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Fracturing World

Why Europe’s best days lie ahead

The continent’s track record of innovation and collaborative research, and its zeal to transform traditional industries, augur well for the future.

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Late last year, amidst all the good news about COVID-19 vaccines, I had an illuminating conversation with the CEO of a European manufacturer. Looking at me through my laptop screen during a video chat, he remarked that he was filled with hope for 2021, while at the same time having some anxieties about the road ahead: would Europe lag Asia and North America? What were the implications for his company’s strategy and resource allocation decisions? Is there a future for Europe and, if so, what are its foundations?

As chairman of PwC Europe, I am well aware of the tide of negativity that has swept our continent, parts of which have been very badly hit by the virus, all of which has been depressed over the last couple of years by the seemingly intractable Brexit negotiations and other wrangling by governments. However, I also see many bright spots on the landscape, and key strengths and competitive advantages on which the EU can build.

Clearly, growth will be uneven as the world bounces back from the pandemic. Based on the forecasts of 180 research institutes and other academic organisations, European Union GDP is likely to have shrunk by around 9.1% in 2020, and will grow by 5.5% and 1.2%, respectively, in 2021 and 2022. Within these numbers, though, there will be sharp differences among countries in the region, and among business sectors.

Europe has to be realistic. We obviously lack big platform companies in technology like Alibaba, Amazon, Facebook, Google and Tencent, and having those will enable other regions, notably the US and China, to accelerate their recoveries. To catch up, we will need exceptional entrepreneurs, a more supportive regulatory environment, and a culture that prizes the opportunities in this space as much as individual privacy and the protection of data.

There are challenges in banking and financial services. Granted, thanks to increased capital requirements, the sector is more resilient than it was in 2008 and has provided the real economy with much needed liquidity in the wake of the latest crisis. Most players are striving to implement their digitisation agenda and to cut costs and consolidate within national borders, while the growth of fintechs and the incursions of big tech companies have injected new competition.

Nevertheless, structural weaknesses remain. Too often, the authorities have sought to mitigate risk by reducing the size of banks rather than encouraging cross-border consolidation and promoting cross-border champions. European banks, meanwhile, have fallen further behind their US and Asian competitors in terms of market capitalisation and balance sheet size. Pressure on profits and capital ratios are set to intensify this year as government guarantees on loans to help struggling companies expire, defaults rise and the need for refinancing becomes apparent. The creation of a continent-wide European capital market to compete with the US, the UK and Asia is more urgent than ever.

This said, there is much to brighten the gloom. Innovation is in our European DNA, and we need look no further for inspiration than the brilliant scientists at Germany’s BioNTech who in partnership with Pfizer developed the first approved vaccine against COVID-19 based on BioNTech’s proprietary mRNA technology. European academics and commentators have been quick to see a correlation between business success on the one hand and diversity and inclusivity on the other, so it is noteworthy in my view that the husband-and-wife team who co-founded the company that allows new vaccine candidates to be developed more quickly than conventional ones are first- and second-generation immigrants from Turkey. 

Most of Europe’s business sectors have been hurt by the 2020 downturn.

Impact of 2020 downturn on growth of gross value added (GVA) added in Europe (EU)1

GVA, %

Transportation, travel, hospitality
-19.9
Entertainment and media
-16.0
Automotive
-14.9
Consumer goods and retail (non-food)
-14.4
Services
-13.5
Chemicals
-10.2
Financial services
-9.8
Industrial manufacturing
-9.7
Freight transportation
-9.7
Energy
-9.0
Agriculture
-5.1
Pharma and life sciences
-4.7
Healthcare
-4.3
Technology and software
-3.4
Consumer goods and retail (food)
-0.3
1.2% Telecommunications was one of the few sectors to avoid a downturn in 2020
1.2

Besides pharma, Europe’s telecommunications sector has a strong track record of innovation, and this sector was one of the few not to suffer a downturn in 2020. In automotive, as elsewhere in manufacturing, Europe has made a good start with Industry 4.0 and the Internet of Things (IoT), which provides some compensation for not having its own platform champions. Automotive suppliers are fast becoming software-driven technology companies; indeed, it’s striking to me how leading businesses in that sector now boast more software engineers than some of the major software giants themselves. Europe is building on its strong heritage of inventors, scientists and engineers, a trend also conspicuous in the fact that 70 to 80% of all global patents in IoT have been registered in the EU.

Innovation also distinguishes the service sector. Europe has an enviable position in luxury goods, with more than 80% of global luxury brands owned by companies in the region. We don’t yet know how the retail sector will evolve after the crisis, but many of the sector’s global leaders with their new “flagship” stores in big cities and innovative online channels are well positioned to prosper in whatever hybrid shopping model emerges.

Many European companies have undergone deep transformations in recent decades, developing capabilities that will be needed in “backbone” industries such as oil and gas, energy and utilities, steel, and chemicals. In automotive, a global industry with one-third of its activities in China, we can be optimistic about the “transformative” role continental Europe can play in ESG. European automobile companies face an enormous challenge to provide leading products and services in the field of electric and autonomous vehicles. But I know from conversations with some of their senior executives that the industry is deeply committed to the EU’s “green deal”—to be the first region in the world to achieve climate neutrality by 2050. The transformation in automotive, it’s worth remembering, is still at an early stage, and the strength of European car brands will be an important asset in future battles with US manufacturers like Tesla (still a relatively small company) and new Chinese competitors.

Underpinning all this is Europe’s proud and distinctive European educational heritage. According to the most recent Times Higher Education World University Rankings, more than 40% of the world’s best universities are based in Europe. Moreover, no other group of countries collaborates across national borders in research to the same extent as the EU, which doubled the proportion of its annual budget devoted to its framework programme for research and innovation to €74.8bn in the years 2014–20. 

It’s my hope that we can soon put behind us the terrible headlines of 2020, and look forward to a year of recovery and opportunity in 2021. Away from the limelight, the pressures of the pandemic have already speeded up change from the C-suite to the shop floor; combined with the continent’s deep reservoir of brains and skills, this makes me optimistic about the way ahead.

As the manufacturing CEO and I traded thoughts about the path forward for Europe, I was struck by the energy and passion he brought to his role. His anxiety was balanced by a belief that there are myriad opportunities for his company to innovate and grow. He is deeply committed to the success of his enterprise, not just for its own sake but for its people, who dug deep and sacrificed much during 2020, and whose capabilities he admires and views as a foundation for the future. That commitment is making him look outwards, not inwards, as he plots the next steps. If Europe as a whole does the same, its best days lie ahead.

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Harald Kayser

Harald Kayser

Senior Partner and Chairman, PwC Europe SE, PwC Germany

Tel: +49 69 95852065