“We turned crisis into opportunity,” says Francisco Riberas. “We did two big acquisitions of German companies during 2010 and 2011 that almost doubled the company size. We have kept investing during hard times to stay as a reliable supplier.”
Mr Riberas runs Gestamp, a Spanish manufacturer of auto components with a turnover of €8.2bn in 2017, four-fifths of it from outside the company’s domestic market. Since the financial crisis, which hit Spain particularly hard, Gestamp has added two countries to the 19 in which it was already present, is set to start operations in Japan and, next year, in Morocco, and has seven industrial plants under construction worldwide.
Profitability has risen by nearly 44 per cent since 2012, fuelled by buoyant demand from the big carmakers. The company has also diversified its sources of finance away from Spanish banks to the global banking system, the corporate bond market and in 2017 a public listing in Madrid.
Mr Riberas is not the only company boss in Europe feeling positive. The political noise — around the UK’s exit from the EU, a populist government in Italy and fears of a global trade war — risks drowning out the fact that the region’s businesses are on a roll. There has been a robust recovery from the gruelling crisis in most parts of the EU: gross domestic product rose by 2.3 per cent in the euro area last year; in the EU28 it was 2.4 per cent, its fastest pace this decade. The crisis has left its surviving businesses financially stronger and focused on new growth opportunities.
Questions are being raised, however, over how sustainable this growth is, and what the longer-term prospects are for corporate Europe. With confidence starting to fall, policymakers are being challenged over whether they have done enough to make businesses more resilient and genuinely able to compete with global rivals.
“There is still good positive momentum, and we have made a lot of improvements in Europe, and companies are investing,” says Pierre Gattaz, president of regional lobby group BusinessEurope. “But institutional reform has been slow and much more must be done.”
Last year was exceptional for Europe Inc in terms of growth, profitability and business expectations. After years of flat demand in their home markets, the region’s companies were finally able to take advantage of rising consumer spending at home, as well as robust demand abroad.
With record flows of foreign direct investment into Europe, most macroeconomic indicators were back to their pre-crisis levels, or even higher. According to Eurostat, investment rose by 3 per cent during the year, while household consumption was up by 2 per cent.
“In Germany and many other European economies, the economic expansion at home and the pick up in global trade since 2017 are still solid factors. Domestic investment has finally picked up across all of Europe,” says Klaus Günter Deutsch, head of research at the BDI, Germany’s largest business federation.
Although some indicators have slowed in 2018, business confidence is still close to the very high levels it reached last year. And the seasonally-adjusted unemployment rate in the euro area was 8.2 per cent in July 2018, the lowest level since November 2008. Overall, economic fundamentals are much stronger than the political disruption would suggest.
“In Europe the alignment of the political narrative and the economy has dislocated,” says Andy Baldwin, managing partner for Europe, Middle East and Africa at EY.
Backed by the European Central Bank’s continuing easy money programme and a banking sector which, on the whole, has emerged from the crisis stronger, Europe’s businesses, particularly its smaller ones, are feeling bullish. In stark contrast to the years immediately after the financial crisis, there are few complaints from companies that they lack access to funding.
“Non-performing loans have fallen dramatically, balance sheets have been restored and banks are overflowing with liquidity and competing with each other to lend,” says Eric Chaney, an adviser to Institut Montaigne, a Paris think-tank.
The story differs by country, but the overall trend is the same. In Spain, restructuring in the banking sector has helped companies access funding for overseas expansion, particularly in Latin America and the Middle East. Spanish and Portuguese companies are competing fiercely for business outside their domestic economies.
Exports from Germany and Spain continue to grow strongly, while in France, President Emmanuel Macron’s reforms, although currently hitting a sticky patch, are shifting the dominant national narrative to one that supports business. “Macron likes business, he likes the entrepreneur,” says Mr Gattaz. “He has made reforms that some of us have been suggesting for 30 years.”
Ireland’s economy is booming and, even in Italy, where a populist coalition took power in June and markets have seesawed since, politicians’ animus against business is overstated. “The business community has a long history of getting on with it despite what’s going on in Rome,” says one Italian business leader.
Meanwhile, the UK’s imminent departure from the EU, while damping investor sentiment towards the country, has been a boost to others. Paris, Berlin, Frankfurt, Dublin and Luxembourg are all benefiting from a shift in financial services jobs and increased investment.
To be clear, corporate optimism is not flourishing despite the financial woes of a decade ago, but because of them. Europe’s economic crisis, which peaked in 2013 with one in 10 people of working age in the EU28 unemployed and record levels of bankruptcies, was enormously painful. The companies that survived did so by becoming leaner and more efficient, often turning their gaze beyond the single market.
This was especially true in Spain, where companies also had to move away from their cosy financing arrangements with regional banks, the cajas, to a more professionalised and demanding relationship with lenders. Construction companies are a good example. Flattened by the crisis, many have been making inroads not just into the rest of Europe but further afield in Latin America and the Middle East.
Although Germany was insulated from the worst effects of the crisis — and consequently, some argue, failed to reform its banking sector as much as it needed — its Mittelstand companies have also focused their efforts on expansion outside Europe.
