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Despite a global downturn in foreign investment and disrupted trade, businesses forecast an increase in Europe’s long-term investment appeal
In brief
- Foreign direct investment (FDI) declined 7% in Europe in 2025. Yet it remains an active destination with over 5,000 projects announced that year.
- Investment is surging in high-growth verticals such as AI, defense and low-carbon energy but declining in traditional industrial sectors.
- Six in 10 businesses surveyed expect Europe’s attractiveness to increase in the next three years.
Europe continues to demonstrate resilience as a destination for FDI. While investment declined 7% in 2025 amid global uncertainty and disruptions to trade, the continent still attracted more than 5,000 projects that created over 200,000 jobs, underlining the strength of its underlying fundamentals
Investment is evolving rather than retreating. FDI in high-growth sectors such as AI, defense and low-carbon energy is expanding rapidly, reflecting Europe’s ability to position itself at the forefront of emerging industries. At the same time, new centers of growth are emerging across Southern, Central and Eastern Europe, supported by competitive costs, strong talent pools and targeted policy initiatives
Although investors remain cautious in the short term, sentiment about Europe’s long-term attractiveness remains positive. Most businesses expect the region to become more attractive over the next three years, driven by its large market, high-quality infrastructure and growing innovation ecosystem
This article explores how Europe is navigating this period of transition, balancing short-term pressures with long-term opportunity. Sustaining momentum will depend on addressing structural cost challenges, reinforcing industrial competitiveness and unlocking investment at scale. Encouragingly, most businesses believe Europe will make the strategic decisions needed to mobilize the additional investment required to enhance its competitiveness and productivity
This is part one of the EY European Attractiveness Survey 2026 edition. Read the second article to take a deeper look at how policymakers and businesses can address Europe’s challenges and capture emerging opportunities across AI, energy, defense and finance
1
Foreign investors remain engaged in Europe
Amid geopolitical and economic pressures, Europe remains a resilient and attractive destination for foreign investment
FDI falls in Europe’s three largest markets
Investment declined in France (-17%), the UK (-14%) and Germany (-10%) — traditionally Europe’s biggest FDI destinations
In France, political uncertainty following the 2024 dissolution of the National Assembly has dented investor confidence despite otherwise strong fundamentals. Post-Brexit trade frictions and higher taxes weigh on investor sentiment about the UK. And investment in Germany has been particularly impacted by the slowdown in manufacturing, caused by weaker demand from China and energy cost pressures. Declining manufacturing FDI has had a knock-on effect on investment across the supply chain
Although investment in Europe’s biggest countries declined at the national level, many cities and regions experienced investment spikes in 2025. In London, for example, the number of FDI projects jumped 5% thanks to its existing strengths in technology and financial services. And the number of jobs created by FDI in France’s Auvergne-Rhône-Alpes region more than doubled because of a spike in logistics projects
Investment surges in major Southern, Central and Eastern European countries
Despite 2025’s overall downward trend, investment surged in several Southern, Central and Eastern European countries, including Turkey (+20%), Poland (+10%) and Spain (+7%)
FDI is increasingly flowing into these regions due to competitive labor costs, high availability of land for industrial projects and EU funding unlocking infrastructure investment. At the same time, regions such as greater Lisbon — where FDI rose by 2% and 11%, respectively — have developed strong digital ecosystems that are attracting tech-intensive projects
Investment in these cities and regions is rising due to a combination of fundamental strengths such as deep talent pools, existing levels of business activity and targeted city-level interventions. These include tax incentives, local upskilling initiatives and investment in modern digital infrastructure
This investment momentum is reinforced by a stronger rate of economic growth across all of these countries than in the euro area in 2025, reflecting rising demand and growing investor confidence in their long-term potential
2
Chapter 2
Investment surges into AI, defense and low-carbon energy
Strategic priorities are driving strong momentum in emerging domains, while traditional industries face challenges
