospects are better than it often appears.

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Trading outside regional blocs has become more risky than in the past. China, by pursuing its dual circulation strategy, is actively pushing to decouple from the US. Global trade is also increasingly being used as a weapon, for example Russia’s attempt to blackmail the world by blocking Ukrainian wheat exports. In a fracturing and protectionist world, investors will retreat to safer ground.

This bodes well for Europe. Its position is further enhanced by the upcoming global minimum tax, supported by 136 countries or 90% of the world’s GDP, which will further strengthen its attractiveness. Apart from curbing destructive ‘race-to-the-bottom tax competition’, it is expected to encourage multinationals to repatriate capital to their home markets. The economic prowess of a country, rather than tax tricks, will re-emerge as a deciding factor for companies’ location plans.

Aspects such as the strong base of skilled manufacturing workers and competitive innovation ecosystems will favour Europe, and lead to a manufacturing resurgence. Research triple helix infrastructure – those well established linkages between academia, business and government – will help drive technological development. These include pan-European projects such as Cern or Euratom for nuclear energy and particle physics, as well as national research organisations like Germany’s Fraunhofer Society and the Netherlands’ TNO.

Many European companies are also crucial to the global value chains needed for the future. Chemical or electro-chemical energy storage, bioplastics and biofuels, sensor technology or optoelectronics, establish the building blocks of much discussed megatrends such as Industry 4.0, cleantech or the mobility revolution.

Protectionist headwinds have also convinced the EU commission to pursue more robust policy measures, as illustrated by the strategic planning to secure raw materials, or the EU drug strategy. Much like with semiconductors, the key words are resilience and increased domestic production, supported by subsidies and intra-European procurement. Add to this the persistent unreliability of global supply chains, and it is easy to see why there is growing intra-EU production. 

The trend for “domestic European” economic development is further supported by the European Carbon Border Adjustment Tax, which aims to curb carbon leakage. Having criticised the US’s $369bn Inflation Reduction Act, the EU is preparing its own subsidy package to foment green investment. 

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Last but not least, Europe is a force to be reckoned with in terms of outward FDI, with flows from Europe being bigger than those from the Americas and Africa combined in 2021 and only slightly behind Asia-Pacific. In terms of FDI stock, Europe vastly outperforms Asia-Pacific, the Americas and Africa. Despite the countless Cassandras – business leaders and politicians warning of Europe’s decline – the old continent is set up well for our splintering world.

Martin Kaspar is head of business development at a German Mittelstand company in the automotive industry.

E-mail: martin.georg.kaspar@googlemail.com

Martin's previous columns: 

This article first appeared in the February/March 2023 print edition of fDi Intelligence. View a digital edition of the magazine here.