There has been prejudice against the European economy. Previously we have discussed the unreasonably bearish outlook on it compared to the rest of the world, such as the United States and especially China. Such prejudice is not exactly fake news but is shaped by popular biased views or outlooks, especially by so-called experts. These are not fact-based, and one can easily refute them with data. Another kind of prejudice is on the UK compared to the rest of Europe, where the popular mass tends again to be bearish on it.
No doubt Brexit affects some sectors and affects them seriously. Even though a decent portion of businesses is affected, it does not mean the overall economy would be affected similarly because these sectors might not take up a large share of high growth contribution to total output. Media tends to magnify stories, especially interesting ones. However touching the stories are, it does not mean they are representative. And this is why we need to analyze the boring data. Only the top-down data can tell comprehensive stories but not the bottom-up fragmented pieces.
To see how detrimental Brexit is, we can compare the performance of the UK before and after 2016 to her neighboring but similar countries like France, Germany, and Netherlands—which are widely regarded as the UK’s competitors. The best variable to judge is foreign direct investments (FDI) because it is neither like hot money, which is too sentiment-driven, nor like GDP, which is largely determined by local factors. FDI usually refers to the business investment in an economy; it can be treated as a confidence vote by overseas yet betted by real money.
Recently there were reports the Netherlands surpassed the UK in attracting FDI inflows. Admittedly the data shows this, but Brexit happened in mid-2016 when UK’s FDI was still strong in 2017–2019, even compared to all three discussed countries, including the Netherlands. The recent stagnated trend should be due to COVID, which was consistent in the surpass time. But as COVID is no longer threatening, the exceptional trends will revert to the old normal paths.
The above discussion focuses only on the inward direction. Excluding the outward one as a “net inward” number, the ranking is completely different, as is seen from the solid lines in the accompanying chart. For most of the years with the data, Europe has been experiencing net FDI outflow, which is consistent with the practice of production relocation to emerging markets. The UK shows an obvious uptrend which is in stark contrast to the downtrend in the Netherlands.
The Netherlands reverts an uptrend to down after excluding the outward direction, while UK’s uptrend remains. This shows there are relatively 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 single side. Judged this way, the UK seems not threatened by her European competitors, including France and Netherlands.
