Foreign direct investments the success secrete of Eurozone

José Manuel Barroso, President of the EC (on the left), and Antonio Tajani, Vice-President of the EC in charge of Industry and Entrepreneurship, gave a joint press conference on the adoption of a Communication "For a European Industrial Renaissance". The EC was urging Member States to recognise the central importance of industry for creating jobs and growth and to mainstream industry-related competitiveness concerns across all policy areas. (EC Audiovisual Services, 22/01/2014).

José Manuel Barroso, President of the EC (on the left), and Antonio Tajani, Vice-President of the EC in charge of Industry and Entrepreneurship, gave a joint press conference on the adoption of a Communication “For a European Industrial Renaissance”. The EC was urging Member States to recognise the central importance of industry for creating jobs and growth and to mainstream industry-related competitiveness concerns across all policy areas. (EC Audiovisual Services, 22/01/2014).

Foreign Direct Investments (FDI) are long-term placements in real economy business, not right away tradable, realized by investors residing outside the country. They should be sharply distinguished from the highly volatile financial investments on stocks and bonds, which can depart from the country at any moment. The crisis years in the period 2009-2012 don’t seem to have damaged the ability of the European Union to both invest abroad and accept foreign direct investments in its soil. According to Eurostat, the EU statistical service, both inward and outward FDI in and out of the EU27 rose by 40% during this period.

It is also of interest to note that outward FDI have been traditionally much higher than inward coming investments in the EU. At the end of the last year of the period in question, investment stocks held by EU entities in the rest of the world reached the amazing figure €5,206.8 billion. On the same date FDI stocks held by the rest of the world in the EU27 totalled €3,947.4bn. At the beginning of this period that is at the end of 2009, the corresponding figures were €3,751.1bn and €2,783.4bn.

FDI within the EU

According to Eurostat “stocks held in the rest of the world represent about 40% of all EU27 FDI stocks, with 60% of the total held in another EU Member State”. This observation underlines the fact that the grandiose EU edifice has greatly helped growth within the borders of the Union through the creation of a level playing field for FDI. Understandably, the more advanced EU countries have taken advantage of the absolute protection of their FDI in other member states. Investments within the EU have flourished freely almost as if it was one seamless sovereign territory.

The existence of the EU then has not only eliminated the internal barriers to trade within the Union but it has also enhanced the growth potential by eliminating any impediments to direct investments from other member states. In this way the gains of the more advanced EU countries are much greater than their gains from the construction of the one seamless internal market.

This observation applies mainly to Germany, the largest and more advanced EU economy, which has based its growth and new job creation during the past fifty years on the unimpeded expansion of its business sector all over the EU. It’s not only the seamless internal EU market for good and services that helped Germany grow, but also the completely unobstructed and protected direct investments in other member states, including the acquisition of key assets like telecommunication and energy companies in other member states.

Only last week the Commission presented a ground-breaking communication for a “European Industrial Renaissance”. The target is to enhance the internal growth potential of industry, by, among other things, eliminating the last remaining bureaucratic obstacles. The Communication promotes a more “business friendly Europe through actions to simplify the legislative framework and improve the efficiency of public administration at EU, national and regional levels”.

US and Swiss

Returning to the international level, two countries, the US and Switzerland, are the major FDI partners of the EU. According to Eurostat, the main partners of the EU27 for FDI stocks held in the rest of the world at the end of 2012 were the “United States (€1,655bn or 32% of total stocks held by the EU27 in the rest of the world), Switzerland (€679bn or 13%), Canada (€258bn or 5%), Brazil (€247bn or 5%), Russia (€189bn or 4%), Australia (€142bn or 3%), Hong Kong (€133bn or 3%), Singapore (€119bn or 2%) and China (€118bn or 2%)”. The leading partners for FDI stocks held by the rest of the world in the EU27 were similar.

All in all, foreign direct investments very probably weigh more for the overall economic relations between two countries, than the flow of goods and services. Their long-term character and the necessary large initial disbursement demand much deeper and trusty relationships than the outright trade. This is probably the secret of the success of the European single money zone, the euro area. The introduction of the common currency offered the utmost protection to internal FDI within the Eurozone.

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