Author: Jacques Bughin | McKinsey Global Institute

Posted: 22/5/2017

The economic recovery has boosted business confidence in Europe and now the message is clear: businesses want strong cooperation and a new vision for the future of Europe.

Jacques Bughin is a director of the McKinsey Global Institute and senior partner of McKinsey & Company, based in Brussels.

The European economy has weathered its worst economic shock in almost a century, and recovery has finally arrived. With it comes a long-overdue restoration of business confidence: companies are once again upbeat about the economy in general, and about their business prospects in particular.

The challenge now is to make the recovery stronger and more sustainable through a revival of business investment, which is still below pre-crisis levels, particularly in Southern Europe. Companies continue to hoard cash—gross corporate savings have risen to almost €2 trillion—and many are doing so because their new-found confidence is still fragile.

We recently surveyed 2,000 C-suite executives in France, Germany, Italy, Poland, Spain, and the UK, and many tell us they are holding back on investment because they are still nervous about the economy, about global trends they see as threating their business, and about the lingering uncertainty that still dogs the eurozone. What will it take to remove or reduce those perceived risks and uncertainties? Europe has every incentive to do so: we calculate that restoring investment to its level before the 2008 financial crisis could boost EU GDP by as much as €1 trillion.

The survey by the McKinsey Global Institute, published today at the European Business Summit in Brussels, provides some revealing insights into the corporate mood and outlook—and useful answers about to what it would take to restore confidence. Our analysis shows that the business leaders’ views of Europe and of global trends, including digitisation and rising populism and anti-globalisation sentiment, are often related to their investment intentions.

The good news is that companies see buoyant GDP growth as well as revenue growth at their own firms that is often higher than economists’ forecasts.  On average, they are expecting revenue growth of 2.1% in the coming year, and about one in five companies—especially larger, more internationally-focused ones—are predicting revenue growth above 5%.

The second upbeat finding is that they aren’t fazed by two of the biggest global trends looming ahead: digitisation and the rise of emerging economies. Both are seen as good for business by a clear majority of our respondents, even though their net impact will be to heighten competition. When we asked their views on the EU, the responses were also positive: just over half the company leaders surveyed think the EU has had a beneficial effect on their business, and the most successful companies are the most positive. UK companies were a little less enthusiastic, but not by much. Moreover, some 60% of business respondents across the EU say they want “more Europe”, in the form of greater policy convergence and integration.

For all this optimism, the survey also threw into sharp relief the concerns and fears that are holding back investment. Weak demand, lack of opportunities, or access to finance have dropped off the list of barriers to investment, but in their place have come new fears, about rising populism, growing anti-globalisation sentiment, and a range of geopolitical risks. Almost half the firms hoarding cash told us they are building reserves to prepare for future crises. And the idea that the root of any future crisis could be found within the EU itself is no longer ruled out. Three in four surveyed companies say they think the EU will remain intact, yet 51% expect the eurozone to shrink or disband in the years ahead.

How can this gap between hopes and expectations be bridged? What can be done to restore confidence, and thereby remove remaining barriers to business investment?

Some of the fears around the eurozone could certainly be eased if the EU were to address areas of fragility, including remaining financial risk, regulatory uncertainty, and questions about the future shape and governance of the eurozone. The geopolitical concerns business leaders cited in the survey, such as migration and populism, will be harder to tackle, although stronger concertation could help. While the recent election of President Macron in France may reduce concerns about other countries following Britain out of the EU, our survey (which was taken before that election) suggests the concerns are nonetheless real: one in three respondents said a decision by any other countries to leave the EU would be negative for their business.

Is institutional reform essential? Perhaps not. While business leaders told us that they have doubts about the ability of EU institutions including the Commission to deliver on policies, they nonetheless tend to view the policies themselves, including the Commission’s ten priorities, relatively favourably.

From the business survey and other research we have conducted, we hear a recurring theme: the EU needs to develop a new narrative about its role and vision for the future that shows that the forces in favour of cooperation are stronger than those opposing it. That is easy to say, and much harder to enact. But the corporate investment that is needed to sustain Europe’s economic and business recovery, and much else besides, is at stake.



 Source: section/economy-jobs/opinion/ building-on-europes-nascent- recovery/