In 2025, global investors sought certainty amid political volatility, the aftershocks of monetary tightening, and supply chain restructuring. Overall, global foreign direct investment came under pressure, yet Europe demonstrated a resilience worth reading closely in this round of adjustment: the total number of FDI projects fell by 7%, but more than 5,000 projects were still announced during the year, bringing over 200,000 new jobs to the European economy.
This is not a purely cyclical contraction, but a structural shift in the track of capital. The direction of incremental cross-border capital is moving away from traditional industries and toward fields with greater policy certainty and long-term growth potential, such as artificial intelligence, defense, and low-carbon energy. At the same time, new recipient regions are taking shape in Southern Europe and Central and Eastern Europe, where costs are more favorable and policy incentives are stronger.
Not an “Ebb Tide,” but a Change of Track
Amid heightened global uncertainty, companies have not pressed the pause button; instead, they are choosing a new arena. The structure of Europe’s FDI attraction is shifting in two directions. On the one hand, investment in traditional manufacturing, represented by auto parts, conventional machinery, and basic chemicals, is weakening—this reflects both cyclical demand-side factors and the revaluation of asset portfolios in the context of the energy transition. On the other hand, projects related to AI infrastructure, defense modernization, and clean energy supply chains are entering a phase of rapid expansion.
The logic behind this substitution is not complicated. Multinationals’ choice of investment destinations is moving from static cost comparisons to dynamic systemic risk considerations. The consistency of policy frameworks, the availability of technology and data infrastructure, and the synergy of local supply chains are becoming more decisive than simply low production costs. In Europe, regulatory pioneering in AI is unfolding alongside a race for computing power; in defense, a trend is emerging in which security policy drives procurement demand; and on climate policy, the forthcoming Carbon Border Adjustment Mechanism is being used to strengthen the intrinsic attractiveness of green investment. These institutional factors are injecting long-term stickiness into foreign capital in specific industries.
Geographical Rebalancing: Southern Europe and Central-Eastern Europe Take Over the Baton
If one looks only at the large markets in Western Europe, the momentum of this round of FDI deployment may be underestimated. Over the past year, new growth nodes have been spreading toward Southern, Central, and Eastern Europe. Southern European countries, leveraging cost advantages in renewable energy, the expansion of employment ecosystems after the tourism recovery, and relatively well-developed logistics corridors, are attracting FDI in data centers and green manufacturing. Central and Eastern Europe, in turn, rely on mature automotive supply chains, a stable labor quality structure, and continuously improving business environments, making them natural destinations for manufacturing projects under “nearshoring” and “friendshoring.”
At the EU level, transfers delivered through the recovery instruments provide funding for public infrastructure and human resources development in these regions, amplifying their locational advantages. From the perspective of Europe as a whole, this geographical rebalancing enhances the risk resilience of the investment structure. When cost or policy volatility emerges in any single country, Europe still has relatively abundant alternative options within its borders, which in turn strengthens multinational enterprises’ confidence in treating Europe as an integrated market when making allocation decisions.## The Window Between Confidence and Reality
For short- and medium-term investors, the pace remains cautious. Real-world issues such as extended project approval cycles, energy prices, and regulatory frictions continue to constrain the scale of capital expenditure. Yet the more telling signal lies in long-term expectations: in this survey covering 500 multinational executives, around 60% expect Europe’s investment attractiveness to rise over the next three years. This proportion indicates that, even in a period of headwinds, Europe’s asset base is still seen as a store of value that can ride out cycles.
At the same time, Europe is in a window between confidence and reality. If it cannot resolve its structural cost disadvantages, shallow capital markets, and investment gaps in some infrastructure areas, its long-term attractiveness could be consumed by short-term friction. International capital tends to flow to regions that not only have large markets but can also deliver on policy dividends quickly. Whether Europe can turn these positive expectations into actual investment projects will depend on the coherence of member states and EU institutions on energy, industrial, technology, defense, and trade policies.
The Next Growth Phase: From Resilience to Expansion?
Europe’s FDI future does not lie in returning to old growth models, but in whether it can further release the potential of high-growth emerging sectors and regions. EY’s analytical framework also raises a key challenge: Europe must mobilize additional investment at scale to raise productivity and competitiveness. This means that, from the perspective of foreign investment policy, Europe needs to build a more explainable boundary between openness and economic security—reducing compliance uncertainty while maintaining market attractiveness.
From the viewpoint of global capital, Europe demonstrates not simply an ability to resist recession, but a proactive reshaping of competitiveness. In the next three years, whichever economy can offer a more predictable return path for AI, security, and the energy transition will win an outsized share of global capital reallocation. Europe, for its part, is attempting to write its own answer with a logic driven by both industry and regions.