The European Commission is once again focused on boosting Europe’s competitiveness, this time by integrating the bloc’s capital markets.
The EU executive published a range of measures on March 19, aimed at unlocking the €11.6 trillion ($12.8 trillion) currently sitting idle in European bank accounts.
This strategy includes offering tax breaks to encourage investment in European assets, adjusting rules for banks’ capital requirements, risk management and liquidity, as well as centralising market oversight, akin to the US Securities and Exchange Commission.
The proposals come at a time when Europe faces stagnating economic growth, trailing behind the US and China.
So, how can the EU boost its competitiveness and drive business growth? And what actions can European businesses take to close the gap and improve economic performance?
Last year, the eurozone’s economy grew by a modest 0.7 per cent and, over the past two decades, US labour productivity has grown more than twice as fast as Europe’s, according to the European Central Bank. This has led some policymakers, such as the ECB’s Isabel Schnabel, to warn that the bloc faces a “competitiveness crisis”.
The ECB is concerned that weak productivity could keep inflation elevated by driving up labour costs for eurozone companies, as it continues its cycle of cutting interest rates from recent highs.
One policy aimed at addressing this issue is the European Commission’s “competitiveness compass”, which seeks to streamline regulations and reduce administrative burdens on businesses.
The plan, announced by Commission President Ursula von der Leyen last November, and later leaked, includes slashing reporting requirements and simplifying sustainability rules – a response to EU business groups and national governments lobbying for a more business-friendly regulatory environment.
Critics say the EU is dealing with an overload of new regulations, especially in the green and digital sectors. However, there is a risk that deregulation could undermine Europe’s long-term competitiveness. In my view, its relatively strict rules provide an advantage.
Consider AI, where Europe’s regulations, through the Artificial Intelligence Act, offer clear benefits for both consumers and businesses. The law, passed in 2023, is considered the most comprehensive regulatory framework for AI globally. It includes provisions that ban specific applications, such as scraping the internet to build facial recognition databases, which helps raise trust in AI by outlawing bad practices.
For businesses, these regulations provide much-needed certainty. In the US, there is no comprehensive, nationwide legal framework specifically governing AI. As a result of this ambiguity, companies may be hesitant to fully implement AI technology.
The same applies to sustainability. The EU executive plans to simplify regulations, particularly by reducing reporting requirements, at a time when US President Donald Trump is pushing a deregulation agenda.
While the EU’s ambitious green goals, such as strict car emissions standards, have led to increased competition from cheaper foreign alternatives, especially from China, the bloc’s Green Deal climate law has provided businesses with a clear path to meet decarbonisation targets. I believe this clarity gives European companies a competitive edge, allowing them to plan and innovate with confidence.
IMD
In contrast, Mr Trump has rolled back environmental protections in the US since taking office.
However, one of Europe’s biggest challenges is its fragmented financial markets. As former ECB chief and former Italian prime minister Mario Draghi highlighted in a report published last year, this fragmentation hinders competitiveness.
Capital flows more freely to the US because of its unified financial system and consistent regulatory frameworks across states, making it easier for businesses to raise capital and expand operations. In contrast, European businesses face varying regulations when operating across borders. While there are overarching EU rules, national regulations in areas such as taxation, accounting standards and financial oversight still differ.
To tackle this, I believe the EU must integrate its financial markets – harmonising rules and reporting standards and removing regulatory barriers, like differing national rules on capital requirements, tax regulations and securities laws.
Aligning accounting standards, like IFRS, across all EU member states and sectors would ensure consistent financial reporting, creating a more efficient and attractive environment for investors and businesses.
This would simplify capital raising, financial reporting and regulatory compliance – ultimately reducing costs and complexity for companies operating across a number of EU countries.
To succeed in this endeavour, the European Commission will need to strike a balance between centralised supervision and the interests of member states that may be wary of handing over regulatory control to the EU.
Another potential, though controversial, tool for boosting Europe’s competitiveness is selective protectionism. The EU is considering a “Buy European” procurement plan that would allow governments to exclude foreign bidders in critical sectors such as defence, energy and technology.
Similar to Mr Trump’s “America First” policy, this plan aims to protect European industries from cheaper foreign competition, particularly from China.
While protectionism carries risks, especially in terms of breaching international trade agreements, it may be necessary for Europe to protect its industries from unfair competition.
The EU has already shown its commitment to defending its economic interests, as seen in its response to US tariffs on steel and aluminium, through retaliatory tariffs on US products such as bourbon and motorcycles. Protectionism does not need to come in the form of tariffs, however. Instead, Europe can limit industry access to domestic players, as China does with its media, insurance and other sectors.
By focusing on supporting European companies in this way, the EU can help its industries stay competitive.
Europe’s sluggish economic performance compared to the US and China is concerning but it is not insurmountable. With policies such as integrating its financial markets, simplifying regulations and ensuring a unified framework for sustainability and AI, the EU can close its competitiveness gap.
Businesses must also rise to the occasion by committing to the green transition. Moreover, it is essential for companies to collaborate closely with governments and regulators to support EU competitiveness and not block regulatory progress.
