Ernestas Einoris // 17 April 2025

EU policymakers have noted that growing the region’s economy while maintaining its bureaucratic red tape is like trying to run a marathon in iron shoes. There have been previous attempts to replace these iron shoes with more comfortable trainers, so will this time be any different?

At the end of January 2025, the European Commission (EC) published its European Competitiveness Compass. This is an action plan to strengthen the EU economy over the next five years. The EC, led by Ursula von der Leyen, noted that “Europe has not kept pace with other major economies, due to a persistent gap in productivity growth” and “has fallen behind the US in advanced technologies, while China has caught up in many sectors”. The lag is particularly evident in the advanced technology sector, with artificial intelligence technology, social network applications, and smartphones all reaching Europeans from the US, China, or elsewhere. With this roadmap, the EC hopes to catch up with other countries in technology and innovation.

The document recognises that Europe’s competitiveness is constrained by a combination of regulations, bans, and requirements. The bureaucratic burden on EU businesses is significantly higher than the level of red tape in its main foreign competitors. To tackle this problem, the EC aims to reduce the administrative burden on businesses by a quarter over the next five years, and by a further 35% for small businesses. This will allow businesses to spend more resources on developing new products and expanding their activities, rather than on filing reports and applying for permits.

This is not the first attempt to cut red tape – the Better Regulation Agenda, adopted in 2015, and the 2017 Industrial Strategy promised the same. But the pace of red tape addition has outpaced efforts to cut it – far fewer regulations have been removed compared to the ones introduced. Although sophisticated procedures have been developed to assess the effectiveness of these policies, and complex models have been used to calculate the administrative burden on businesses, red tape remains a pressing problem.

One of the most striking areas where the EU is showing leadership is in the introduction of new industrial regulations. We were probably the first in the world to adopt the Artificial Intelligence Act, which sets out detailed documentation and risk management requirements for companies developing AI systems. These companies have publicly stated that the regulation will stifle AI innovation in Europe. The regulation sends a clear message to start-ups: if you want to innovate, do it elsewhere. For example, in the US, AI innovators will not be greeted with a long list of requirements, but with investment and talent attraction programmes.

Political ownership is needed for the EC to successfully implement changes. The task of ‘implementation and simplification’ has been entrusted to the Commissioner, Valdis Dombrovskis, former Prime Minister of Latvia. Over the next five years of Commission’s term, he is expected to review EU legislation and conduct a public consultation to identify the bureaucratic challenges faced by industry stakeholders. However, similar procedures have already been undertaken, with prior strategies and assessments listing the red tape problems identified by businesses.

However, their findings were either ignored or given limited consideration by lawmakers. The last EC legislature introduced a plethora of directives that made the business environment worse. Among them was the Minimum Tax Directive, which, despite the comparatively small additional tax revenue generated, has burdened businesses with a raft of new reporting requirements. The benefits for Europeans are minimal, but the damage to economic competitiveness is significant. This is especially so given that the US moved away from similar taxes this year, giving it yet another competitive advantage over the EU.

One more strategy is not enough to make the EU competitive and put it back on a growth path. Real change will occur only when the EU returns to its core idea – the Single Market – and removes the regulatory barriers that exist within it. Instead of a raft of new five-year plans and regulations, the EU should focus on removing bureaucratic constraints, many of which were introduced by the last EC. The objective of adopting new directives should be replaced by a plan to abolish existing ones. If the EC's direction remains unchanged, the new European Competitiveness Compass will remain just another unimplemented five-year plan, and Europe will continue to watch the backs of its competitors.

Ernestas Einoris is an Expert at the Lithuanian Free Market Institute.

This blog was originally published by the Lithuanian Free Market Institute in Lithuanian.