Europe is attracting investment in high-growth areas such as AI, defense and low-carbon energy, even as broader investor sentiment remains cautious in the near term. For example, the number of AI FDI projects jumped 96% in 2025, creating more than 14,000 new jobs (up 41% on 2024). While overall investment fell in France, the UK and Germany, AI FDI increased in all these countries
AI FDI projects include those initiated by large AI businesses, AI research and development hubs opened by non-AI businesses and data centers. Recent examples include Anthropic opening offices in Paris and Munich
Despite this increase, businesses were more likely to view Europe as less attractive than other regions for AI investment (43%) compared to more attractive (32%). Surveyed businesses indicated that they want policymakers to act decisively on regulation, technology skills and technology infrastructure to ensure Europe builds on its early AI momentum
The number of defense FDI projects, meanwhile, increased 84%, creating almost 7,000 jobs. Investment is surging as European countries rearm in response to the ongoing war in Ukraine and increased uncertainty over the US’s commitment to NATO
Investment was strongest in the UK, France and Ukraine, and spanned a number of subsectors, including air, unmanned aerial vehicles and space (accounting for more than a third of defense FDI projects), munitions and missiles (accounting for 21%), and military land systems such as tanks (also representing 21%)
Many defense FDI projects focused on dual-use technologies, goods and services, which could encourage innovation in adjacent sectors as well as help Europe to achieve its security ambitions. For example, Spain-based space software business INTEGRASYS established a center of excellence located in France that will develop space technology for commercial and defense applications.
Reflecting a desire for independence in specific areas of the defense value chain, two-thirds of defense FDI originated from within Europe, compared with 57% across all sectors
FDI in the low-carbon energy sector rose 25% in 2025. The conflicts in Ukraine and the Middle East have created a need for low-cost, domestically produced alternatives the growth of power-hungry data centers to support AI. Europe’s existing leadership in green energy transition will help attract further investment
Traditional industries are facing challenges
Long-term structural issues caused foreign investment to drop in some of Europe’s largest and most established industries in 2025. Investment declined 11% annually in the automotive sector, 19% in chemicals and 28% in healthcare manufacturing (pharmaceuticals production and medical devices)
These industries are highly exposed to rising production costs — particularly energy — as well as volatile input prices, a more challenging US export market and intensifying global competition. The automotive sector also faces weaker demand from China and slower-than-expected adoption of electric vehicles (EVs). Healthcare manufacturing is particularly affected by a more restrictive regulatory and funding environment compared with the US
US and German investment into Europe softens
Between 2019 and 2025, investment into Europe from the US and Germany declined by 38% and 28%, respectively
US businesses have grown cautious about Europe due to tariff uncertainty and America First policies, including subsidies and tax benefits, that encourage domestic investment. US investors are also increasingly compelled by Asia due to its rapid economic growth, expanding middle class and growing manufacturing base. The backlash against sustainability investment also likely dented FDI globally in sectors such as low-carbon energy, including in Europe.
Investment from German businesses declined as revenues and margins fell in response to rising production costs, weaker demand from China and stronger international competition. Policies to renew industrial activity in Germany have also focused on domestic investment
3
Chapter 3
Investors are cautious now but confident about the long term
Near-term caution reflects geopolitical and economic risks, but businesses continue to recognize Europe’s structural strengths and policy ambition
Fifty-four percent of surveyed businesses plan to establish or expand operations in Europe over the next year. This is down from the 59% that expressed investment intent in 2025 and 72% in 2024, but it’s above the proportions in 2022 (53%) and 2021 (40%)
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But businesses are wary of geopolitical risks and, in particular, the impact of the Middle East conflict on energy prices in Europe: 41% say that geopolitical tension and conflict is the top risk to Europe’s attractiveness in the next three years. This is up from 35% in 2025 and 27% in 2024. However, geopolitical volatility could also work in Europe’s favor. As unpredictability increases around the world, businesses might be drawn to the stability provided by Europe’s commitment to strong governance.
