How can Europe act now to create advantage from adversity?

Europe must create an internationally competitive business environment to improve its attractiveness to foreign investors. Our research points to five key strategies.

1. Accelerate energy price reduction

Businesses rank reducing energy prices and increasing energy independence as Europe’s top priority to regain its global competitiveness. Electricity prices in Europe remain 2.5 times higher than in the US, with natural gas prices nearly five times higher.¹

Europe’s Action Plan for Affordable Energy, which lays out how to avoid cost increases of up to €103 billion (US$117 billion) by 2040, is beginning to address this.² But a challenge of this scale requires a further-reaching solution.

Options include:

• Reducing costs for industrial sectors that are highly exposed to international competition
• Encouraging an energy consumption shift to periods of low demand
• Coordinating cross-border investments in energy generation and distribution infrastructure
• More deeply integrating Europe's energy grids³

Energy independence is just as important as reducing prices. Increasing renewables generation in Europe will promote long-term energy security, but the market urgently requires short-term remedies. These could include:

• Diversifying sources of liquefied natural gas (LNG)
• Replenishing reserve stocks of LNG
• Reducing overall energy demand through investments in energy efficiency and demand response

2. Sustain Europe’s green leadership

Surveyed businesses rank the intensity of sustainability policies as one of Europe’s top three competitive advantages. What’s more, 66% say Europe's approach to sustainability in the past three years has enhanced its attractiveness as an investment destination (only 14% think the opposite).

Action is required to preserve this leading position. When asked which sustainability measures European policymakers should prioritize, surveyed businesses rank accelerating the low-carbon energy transition first, by some distance. Expanding renewable energy generation sources is vital to achieving this, alongside investing in electricity distribution infrastructure across Europe and transition technologies such as carbon capture and storage (CCS) and methane-to-energy systems.

Businesses surveyed rank providing grants and other incentives as the second most important sustainability initiative that would improve Europe’s attractiveness. Unfortunately, uptake is lackluster. Policymakers could galvanize uptake by making these grants simpler to access, especially for SMEs, and providing tailored support to individual sectors. 

Businesses rank cutting back sustainability regulation as the equal third most important initiative. Encouragingly, the EU has already announced plans to rationalize overlapping and disproportionate sustainability regulations. But policymakers should be cautious about cutting regulation back too far. Sustainability regulation builds stakeholder trust, an important aspect of Europe’s profile as an investment destination.

3. Catalyze research and innovation

When it comes to innovation and R&D, Europe lags behind other advanced economies. Public and private sector investment in R&D as a proportion of GDP totaled 2.2% in 2023, trailing China (2.6%), Japan (3.4%) and the US (3.6%).⁴ Europe also continues to lag in applied research and marketable products.

When asked how Europe should accelerate innovation and R&D, survey respondents rank improving funding access for early-stage businesses first, followed by upskilling the workforce and strengthening collaboration through clusters, joint projects and knowledge-sharing programs. 

AI is the digital technology with the greatest potential to drive Europe's competitiveness as an investment destination. But the Global AI Index scores European countries significantly below the US and China on AI development.⁵ Businesses ranked improving technology infrastructure as top priority for improving Europe’s attractiveness to AI investment, followed by enhancing tech skills.

4. Simplify regulation

Between 2019 and 2024, the EU implemented 13,000 legislative acts, compared with 3,500 in the US.⁶ This has led to significant regulatory overlap and inconsistency between and within individual countries, damaging innovation and investment.

Despite the long-term rise in regulatory complexity, surveyed businesses rank overregulation and complexity across Europe as only the 11th-greatest obstacle to Europe’s attractiveness. What’s more, 56% say Europe’s approach to regulation in the past three years has enhanced Europe’s attractiveness.

The recent launch of initiatives to streamline regulation is assuaging fears in this direction. For example, the Competitiveness Compass, the European Commission’s five-year plan to enhance EU competitiveness,⁷ aims to cut reporting burdens by 25% for all companies and 35% for SMEs.

In terms of further steps, respondents ranked harmonizing regulation across Europe first, followed by introducing regulatory flexibility for emerging sectors such as AI and FinTech.