Emco is typical of this trend. A family-owned company founded just after the second world war which employs 1,350 people and has its biggest operations in Lingen, north-west Germany, it makes bathroom fittings, construction and air-conditioning technology. It had a record turnover of €160m last year. Christian Gnass, its chief executive, says domestic revenues now account for less than two-thirds of the total.
“The financial crisis was a signal to us to broaden our customer base and make sure not to depend on one single market and one single product,” says Mr Gnass, whose company has expanded into Turkey and other countries while building a new research and development centre at home.
Mr Baldwin at EY says Emco’s story is being replicated across Europe. “There is a real sense that middle-market businesses in Europe have finally shaken off the last of the effects of the financial crisis,” he says. “They have strengthened their balance sheets, are embracing new opportunities presented by digitisation and recognise the central role of innovation and purpose in driving growth and attracting talent.”
A recent survey by EY of 642 executives at businesses with annual revenues of €1bn-€3bn found that nearly half are expecting to increase revenues by between 6 and 10 per cent in the year from September, while a quarter were anticipating growth of more than 11 per cent. A fifth of executives in the 12 European economies surveyed said entry to new markets and mergers and acquisitions are the top growth priorities.
Dealmaking, much of it cross-border, has been buoyant. With nearly $785bn in announced deals during the first half of 2018, European M&A increased by 97 per cent compared with the same period in 2017, according to Refinitiv (formerly Thomson Reuters).
Colm Donlon, head of mergers and acquisitions for Morgan Stanley in Europe, the Middle East and Africa, says a series of factors have converged to feed the record pace of activity, including a focus on consolidation in corporate Europe and a targeted return to dealmaking in the region by Chinese and Japanese companies.
The ability to expand outside the single market has been a key driver of corporate recovery in Europe. “Cross-border activity within the single market, whether exporting or deals, makes you very comfortable to then export outside the EU,” says Mr Baldwin.
Despite the evidence of strong corporate activity, concern is rising that growth is at risk from developments both inside and outside the EU that have hit business confidence. The prospect of a global trade war in the wake of US president Donald Trump’s imposition of tariffs on China, the unstable coalition in Italy, oil price rises and Brexit are all putting a damper on investment.
“There is still good positive momentum, but we have to be careful because of geopolitics,” says Mr Gattaz. “Trust is 50 per cent of business. If you have trust, you invest.”
An additional challenge is the lack of workers with the required skills, particularly in digital sectors. BusinessEurope says labour constraints are at their highest since it began keeping records in 1985. Salaries in the specialist areas most in demand are soaring, with artificial intelligence experts most highly sought after, followed by software engineers and mobile app designers, according to recruitment companies.
“After a very strong 2017, businesses are increasingly concerned that growth is peaking and about to slow down. European companies increasingly see a shortage of skilled labour, which can hinder their expansion plans,” says Emma Marcegaglia, chair of Italian energy group Eni and a former president of BusinessEurope.
Business groups and analysts also warn that policymakers have not taken the opportunity they had after the easing of crisis conditions to put in place policies which both protect business from a future crisis and provide the conditions for sustained long-term growth.
“The EU hasn’t fixed the roof while the sun has been shining over the past few years,” says Mr Baldwin.
The BDI’s Mr Deutsch describes policy change in Europe in the key areas of innovation, digitisation and higher productivity as “sluggish”, with progress on many reforms stalled in the face of national resistance.
The failure to reform capital markets is particularly critical. There were hopes that Europe’s companies would diversify their sources of funding away from an over-dependence on bank lending, and that policy changes would help deepen and broaden the continent’s capital markets. This has not happened.
Research this year by the think-tank New Financial showed EU capital markets have fallen relative to GDP by 8 per cent in the decade to 2016. US capital markets, meanwhile, are nearly three-times larger on this measure than those in Europe.
“This has been one of the failures of post-crisis reform,” warns Mr Chaney. “The doom loop between government bonds and Europe’s banks has not been cut.”
Europe’s corporate comeback
The FT examines why corporate Europe is leaner, meaner and fitter following the global financial crisis. The series will include:
Monday
Italy: luxury
Tuesday
Germany: Mittelstand
Wednesday
Spain: infrastructure
Thursday
France: recruiters
The failure to push critical reforms forward could be exacerbated by next year’s change at the top of the EU’s executive, with the replacement of Jean-Claude Juncker, whose agenda was focused on jobs and growth, by a European Commission president with different priorities. In addition, national governments will have little fiscal or monetary policy space to stimulate the economy when the cycle eventually turns.
Meanwhile, R&D spending lags behind that of Asia and the US. This, allied to a workforce ill-equipped for the 21st century, may prove a long-term drag on growth that could fuel unemployment and populist trends.
“Populism will sell you a dream for free,” says Mr Gattaz at BusinessEurope, “that there will be more jobs, more purchasing power. Business can provide a concrete dream, a real one. If you have a good economy, you can give more money to the people. This is why we need to explain to people why populism is not the solution and why we have to protect business.”
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