Euro outsiders top investment league

Date: 02/03/2000

By Bruce Barnard

Foreign investors were supposed to migrate to the euro zone like bees to a honey-pot.

But in the first year of its existence, more than 55% of the €253 billion of foreign direct investment into the Union flowed into two countries which opted out of the fledgling currency: Sweden, which attracted €79 billion and ousted the UK from its traditional top spot, pushing the British into second place with €63 billion.

The UK also dislodged the US as the biggest overseas spender - €212 billion against €153 billion - for the first time in 11 years. The bulk of the spending did not hop across the English Channel to the nearby euro zone but instead crossed the Atlantic.

This annual league table from the United Nations Conference on Trade and Development (UNCTAD) attracted more attention than usual this year as the divisive debate over whether to join the euro zone reached fever pitch in the UK and the leadership of Sweden's ruling Social Democrats began to sell its recent decision to support membership of economic and monetary union formally for the first time.

Inward and outward investment has a higher political priority in the UK and Sweden than in most other Union member states, with the exception of Ireland and the Netherlands.

British supporters of the single currency argue that membership will safeguard the UK's position as the biggest recipient of foreign investment in the Union, while opponents claim it will erode the country's competitiveness. Indeed, one of the (pro-euro) Labour government's five tests for membership of monetary union is its likely impact on inward investment.

Sweden's foot-loose companies dropped heavy hints that they would shift their production plants and headquarters out of the country if it did not join the Union in 1995, and now they are making similar noises about euro-zone membership.

According to the euro's opponents, however, a superior inward investment performance is not the only benefit of staying out of monetary union. They point out that the UK had the lowest inflation rate in the Union in January this year, followed by Sweden; both countries have markedly lower unemployment rates than their EU neighbours; and Sweden's economy also is growing faster than the euro-zone average.

At first glance, the latest UNCTAD figures appear to suggest that the euro is a dud for foreign investors. But it is not quite as simple as that.

Sweden topped the rankings last year thanks to a spate of big-ticket deals including the merger of pharmaceuticals manufacturers Astra and Zeneca and Ford's acquisition of Volvo's car business. There is unlikely to be a repeat performance in 2000.

The figures for the UK are, however, in line with past performance, which has seen the country regularly bag around 25%-30% of the inward investment -mainly from the US and Japan - into the Union.

Foreign investors knew that the UK would not join the euro back in 1991, but that has not yet influenced their spending decisions - and this is unlikely to change in the short term, according to a recent poll by A.T. Kearney. Its survey of the investment intentions of more than 150 chief executives over the next three years put the UK well ahead of the euro-pack.

There is little doubt that the UK will regain its top spot this year and Sweden will fade away. But forecasts that the foreign investment pecking order will remain broadly unchanged are being revised following VodafoneAirTouch's record-breaking €190-billion hostile take-over bid for rival German mobile phone company Mannesmann.

One of the UK's main attractions to foreign investors has been the ease of launching take-overs, hostile and friendly, and the availability of finance. Germany, by contrast, was until recently a no-man's land for foreign predators - Pirelli, the Italian tyre giant, was chased out of the country when it made an unwanted bid for its German rival Continental back in 1991. The strong deutschmark, meanwhile, was a major obstacle, to direct foreign investment in production plants.

Vodafone's dramatic victory does not mean that it is now open season for foreign investors in Germany: days after Mannesmann threw in the towel, employee shareholders in the electronics and engineering giant Siemens were hatching plans to prevent a possible hostile foreign bid.

Nor does the displacement of the (formerly strong) deustchmark by the (currently weak) euro make Germany a low-cost haven for foreign companies seeking a production base in Europe. An over-regulated and rigid labour market, powerful and pervasive trade unions, and high welfare costs are a potent turn-off to inward investors.

But the Mannesmann deal was a watershed in Germany's transition to a more open, less regulated Anglo-Saxon style business environment - and that will intensify pressure on France, the euro zone's second largest economy, to follow suit to maintain its global competitiveness.

Last year, the UK attracted three times as much foreign investment as Germany and twice as much as France. But maintaining this lead will get ever more difficult as globalisation forces the two continental giants to become more investor-friendly.

The euro will play a key role in this transformation as it fuses with privatisation, deregulation and single market legislation to create a unified European economy.

Monetary union has created a single pan-European capital pool and freed cross-border transactions from currency risks. This helped to more than double merger and acquisition (M&A) activity in Europe last year to €1,200 billion, to move within sight of the record-breaking €1,725 billion of deals in the US. Europe is now on target to edge out the US as the world's biggest M&A arena in 2000.

Foreign investors were supposed to migrate to the euro zone like bees to a honey-pot. But in the first year of its existence, more than 55% of the €253 billion of foreign direct investment into the Union flowed into two countries which opted out of the fledgling currency: Sweden, which attracted €79 billion and ousted the UK from its traditional top spot, pushed the British into second place with €63 billion.