The increasingly unpredictable geopolitical environment has elevated the importance of other risks to Europe’s future attractiveness. Macroeconomic conditions were businesses’ second most significant risk to Europe’s attractiveness in the next three years. This concern comes from the continent’s slow pace of economic growth, rising public debt levels and inflationary pressure from rising energy prices. Businesses ranked tariffs and other barriers to trade as the third-greatest risk
After declining significantly as a perceived risk to Europe’s attractiveness last year, the proportion of businesses that identified over-regulation and complexity across Europe as a risk rose 11 percentage points. It is now considered to be the fourth most important issue. In parallel, the EU is making concerted efforts to simplify regulation to reduce the administrative burden on businesses by 25% by 2029, rising to a 35% reduction for small- and medium-sized enterprises (SMEs)
Europe’s underlying strengths still matter for long-term investment attractiveness
A majority (60%) of surveyed businesses expect Europe’s attractiveness to increase over the next three years because of its strong fundamentals: a large addressable market, high-quality infrastructure, and a proactive policy approach to climate change and sustainability
There are also signs that Europe is improving its reputation for innovation. Businesses ranked the level of innovation and R&D as Europe’s third-greatest relative advantage as an investment destination. In parallel, the slow pace of innovation in Europe is only the eighth-biggest risk to the continent’s future attractiveness. Last year, it was fifth
It’s likely that, in addition to its skilled workforce and leading universities, businesses have noticed Europe’s momentum in AI innovation. The EU’s InvestAI initiative, for instance, hopes to mobilize €200 billion in AI investment through public-private partnerships, including €20 billion for AI gigafactories. The EU and European Investment Bank have established financing frameworks and are now evaluating potential gigafactory projects
There’s also optimism that policymakers will act decisively. While only 10% of Mario Draghi’s policy recommendations to improve Europe’s competitiveness have been implemented to date, 52% of surveyed businesses are confident that Europe will make strategic decisions to unlock the additional investment it needs to address its competitiveness and productivity shortcomings. Only 21% lack confidence
Europe’s plans must become action
Our survey of 500 foreign investment leaders highlights two immediate priorities for Europe to maintain its competitive position in the global economy: greater support for SMEs and lower energy costs
Reducing energy prices would alle in Europe. Meanwhile, SMEs are central to Europe’s economy and its attractiveness to foreign investors. They drive innovation and regional development, and are critical suppliers to large industrial businesses. Yet they are also more exposed to rising costs, regulatory complexity and financing constraints than larger businesses, limiting their ability to scale and compete globally
Beyond these urgent measures, business leaders point to additional priorities: supporting strategic sectors, reducing and simplifying taxation, and supporting digital innovation and competitiveness
More broadly, Europe’s attractiveness will depend on its ability to address structural cost challenges, reinforce its industrial base and sustain pro-growth conditions, supported by simpler regulation and stronger skills development
Notably, businesses consider investing in Europe’s security and strategic autonomy as relatively less important priorities. This likely reflects the fact that they want Europe to remain open to international trade and investment while protecting critical supply chains
Europe’s resilience is clear, but sustaining it requires decisive action. Policymakers and businesses must move quickly to lower structural costs, accelerate investment in strategic sectors, and strengthen the conditions that enable innovation and scale. Simplifying regulation, supporting SMEs and lowering energy prices will be critical to maintaining momentum. With strong fundamentals and growing confidence, Europe is well positioned to compete. But capturing this opportunity now depends on turning intent into execution.
Summary
Amid a broader global downturn driven by geopolitical tensions and economic uncertainty, Europe is navigating a more selective investment cycle. While activity moderated in 2025, Europe proved relatively resilient and momentum shifted toward faster growing regions and strategic growth areas such as AI, defense and low carbon energy. Though near term conditions remain challenging, businesses continue to see compelling reasons to engage, underpinned by Europe’s market scale, governance framework and innovation potential. Future progress will hinge on decisive action to further improve competitiveness and ease structural constraints.
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