By Ernestas Einoris, a policy expert at the Lithuanian Free Market Institute
EU policymakers have recognized that attempting to grow the European economy under the current bureaucratic burden is like trying to run a marathon wearing iron shoes. Efforts to replace them with comfortable sneakers have been made before, so the essential question remains: will this time be any different?
In late January, the European Commission (EC) unveiled the “European Competitiveness Compass,” an action plan outlining measures to boost the EU’s economy over the next five years. The Commission, led by Ursula von der Leyen, notes that Europe’s economy has long stagnated at levels where the US was two decades ago. This gap is particularly noticeable in the technology sector—artificial intelligence, social networks, and smartphones predominantly come to Europeans from the US, China, or other countries. By implementing its new plan, the EC hopes to catch up with global leaders in technology and innovation.
The plan explicitly acknowledges that Europe’s competitiveness is severely restricted by numerous regulations, prohibitions, and compliance requirements. The bureaucratic burden on businesses in the EU is substantially greater than in major international competitors. To address this issue, the Commission has set an ambitious goal: to reduce the administrative burden on companies by 25% and on small businesses even more—by 35% within the next five years. This reduction would enable businesses to focus more time and resources on innovation and growth rather than paperwork and permit applications.
Recent gap in performance has been staggering…
2010-2023:
🇪🇺 EU productivity: +5%
🇺🇸 US productivity: +22%GDP Share (1960 vs 2024):
🇪🇺 EU: 34% → 15%
🇺🇸 US: 28% → 25% pic.twitter.com/A47cY0zUsr— Alessandro Palombo (@thealepalombo) December 5, 2024
This is not the first attempt to ease bureaucracy—similar promises were made in the 2015 “Better Regulation Agenda” and the 2017 Industrial Strategy. Yet, the introduction of new bureaucracy has consistently outpaced efforts to eliminate old regulations. Despite sophisticated evaluation procedures and complex models used to assess administrative burdens, bureaucracy remains a pressing issue.
One area where the EU notably leads globally is introducing new regulations. Europe was among the first to adopt the Artificial Intelligence Act, imposing detailed documentation and risk management requirements on AI-developing companies. Increasingly, businesses argue such regulations stifle AI innovation in Europe. They send a clear message to startups: if you want to innovate, consider doing it elsewhere, such as in the US, which offers investment incentives and talent attraction programs rather than lengthy compliance checklists.
For the EC’s proposed changes to succeed, political accountability is crucial. Valdis Dombrovskis, the European Commissioner and former Latvian Prime Minister, has been tasked with implementing and simplifying legislation. Over the next five years, he will review EU laws and conduct public consultations to identify practical implementation issues faced by stakeholders. However, similar consultations have taken place before, with identified bureaucratic issues extensively documented in ex-ante and ex-post evaluations and previous strategies.
Belgian Big Four auditors manage to "compensate lower or even reduced turnover with a solid growth in audit activities" which rely on growing EU regulation, as for example the Corporate Sustainability Reporting Directive (CSRD) (DE TIJD) pic.twitter.com/OgTTdmNVUO
— Pieter Cleppe (@pietercleppe) November 22, 2024
Unfortunately, past recommendations have often been ignored or only partially considered by lawmakers. Examples abound, notably from the previous EC tenure, which saw numerous directives worsening the business environment. One example is the minimum profit tax directive, which added extensive reporting and complex calculations for companies, despite generating relatively modest additional tax revenue. The directive’s benefit to Europeans remains minimal, while the harm to economic competitiveness is substantial, especially since the US withdrew from similar tax measures this year, gaining a further competitive edge over the EU.
For Europe to regain competitiveness and return to growth, yet another strategy alone will not suffice. Real change will only occur if the EU returns to its foundational concept—the single market—and genuinely removes existing regulatory barriers. Instead of creating another batch of five-year plans and new regulations, the EU should prioritize dismantling the bureaucratic constraints already in place, many introduced during the previous Commission’s term. The goal of issuing new directives should shift towards eliminating existing ones. If the Commission does not alter its direction, the new “European Competitiveness Compass” will merely become another unfulfilled five-year plan, leaving Europe further behind its global competitors.
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