The EU needs a bonfire of regulations to regain its competitiveness

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BrusselsReport.eu
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By Adam Bartha, Director of EPICENTER, the network of leading European free-market think tanks.

EU legislation increased by more than 700% since the implementation of the Maastricht Treaty 30 years ago and by more than 100% since the Treaty of Lisbon came into effect in 2010. The period of exorbitant regulation increase also coincided with the sluggish economic growth of many old member states. To regain our economic competitiveness, and to avoid lagging behind peers such as the United States and China, the next European Commission has to start with a bonfire of regulations and ensure that the Single Market is complete.

The wise old men of Europe, with Mario Draghi and Enrico Letta at their helm, have been tasked with the commendable task of finding out why Europe is falling behind its rivals and what can policymakers do about this worrying trend. Sometime a picture can tell a thousand words and when it comes to the slowing economic competitiveness of the EU, this is certainly the case.

Figure 1. The trend in the total number of words in current EU legal acts

Source: ‘EU regulatory volume has doubled since the Treaty of Lisbon’, EPICENTER, 7 June 2024,

At its core, the EU’s Single Market is fundamentally a pro-growth invention. Without it, some EU economies could shrink by up to 20.5%. However, over the years, the Single Market has become riddled with additional regulations that are not core to its functioning – in fact, they often hinder it.  Without new EU members, the economic performance of the EU as a whole would be more dire. However, this sluggish economic performance can be reversed, but European policymakers need to accept the reality first.

The results of the European parliamentary elections indicate a slow shift in popular support away from a more centrist position and towards the right – primarily in countries like France and Italy where sluggish economic growth over the last two decades has led to rightful resentment in many parts of the electorate.

Take the rising popularity of state aid across old EU member states, and especially in France. The increase in state support has largely been toward green subsidies, which pose significant risks for competition within the Single Market. In particular, they stand to adversely affect new member states that cannot spend as much on subsidies as their Western counterparts. It’s not only subsidies, but also the high compliance costs of new regulations that impede the competitiveness of the EU. For example, mandatory environmental, social, and governance (ESG) frameworks entail substantial reporting costs for businesses, disproportionally affecting SMEs, and undermining overall competitiveness. New digital regulations, such as the Digital Markets Act, the Digital Services Act, and the AI Act, introduced during the current mandate of the European Commission, risk stifling innovation and limiting freedoms in digital markets – further disincentivising sectoral growth and innovation.

Despite the strong foundations of the Single Market, the EU’s economy has been underperforming compared to its potential and its economic rivals. So, what can policymakers do to enhance our competitiveness and ensure that Europeans across the continent benefit from the potential of the Single Market?

First of all, the European Parliament and Commission needs to prioritise the Single Market as a key political objective. In recent years, geopolitical challenges, social tensions around migration, and issues around the rule of law have taken priority over economic questions. While they are still important, the EU should not forget its key strength – its capacity to set the economic agenda of the continent. Instead of focusing on economic growth, EU policymakers have been obsessed with focusing on environmental and technological regulations, without considering how they’ll impact growth and innovation across the continent. Policymakers should not lose sight of the EU’s main goal: how to incentivise greater economic growth across the Single Market.

The European Commission already has several tools at its disposal to achieve this. It should strengthen its legislation enforcement in member states by streamlining procedures and reducing case backlogs. It should decrease the regulatory burden with a technology-neutral approach and harmonised permitting systems. The ESG framework has a considerable impact on businesses and much of it should be reconsidered or abolished. For example, enforcing the Corporate Sustainability Reporting Directive (CSRD), on average, costs a company €320,000 annually. When hundreds of thousands of euros are spent on compliance and reporting instead of innovation and development, the cost of EU red tape becomes obvious.

Thanks to our excessive regulatory burden, we have less competitive markets across Europe, which contributes to increased consumer prices. Around 94% of EU imports and products are subject to non-tariff measures, notably higher than in the US at 77% and Japan at 76%. These non-tariff barriers negatively impact the food, chemicals, and textiles industries, in particular. By liberalising some of our trade policies, we can ensure better access to global goods and services, and thus increase our own ability to compete on the world market.

But trade policy and domestic economic policies often go hand in hand and can positively reinforce on another. If occupational regulations and labour markets are liberalised across the EU, we would gain a significant competitive edge over our international rivals. If the least stringent regulations for a particular profession are established as the EU benchmark, we would be able to ensure that unnecessary red tape and the lobbying efforts of particular professions do not impede economic growth.

The EU’s foundations – with the Single Market being it’s crown jewel – are based on core four freedoms that aim to maximise the prosperity and well-being of Europeans. By ensuring that all EU policies respect and further enhance the free movement of labour, goods, services, capital without impediment, we can make sure that the EU’s purpose lives on for the next generations.

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