Europe awakes from its slumber

Europe has struggled with economic stagnation for years. Most attribute this to excessive regulation, a lack of international competitiveness, and external shocks such as the 2008 financial crash. However, recent changes indicate that the European Union has started taking action. Initiatives like the Draghi report and the European Commission’s ‘Competitiveness Compass’ suggest a revived effort to remodel Europe as a more productive and attractive place for investment. 

Global pressures, such as the war in Ukraine and US protectionism, may have accelerated this policy shift. These factors may have spurred Europe’s realisation that prolonged stagnation weakens its ability to sustain its prosperity, bolster defences, and remain competitive internationally. 

At the core of the policy shift is the Competitiveness Compass, which is a five-year strategy put forward by the European Commission to ease regulations, improve investment coordination, and strengthen economic security. It aims to foster an economic policy that is business-friendly while reducing reliance on foreign sources of energy, technology, and infrastructure. In doing so, Europe hopes to become a more stable, consistent platform of growth that’s less dependent on external nations. 

One of the key aspects of the Competitiveness Compass plan is reducing bureaucratic hurdles. The EU has long been critiqued as an overcomplicated regulatory body that discourages investment and hinders business activity. To address this, the Commission proposed an “omnibus package” that aims to simplify regulations, particularly in sustainable finance and corporate compliance. If implemented successfully, the reform hopes to “save companies €37 billion a year, by 2029”.  

The largest challenge with this plan is ensuring that these benefits materialise into tangible economic benefits. In the past, attempts to simplify regulations have met resistance from individual member states unwilling to give up national control. Furthermore, cutting regulations may have unforeseen negative externalities. For this initiative to succeed, it must translate economic theory into practice successfully and be enforced consistently across the EU. 

The largest issue with the EU’s ambitious economic reforms is that they may conflict with the EU’s commitment to carbon neutrality by 2050

Another major effort in the European Commission strategy involves creating a standardised legal framework for businesses. Currently, companies in Europe must navigate a multitude of diverging national regulations, making expansion across borders complex and costly. A standardised system would eliminate these “regulation obstacles”, making it quicker and easier for businesses to grow across borders and operate across multiple countries seamlessly. The simplification would hopefully encourage foreign investment, and strengthen the internal European market, especially at a time when international markets seem less stable. It could also support smaller businesses by lowering operating costs and offering better chances to compete. This is especially the case as smaller businesses find regulation relatively expensive. However, getting member states to implement aligning policies rests as a major obstacle. 

Another issue the EU faces is competition with the United States, particularly regarding its labour costs. In comparison to the USA, Europe has stricter labour laws and higher labour costs. This makes it less attractive for businesses looking to minimise expenses, especially for industrial sectors. Instead of focusing on lowering wages, the EU has bet on long-term competitiveness through innovation, AI infrastructure improvements, and economic stability. However, this ‘long-term view’ has been criticised; with many economists arguing the EU is underinvesting in research programmes. In 2021, The EU spent 2.27% of GDP on R&D. Meanwhile, the USA spent 3.46% of GDP. This risks the EU falling behind on intellectual property development and causing the long-term bet to fail. 

The challenge will be in striking a balance between economic growth and the environment

By investing in artificial intelligence, clean energy, and advanced manufacturing, the EU hopes to close the innovation gap with the US and boost its productivity. However, for this strategy to work, it must ensure that funding reaches the correct areas and does not create more bureaucracy for corporations to navigate. 

The largest issue with the EU’s ambitious economic reforms is that they may conflict with the EU’s commitment to carbon neutrality by 2050. Businesses have argued that strict environmental regulations have increased costs, which has reduced their global competitiveness. To solve this, the Competitiveness Compass has proposed adjustments to regulatory requirements in areas such as sustainable finance and compliance. However, environmentalists have protested that these changes may have drastic consequences on the climate. Nevertheless, the EU remains committed to its green transition, but it may be willing to make strategic concessions to ensure economic viability. The challenge will be in striking a balance between economic growth and the environment. 

Europe’s economic revival is far from guaranteed, but these policy shifts indicate a new sense of urgency in European leadership. The hope is, that through reducing bureaucracy, standardising regulations, and making the right investments in future industries, the Competitiveness Compass plans could help transform the EU into a more dynamic, thriving, and business-friendly economic power.