EU aims to boost competitiveness at long last

Policymakers are keen to reform Europe’s stagnating economy through less regulation and more investment.

Ursula von der Leyen speaks about European competitiveness
President of the European Commission Ursula von der Leyen in Brussels, Belgium, on Sep. 9, 2024, discussing a recent cautionary report on the EU’s competitiveness issued by former European Central Bank President, Mario Draghi. © Getty Images
×

In a nutshell

  • EU heavyweights propose a lighter-touch administration
  • Recent EU green and social regulations still impose a toll on business
  • Less regulation can lift economic growth, but structural issues persist

A starkly critical report of European Union economic policy was issued by former European Central Bank President Mario Draghi in early September, entitled “The Future of European Competitiveness.” The report warns that the bloc is facing long-term declining economic growth that threatens Europe’s prosperity, independence and social welfare.

To address the EU’s vulnerabilities, the near 400-page document proposes cutting geopolitical dependencies by securing supply chains and closing its innovation gap with the United States and China. From a policy standpoint, these objectives would be achieved through a mix of sectoral reforms, including development of the energy, artificial intelligence, transport and pharmaceutical industries. Mr. Draghi also suggests horizontal measures to boost innovation, skills and governance.

Large-scale investment key to achieving growth

The report is no less forthright about the unprecedented financial outlays needed to achieve the desired productivity and growth ambitions. Mr. Draghi asserts that Brussels needs to make additional combined public and private investments of 750-800 billion euros each year – equivalent to 5 percent of the bloc’s current gross domestic product (GDP). Such a rise in EU investment would, proportionately speaking, put it at levels not seen since the late-1960s and early-1970s.

Mr. Draghi also promotes new policies on slashing bureaucracy and championing lighter regulation. Accordingly, the report proposes reforming competition law by harnessing more of the benefits from the innovation aspects of mergers. New competition rules would also allow market consolidation in sectors such as telecoms and information technology. Meanwhile, efficiencies in capital markets vital for funding a large part of the bloc’s necessary investments would be achieved through the Capital Markets Union by facilitating the centralization of market supervision at the EU level.

In his remarks to the media during the unveiling of his report, Mr. Draghi warned, “The reasons for a unified response have never been so compelling – and in our unity we will find the strength to reform. … Do this, or it’s a slow agony.”

EU Commission refocusing on competitiveness

In her comments on Mr. Draghi’s report, European Commission President Ursula von der Leyen reiterated the importance of competitiveness, stating, “First, to be competitive, we need to master the clean and digital transition … we need to act on all the principal levers that are at our disposal … mobilizing public and private investment, improving the business environment and cutting unnecessary red tape.”

Ms. von der Leyen also highlighted this focus on competitiveness in her own report, “Europe’s Choice,” published in July. In this report, she pledged that the main priority of her new upcoming five-year term following her reelection in July will be boosting domestic competitiveness. She also advocated for making business “easier and faster in Europe.”

To implement these goals, newly appointed EU commissioners will be tasked with reducing administrative burdens and simplifying business-related rules. These would include less red tape and reporting, improved enforcement and faster permitting. “The whole college [Commission] is committed to competitiveness,” she said.

The new commissioners will hold regular dialogues on policy implementation with businesses. They will also work with a newly created EU representative for Implementation and Simplification to stress-test the entire scope of EU legislation on how it conforms to the interests of business.

Read more by trade, sanctions and regulatory expert Bob Savic

Future regulations are to be simplified and designed with small businesses in mind. This will be done through a new small- and medium-sized enterprise and competitiveness check to help avoid unnecessary administrative burdens.

According to President von der Leyen, better lawmaking will have to be a joint task between all institutions involved and all legislative processes covered – from proposal to amendments to adoption. “In this spirit I will propose to renew interinstitutional agreement on simplification and better lawmaking so that each institution assesses the impact and cost of its amendments in the same way.”

A starting point for this envisaged collaborative, interinstitutional legislative approach may be to consider reforming key pieces of legislation widely slammed for stifling competitiveness.

Burdening companies with administrative obligations

The Corporate Sustainability Due Diligence Directive (CSDDD) was formally adopted in July 2024, and its provisions will come into force in graduated steps over several years. The directive introduces mandatory human rights and environmental due diligence requirements for large companies operating within the EU, both EU- and non-EU-based.

Obligations under the directive will apply in addition to other more specific, or potentially stricter, due diligence obligations under other EU laws. These include regulations on conflict minerals, batteries, deforestation and a forthcoming law on forced labor.

The EU has increasingly come under pressure from member states, trade associations and major European political parties to “halt and review” the application of the directive’s rules. The main criticism of the law stems from its imposition of an excessive administrative burden on businesses. A risk is that member states could transpose the obligations into national law without transparency and without being clear or understandable for businesses.

×

Facts & figures

EU GDP as a percentage of U.S. GDP

EU U.S. GDP
In terms of gross domestic product (GDP), the EU has been lagging behind the U.S. for years. Policymakers in Brussels now seem determined to catch up.

Companies hindered by sustainability laws

Onerous environmental legislation also incurs a heavy cost for business and is an area where Mr. Draghi sees room for streamlining. For instance, the framework to facilitate sustainable investment regulation (Taxonomy Regulation), which came into force in January 2022, establishes a classification system providing businesses with a common language to identify whether a given economic activity should be considered “environmentally sustainable.”

Companies applying the Taxonomy Regulation are facing additional costs and resources associated with new reporting requirements. This applies to collating and reporting a new information category, such as sustainability data, which played none or only a subordinate role in previous reporting. From the perspective of these companies, this work and expense requires greater investment.

