European investment in Egypt is one of the biggest factors driving the country’s economic growth, with a total value of €39 billion, placing it first in Africa and second in the Mediterranean. While these investments experienced a decline in 2020 and 2021 as a consequence of Covid-19, there are signs that a new recovery is imminent, as the European Union (EU) is reorienting its investment policies to favor alternative energy sources and nearby supply chains.
Additionally, Egypt ranks as the EU’s twenty-ninth trading partner, representing 0.7% of the EU’s total trade in goods with the world in 2020. On the other hand, the EU is Egypt’s largest trading partner, accounting for 24.5% of Egypt’s trade volume in 2020. Approximately 25.8% of Egypt’s imports and 21.8% of its exports are sourced from the EU.
In 2020, the EU and Egypt engaged in a total of €24.5 billion in goods trade. EU imports from Egypt totaled €6.4 billion, with fuel and mining products accounting for €2.4 billion (37.7%), chemicals for €1.1 billion (16.9%), agriculture and raw materials for €1.1 billion (16.8%), and textiles and clothing for €0.6 billion (9.9%). EU exports to Egypt totaled €18.1 billion, with machinery and transportation equipment accounting for €7.2 billion (39.8%), chemicals for €2.9 billion (16.1%), agriculture and raw materials for €2.4 billion (13.1%), and fuel and mining products for €1.6 billion (9.0%).
Since June 2013, Egypt and the EU have seen a strengthening of trade and investment ties through the Deep and Comprehensive Free Trade Area (DCFTA) agreement. The DCFTA is intended to improve market access and investment climate. The EU also endeavors to provide assistance to Egypt in its economic reforms, extending beyond the DCFTA agreement to encompass investments, government procurement, tenders, intellectual property rights, and trade in services.
Notably, foreign direct investment (FDI) flows have experienced fluctuating patterns in recent years. They observed a rapid increase in rates as a result of Covid-19, causing a decrease in global economic activity surpassing $13.4 billion in 2022, with a growing emphasis on emerging markets. There is a growing inclination to concentrate EU external investments on emerging markets, specifically in Asia and Africa, with the aim of capitalizing on high growth prospects and portfolio diversification. The following figure indicates the evolution of FDI flows out of the EU over the 2005–2022 period .
Figure 1: Evolution of FDI flows out of the EU, 2005-2022
Opportunities for Localization of European Industry in Egypt
1. Europe’s Growing Environmental Restrictions
The EU confronts significant ecological challenges necessitating stringent measures to mitigate carbon emissions and safeguard the environment. This has resulted in the implementation of stringent environmental regulations for factories, including the following:
- Stringent Emissions Regulations: Strict standards are imposed on factory greenhouse gas emissions, forcing companies to invest in new technologies to reduce them.
- Environmental Fees: Companies that fail to meet emission standards are subject to substantial fees, resulting in higher production costs.
- Prohibition of Use of Certain Chemicals: Several chemicals that are detrimental to the environment are no longer allowed to be used, which has forced businesses to look for new alternatives.
These environmental constraints impose a substantial burden on European companies, particularly energy-intensive ones.
2. Ageing European Societies
The EU is experiencing population ageing, with an increasing proportion of elderly people and a decreasing proportion of young people. As a result of demographic change, the proportion of working-age people in the EU is decreasing, with the number of workers expected to fall by 0.4% annually until 2040, accounting for more than 20% of the labour force by then. This results in the following:
- Shortage of Young Workers: The EU is experiencing a shortage of young workers, which puts a strain on businesses that are having trouble finding skilled workers.
- Increasing Health Care Costs: The health care burden on European countries is on the rise as the number of older individuals increases, resulting in higher corporate taxes.
- Low Rates of Innovation: A lack of young people can result in low rates of innovation in European businesses.
The ageing of European societies poses a significant challenge to European economies, prompting companies to seek alternative ways to reduce production costs and increase competitiveness.
3. Europe’s High Energy Prices
European countries are experiencing elevated energy costs, particularly in the aftermath of the Ukrainian crisis. The cost of gas and electricity has significantly increased, more than doubling in EU countries. In 2023, the price of electricity was €28.9 (euro/100 kilowatt-hours), up from €23.7 in 2021. The operational costs of factories were adversely impacted by the recent rise in gas and electricity prices, particularly in industries that are highly energy-dependent.
This leads to the subsequent outcomes:
- Increased Production Costs: Energy costs account for a significant portion of production costs in many industries, resulting in higher prices for goods and services.
- Reduced Competitiveness: European companies are less able to compete with those in countries with low energy prices.
- Alternative Energy Sources: European companies are compelled to investigate alternatives to conventional energy sources, including solar and wind energy.
The economies of European countries are significantly impacted by the high prices of energy, which compels companies to seek out production sites that offer lower energy costs.
4. Additional Benefits of Localizing European Industry in Egypt
Apart from the potential benefits Egypt offers to address the three aforementioned factors, there are several other benefits that facilitate the localization of European industry in Egypt, with the following being the most significant:
- Egypt’s Strategic Location: Egypt’s location at the intersection of the continents of Asia, Africa, and Europe renders it an optimal gateway to access vast markets.
- Skilled Workforce: The Egyptian youth are a significant human resource, accounting for approximately 60% of the total population.
- Huge Domestic Market: Egypt’s population is thought to number over 100 million, and it continues to grow every year.
- Huge Potential for Renewable Energy Sources: Egypt experiences year-round sunshine.
In conclusion, despite recent fluctuations due to global economic factors, the EU remains a significant investor in Egypt, and the trade relationship is mutually beneficial. Looking ahead, the EU’s focus on environmental sustainability, demographic shifts, and energy security presents opportunities for Egypt to attract European companies seeking to relocate production facilities. Additionally, Egypt’s strategic location, skilled workforce, large domestic market, and abundant renewable energy resources all position it well to capitalize on this trend.
