The EU’s competitiveness strategy is not adequate

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EU Commission President Ursula von der Leyen (Copyright: "CC-BY-4.0:© European Union 2022 – Source: EP")

By Nicos Rompapas, Director of the Center for Liberal Studies (KEFiM), Greece

Since Mario Draghi’s influential report on European Competitiveness, public discourse has largely converged on identifying the causes of EU’s economic stagnation. It however remains divided on the strategies to address them. The European Union is struggling with a sharp drop in its place in the world economy. The EU’s economic contribution to the global economy has decreased over the last 20 years, from 25.8% in 2004 to 17.6% in 2024. Slow economic development, demographic stagnation, and a growth divide among member states are all factors contributing to this downturn. The EU’s old members (the ones joined before 2004) have suffered, seeing their proportion of the global GDP drop from 24.1% to 15.4% as the US and China have increased their economic clout. Newer member states (after 2004) in Central and Eastern Europe, on the other hand, have seen strong development as a result of greater productivity growth and access to EU markets. The EU runs the risk of slipping farther behind its international rivals as economic difficulties worsen and growth projections stay low, in a very unstable geopolitical environment.

To address its waning competitiveness, the EU has outlined a multi-faceted strategy focused on simplifying regulations, fostering innovation, and enhancing economic security. A core pillar is reducing administrative burdens and ensuring EU regulations are simpler, faster, and technology neutral. Measures include streamlining permitting processes, such as through the Decarbonisation Accelerator Act, and simplifying access to EU funding under initiatives like Horizon Europe and InvestEU. A new definition for “small mid-caps” will allow 31,000 companies to benefit from tailored regulatory measures, while coordination between member states is another priority, with the introduction of a Competitiveness Coordination Tool to align industrial policies and prioritize strategic cross-border projects. The EU also aims to close its innovation gap by launching a Start-up and Scale-up Strategy to reduce barriers to market entry, talent mobility, and access to risk capital. Additionally, the EU will enhance research infrastructure to support cutting-edge technologies. Security and resilience are integral to the strategy, recognizing that geopolitical stability underpins long-term investment and innovation. By integrating economic security into policy and deepening trade relations—such as modernizing agreements with Mercosur and Mexico—the EU seeks to sustain its global trade advantages and ensure strategic autonomy.

The EU’s strategy addresses the competitiveness gap aiming for mid-to-long-term benefits; however, it fails to adequately address the pressing issue of insufficient financing for innovation and growth in the present. To enhance the business climate, the strategy places a strong emphasis on expedited permitting, simplified regulations, and customized assistance for small and mid-cap firms. But the underlying issue—high taxes, excessive government involvement, and wasteful spending—remains unsolved. In the EU, borrowed money is frequently used for paying consumption rather than productive investments, which raises national debt and leaves little money for infrastructure and innovation. The strategy may not be enough to close the gap with the US, where innovation is driven by more powerful private capital markets and pension funds, because it depends too heavily on programs like InvestEU and Horizon Europe to mobilize investments. Furthermore, the Competitiveness Coordination Tool does not directly address member states’ varied fiscal capacities, which impede collective action, even though its goal is to support cross-border projects. The EU runs the risk of further losing its price competitiveness due to ongoing production stagnation and growing labor costs if fiscal policies are not structurally changed and more attention is not paid to developing capital markets and pension funds.

In summary, although the suggested actions are a positive start, resolving the underlying financial issues is necessary for them to be successful. To foster long-term growth and innovation, the EU must prioritize reducing tax and debt burdens, maximizing private investment, transitioning to funded pension systems, and strengthening its financial systems, benchmarking not against its past, but against its global competitors.

Revitalizing the Single Market

Many of the EU’s urgent competitiveness issues, most notably its lack of funding for expansion and innovation, could be resolved by revitalizing the Single Market. The Single Market may become a more active engine for economic integration by giving priority to the reduction of administrative and regulatory barriers, which will lower business costs and increase efficiency. Furthermore, over-regulation, which frequently stifles entrepreneurship and innovation, should be avoided by ensuring that new laws are in line with Single Market principles and by routinely reviewing current laws’ enforcement.

By breaking down tariff and non-tariff trade barriers and seeking new trade agreements, the Single Market can be extended outside of the EU, opening up new markets and expanding export prospects for EU companies. Businesses would be able to grow more freely inside the EU if trade barriers for services were removed and national permission procedures were made simpler; this would promote competition and innovation.

Advancing EU capital market integration and pension reforms is crucial to competing with stronger economies like the U.S. Revising the Maastricht debt criterion to reflect unfunded pension liabilities could accelerate the shift from pay-as-you-go to funded systems, boosting retirement savings and deepening Europe’s capital markets, while a unified capital market would enhance business financing.

Lastly, the Single Market must be made more attractive for digital and technological advancements by reevaluating restrictive legislation, like the Digital Markets Act, and promoting innovation-friendly policies. Paired with initiatives to integrate labor markets and attract skilled professionals from abroad, these steps can ensure that the Single Market remains vibrant, adaptable, and a leader in global economic competitiveness. By revitalizing the Single Market, the EU can unlock significant economic value, create new investment opportunities, and foster long-term prosperity—returning to the original vision that drove its success for decades before its evolution into a regulatory powerhouse.

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