Companies are also worried about the Carbon Border Adjustment Mechanism (CBAM), which forms part of the EU’s green deal package. This is a collection of initiatives aiming to secure the bloc’s goal of a 55 percent reduction in carbon emissions (compared to 1990 levels) by 2030.

CBAM will apply to financial charges on imported goods from January 1, 2026. The reporting will involve calculating an EU importer’s total imported goods and associated embedded emissions. This calculation would form the basis of purchasing CBAM certificates, minus any carbon price already paid abroad.

European industries have been largely skeptical of CBAM, voicing concerns over negative impacts on investment prospects for the sectors affected, as well as the efficacy of its implementation.

New digital laws hamper EU tech competitiveness

The EU’s Artificial Intelligence (AI) Act came into force in August 2024 and is the first such comprehensive regulation in any global jurisdiction. The law assigns risk categories to providers of AI systems. This involves companies that develop AI with a view to placing it on the EU market under their own name or trademark, whether for payment or free of charge.

Given the law was enacted recently, it is widely anticipated that its application will entail new expenses, particularly during the initial phase of implementation. Satisfying its requirements will also likely increase administrative burdens, resulting in delays for the launch of new AI products.

Meta logo in front of EU flags
The EU’s recent AI and Digital Services Acts will entail untold costs for tech companies wanting to operate in the common market, potentially undermining the bloc’s competitiveness. © Getty Images

Another new set of laws regulating the digital realm is the Digital Services Act (DSA), which restricts the activities of digital services providers within the EU. Alongside the Digital Markets Act, the DSA is part of a comprehensive European digital strategy imposing far-reaching obligations on providers of very large online platforms (VLOPs) and very large online search engines (VLOSEs).

The DSA became mostly applicable by February 2024. Critical voices have expressed concerns regarding the DSA’s extensive and complex rules creating unnecessary bureaucracy for digital businesses and stifling innovation.

×

Scenarios

More likely: New EU Commission injects business competitiveness in legislation

The respective pronouncements and reports by Ursula von der Leyen and Mario Draghi appear to have set the tone for a more business-friendly upcoming five-year Commission presidency, commencing this November. The appointment of several new commissioners, including for the important post of running competition policy, also points toward a team-focused and market-oriented administration.

In this context, the impulse for a lighter-touch regulatory environment appears more likely to emerge than not. Its consequences could lead to a reassessment and redrafting of the burdensome regulatory stance contained in numerous EU laws currently on the books and various regulations in the pipeline.

The EU’s response to the growing pressure to revamp the controversial due diligence directive will provide clues as to how a slimmed-down legislative environment will look. Whether Brussels manages to reduce its many onerous provisions on business may reveal the extent to which a new era of pro-business policymaking will emerge. The challenge will be to strike a balance in crafting legislation that is supportive of business interests, while being mindful of securing green, social and economic security objectives.

Certainly, the political backdrop for a more market-friendly legislative arena is already in place. The expanded representation of pro-business groups in the European Parliament, including the European People’s Party, is likely to push for a more business-enhancing approach to legislative drafting and proposals. This would move the bloc toward a much lighter, if not a wholly deregulatory, approach.

Moreover, there now appears to be a growing acknowledgement, across the entire EU policymaking institutional spectrum, that the upcoming five years will make or break the bloc’s economic progress. It will be a period clearly driven by the imperative to consolidate its economic security, especially in light of competition with economic rivals China and the U.S.

In these two economies, but especially in the U.S., rapid technological change is being driven by corporate investment. This, in turn, is incentivized by generous government funding programs and streamlined business regulation. Such an approach could serve as a model for the EU.

Less likely: EU policymaking remains bogged down in stifling business rules

In the speech launching his competitiveness report, Mr. Draghi underscored the scale of challenges that EU businesses face in driving growth and productivity across the bloc. According to him, each year U.S. companies invest 700 billion euros more than do their EU counterparts.

In response, his calls for investment of 800 billion euros a year – to be reached within a short time frame – would set the ball rolling in reviving the EU’s economic prospects if enacted. Yet, the question arises as to how realistic this financing target really is.

The EU’s low level of private investment has been worsened by a series of crises. Ten years after the global financial crisis, private investment in the EU fell a precipitous 15 percent. The Covid-19 pandemic and the war in Ukraine have further hampered the bloc’s ability to invest, transform and reform since 2020, according to the European Investment Bank.

Public interest group Finance Watch has also highlighted the EU’s investment plight. It says the bloc is facing major funding gaps for delivering on the pillars of its strategic agenda between 2024-2029. Climate change policies alone will require the bloc to invest between 5 and 10 percent of its GDP each year over the coming decades.

No doubt, reasons for the EU’s poor investment performance are multi-causal and deeply structural. Yet, the Commission’s agenda over the last five years in promoting its green deal, elevating labor and social policies, and focusing on various ideologically driven issues, no matter how worthy, has resulted in an expanding legislative swamp which has submerged business activity and investment.

Given this history, both the nature of EU legislative development and the style of its provisioning may have already become so deeply entrenched within policymaking institutional structures that lofty ambitions may ultimately prove beyond reach.

Most worryingly, if Germany, the continent’s largest and most influential economy, persists down its path of creating a highly regulated domestic business environment, this will cast a pall over prospects for a less stifling regime across the entire EU single market.

For industry-specific scenarios and bespoke geopolitical intelligence, contact us and we will provide you with more information about our advisory services.

Related reports

Scroll to top