There has been a negative perception of the European economy. We have previously discussed the unjustified pessimism towards it compared to other parts of the world, such as the U.S. and China. This prejudice is not necessarily false, but is often shaped by popular, biased views or outlooks, particularly from so-called experts. These are not based on facts, and can be easily disproven with data. Another type of prejudice is directed towards the UK in comparison to the rest of Europe, where the general public tends to be bearish.
No doubt Brexit has had an effect on some sectors, and a significant one at that. However, this does not mean the entire economy has been affected in the same way, as these sectors may not represent a large share of the growth contribution to the total output. The media often exaggerates stories, particularly interesting ones, but this does not mean they are representative. This is why we need to look at the data. Only a top-down analysis can provide a comprehensive understanding, not bottom-up fragmented pieces.
To assess the impact of Brexit, we can compare the performance of the UK before and after 2016 to other similar countries in Europe, such as France, Germany, and the Netherlands. The best variable to measure this is foreign direct investments (FDI), as it is neither sentiment-driven like hot money, nor largely determined by local factors like GDP. FDI usually refers to business investments in an economy, and can be seen as a confidence vote from overseas, backed by real money.
Recently, reports suggested that the Netherlands had overtaken the UK in terms of FDI inflows. While the data does show this, Brexit happened in mid-2016 when the UK’s FDI was still strong in 2017-2019, even compared to all three countries discussed, including the Netherlands. The recent stagnation could be due to the COVID-19 pandemic, which was a consistent factor in the time of the overtake. As COVID is no longer a major threat, the exceptional trends should return to the pre-pandemic paths.
When looking at the net inward FDI, the ranking is completely different, as shown by the solid lines in the accompanying chart. For most of the years with data, Europe has experienced net FDI outflows, which is consistent with the practice of production relocation to emerging markets. The UK, however, has shown an obvious upward trend, in stark contrast to the downward trend in the Netherlands.
When looking at the net inward FDI, the Netherlands see a downward trend, while the UK’s trend remains upward. This suggests that there are more local investments retained in the UK than in the Netherlands. Regardless of the origin of money, a country’s attractiveness should be measured by the combination of both investment flows, rather than one side. Viewed this way, the UK does not seem to be threatened by its European competitors, including France and the Netherlands.
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