The past decade has been one of the toughest in the postwar era for the European economy, but recovery has finally arrived—and the business mood is brightening.
A new report, European business: Overcoming uncertainty, strengthening recovery, outlines results from a survey of 2,000 C-suite executives conducted by the McKinsey Global Institute in France, Germany, Italy, Poland, Spain, and the United Kingdom. It highlights leaders’ newfound optimism about the outlook both for European economic growth and for their own companies’ prospects. They expect revenue growth of 2.1 percent on average in the coming year, with about one in five companies—especially larger, more internationally focused ones—predicting revenue growth above 5 percent. Business leaders are also upbeat about some key global trends affecting business everywhere, including digitization and the rise of emerging economies.
Along with the European business leaders, we also surveyed executives at more than 400 US and Chinese companies with operations in Europe. Their expectations for GDP growth in the European Union were even higher than that of their European counterparts on average—almost 3 percent and 2.3 percent, respectively.
The survey nonetheless indicates a continuing reluctance among European firms to invest, with many hoarding cash (Exhibit 1). Gross corporate savings rose to almost €2 trillion in 2015, and companies are divided between those saying they are saving to fund future investments (48 percent) and those building reserves for future crises (47 percent). Yet most businesses believe they already invest at the right level and see sufficient opportunity to invest more; weak demand, lack of opportunities, and access to finance no longer feature highly as barriers to investment.
How to explain this investment behavior? European business leaders cite a range of risks and uncertainties, including concern about future crises, nervousness about rising populism and anti-globalization sentiment, and lingering fears about the future shape and direction of the European Union (EU) itself.
We delved more deeply into attitudes toward the EU, asking about the benefits companies had experienced in the past, as well as their hopes and expectations for Europe in the future. These are complicated times for the European Union, which has had to contend with growing political and economic divergence, including the decision by the United Kingdom to withdraw from the EU altogether.
Overall, the response to our questions on the EU was positive. Just over half the companies surveyed think the EU has had a beneficial effect on their business, and the most successful companies are the most positive. Moreover, some 60 percent of business respondents say they want “more Europe,” in the form of greater policy convergence and integration.
The answers nonetheless highlight a gap between the future EU that business wants and the scenarios it expects (Exhibit 2). Almost 85 percent of surveyed companies say they think the EU will remain intact, and just under half anticipate that the status quo will prevail or that greater integration will take place. However, 51 percent fear the eurozone will shrink or disband in the years ahead.
Concerning Britain’s decision to leave the EU, one in three respondents said a decision by any other countries to follow suit would be negative for their business.
Stronger productive investment will be critical to ensuring that Europe’s economic recovery remains on track. We have calculated that restoring investment to its level before the 2008 financial crisis could boost EU GDP by as much as €1 trillion. Our survey suggests that, to achieve that potential, the EU will need to address lingering areas of fragility, including remaining financial risk, regulatory uncertainty, the direction of the eurozone, and where possible, geopolitical concerns such as migration and the integration of refugees, as well as populism. It could also help companies harness digitization, enabling the EU to achieve more of its digital potential.
One way to bolster confidence would be to develop a new narrative about the European Union’s role and vision for the future that shows that the forces in favor of cooperation are stronger than those opposing it.
The MGI business survey was undertaken between February 17 and March 14, 2017. Respondents are active in a representative range of sectors in services, manufacturing, and primary industries and infrastructure, in organizations covering a broad range of sizes. The results were presented at the European Business Summit held in Brussels in May 2017. The survey is part of ongoing research into the European economy. Previous publications include an assessment of the EU’s achievements and challenges since its founding in 1957, an essay prize contest that sought to crowdsource solutions to the question of how to implement reforms in the EU, and an in-depth analysis of Europe’s “window of opportunity” to give a sustainable boost to the EU economy.