5. Reduce tax complexity and unpredictability

Our survey indicates that 45% of respondents believe Europe's tax approach over the past three years has diminished its appeal as an investment destination, while only 35% feel it has enhanced it.

Concerns over rising public sector debt and increased demands for public investment are leading many businesses to fear business tax rises. Countries such as France and the UK have already experienced this. By contrast, competitors such as the US are considering reductions in business taxes or extensions to existing cuts.

Unpredictability in tax policy is also a major deterrent for investors. Greater predictability is the top recommendation, followed by a reduction in corporate tax rates. Moreover, the risk of double taxation is a growing concern. An EY global survey of 1,000 transfer pricing professionals found that, owing to global tax reforms, 84% face a moderate or significant risk of double taxation. When setting their policy ambitions, EU tax legislators must consider the associated administrative costs.

Europe can only rebuild its attractiveness to foreign investors if it becomes more resilient to external shocks. Four strategies are crucial.

7. Champion and fortify strategic sectors

Governments must protect critical industries and reduce dependency on unreliable exporters of certain goods and components used in strategically important industries such as clean energy and automotive.

Europe also needs to promote innovative industries (including automotive, pharmaceuticals, clean energy, chemicals, telecoms, semiconductors and AI) that will create future employment and exports, and contribute to meeting its defense, digital and sustainability objectives. Respondents ranked supporting strategic industries third of 16 options for regaining Europe’s competitiveness. Options include targeted import tariffs, tax incentives, direct government funding or investment screening.

As AI becomes an increasingly important driver of economic growth, Europe should enhance businesses’ ability to deploy it effectively. It will need to implement digital sovereignty initiatives to ensure access to semiconductors and their raw materials, network infrastructure, and data required to train complex AI models.¹⁰

8. Help SMEs manage risk and seize opportunities

Headline foreign investment projects in Europe involve large multinationals, but these investors rely on a vibrant ecosystem of SME suppliers, partners and customers. Unsurprisingly, businesses rank supporting SMEs as the second most important priority for Europe to regain its competitive position in the global economy, behind reducing energy prices and increasing energy independence.

SMEs face specific challenges that require targeted support. First is the uniquely labyrinthine and copious regulation that Europe applies to them. Indeed, 63% of SMEs flag business regulation as their greatest challenge.¹¹ To ease this burden, Europe must continue its simplification agenda, with a focus on lowering compliance costs.

Europe also needs to support SMEs in seizing digital opportunities. Initiatives such as digital innovation hubs, vouchers for access to consultants and AI tools, and libraries of approaches to calculating the return on investment could help. 

Policymakers should seek to reduce requirements of public procurement processes, which can disqualify smaller organizations. They could also assist SMEs in winning private sector business through export programs and by subsidizing their participation in trade fairs and exhibitions.

9. Increase security confidence by fortifying defense

The ongoing war in Ukraine and the US’s increasingly ambivalent stance on European security have put pressure on Europe’s domestic defenses. Surveyed businesses rank geopolitical tension and conflict as the top risk to Europe’s attractiveness. And while only 11% flagged security as a priority for European leaders, this proportion would probably have been higher if we had conducted the survey after the US had signaled its newly hands-off stance.

Between 2019 and 2024, EU Member States’ total defense expenditure rose by more than 30%.¹² But, as of May 2025, only 10 EU Member States had met the NATO defense spending requirement of 2% of GDP. In 2024, the European Commission estimated that Europe needs to invest €500 billion in defense during the next decade. 

The European Commission must coordinate spending and manufacturing plans by individual Member States to ensure there is no duplication of manufacturing effort or shortfall in critical areas (for example, if every country boosts manufacturing of ammunition but none increases manufacturing of drones).

Governments must also ensure that the European supply chain for defense products is secure, possibly by strengthening FDI screening mechanisms to prevent takeovers of producers of critical defense components and by prioritizing procurement of goods purchased within Europe’s borders.

Defense procurement bodies should engage with private sector manufacturers to make businesses aware of likely future requirements and allow them to start formulating solutions.