Mario Draghi released his long-awaited report on the EU’s competitiveness on the 9th of September. The report is essentially a wake-up call, stating that if the EU does not take steps to change the direction of its economic policy, the EU is condemned to a “slow agony.” The report became the focus of attention in the EU, Draghi even participated the informal European Council meeting in Budapest in November, where the Budapest Declaration focusing on boosting the competitiveness of Europe was adopted.

The topic of Europe’s declining competitiveness is one that has surfaced many times during the previous months. Enrico Letta’s report in April has also referenced the problem of the EU’s declining competitiveness. Decision-makers in Europe are becoming aware of the problem. The European Council adopted its conclusions on the future of industrial policy, with a focus on European competitiveness and a “way forward to a European competitiveness deal.” The program of the Hungarian Presidency of the Council of the European Union puts great emphasis on European competitiveness as its first priority and strives to adopt a New European Competitiveness Deal during its six months, reminding that “in the current international context of multiple challenges, where Europe is lagging behind its global competitors.” Interestingly, the political guidelines of Ursula von der Leyen from 2024 also put great emphasis on European competitiveness, the first chapter begins with “the structural brakes on our competitiveness”, titled “A new plan for Europe’s sustainable prosperity and competitiveness.” Furthermore, the Presidency calls for a European legal reform to enhance legal competitiveness and transparency.

A previous post on Constitutional Discourse also described how the industry and the organizations representing them alert the world on how the productivity and competitiveness of Europe are currently declining.

The Draghi report captivated European public discourse for a couple of days after its publication. Many have tried to assess how serious the call to arms really is and how much in fact should we be worried. Some have welcomed the report stating that it shows precisely that there is a problem, while there were some opinions calling the report one-sided as well. One thing is for sure, it is definitely worth some reflection.

In this post, the recommendations of the Draghi report on “The future of European competitiveness” will be assessed that are of a legislative, legal nature, giving an overview of what the EU should do to enhance its legal framework to increase Europe’s competitiveness according to the former chief of the European Central Bank.

Europe’s (legal) competitiveness in jeopardy

Draghi presented his report in the plenary session of the European Parliament on the 17th of September. He stated that Europe faces many challenges, not only geopolitical but economic and technological as well. The changes in the world especially affect an open economy. Europe is lagging behind the USA and China in innovation, as it does not focus enough money on research and development, the industry needs to become more dynamic. There is a need to integrate the common market and the European capital market for innovations to thrive, private investments in high-tech fields need to flourish. Subsidies are needed to expand the use of AI technologies in all sectors. Europe also needs to develop its education. Decarbonization and competitiveness need to be linked together to reach emission goals. The installation of clean energy sources is needed, the price of energy in Europe is too high. Furthermore, there is a need for a differentiated approach in the economy, as in some sectors it is a better decision to import technologies, while in others European technological independence needs to be preserved. A better view on critical raw materials and a better trade policy are critical, focusing on trade agreements. The economy is fragmented, there is not enough coordination among Member States. A great amount of investment is essential into specific fields, in his estimation in the sum of 800 billion euros (private and public as well).

Effective legal tools are needed to implement the proposals of Draghi. Decarbonization and competitiveness together need a more effective tool than the current EU ETS, the car industry needs to be regulated in a way that the emission goals are in fact reachable and not too burdensome for the consumers, trade needs well-written free trade and other agreements, the regulation of the IT infrastructure and of public services, including energy services, need to be up to the challenges of the 21^st century. The development of AI is not possible without a proper framework that ensures the safe usage of AI technologies, striking the right balance between efficiency and safety. There are many aspects of better regulation and deregulation in general that could help achieve competitiveness goals.

Focusing on the explicit proposals of Draghi, the following ones can be listed as legal, or legislative ones. In the introductory chapter, the report claims that even though the EU favors innovation, it continues to add regulatory burdens onto European companies. These raise costs, especially for SMEs and for the digital sector. More than half of SMEs flag regulatory obstacles and administrative burdens as their greatest challenge. Furthermore, it references that the decision-making rules are not efficient enough and not ready for the changes in the global environment (the report favors the community method in general).

It takes about 19 months on average to adopt a legislative proposal, which is way too long. There are also areas, where the EU needs to step back, apply the subsidiarity principle and reduce regulatory burden. As a beginning, a small number of overarching, targeted institutional changes could help, without the need for a treaty change. National parliaments are not active enough in the current framework, which needs assessment and steps to increase their activity and the application of the principle of subsidiarity. There were around 3500 pieces of legislation enacted and around 2000 resolutions were passed by Congress in the US between 2019 and 2024, in the case of the EU, around 13,000 acts were passed during the same period. There is a lack of a framework analyzing the costs and benefits of new laws. At the start of a new commission’s mandate, at least six months should be set aside devoted to systematically analyzing and stress-testing all economic rules, and then the Commission should pursue simplified legislation. All new legislation should be scrutinized from the same aspect as well. Implementation and enforcement need to be streamlined as well. All new proposals need to be subject to a competitiveness test, with a clear methodology.  

Regulatory barriers are hindering the tech sector, especially for young companies. Regulation should be designed for priority sectors in a way that is neutral, and regulation should be facilitating market entry. The complex and costly procedures that are fragmented due to the different national systems discourage investors from filing Intellectual Property Rights applications. The EU’s regulatory stance towards tech companies is against innovation, as there are 100 tech-focused laws and over 270 regulators across all Member States. Many EU laws are too cautious; by averting risks ex ante, they hinder competitiveness, for example in the case of AI requirements and a pre-defined threshold of computational power. There are heterogeneous requirements for digital companies using subsidiaries in other Member States, there is a proliferation of regulatory agencies and gold plating of EU legislation by national administrative authorities. There are limitations to data storage and processing, which creates high costs for these companies. Also, there are multiple different national rules regarding public procurement, generating high ongoing costs for cloud providers. These lead to many young tech companies not to operate in the EU at all.

The high cost of adhering to the fragmented regulations and of tax compliance and rules regarding companies reaching a threshold of size all lead to companies not using the opportunities of the single market. In the case of specific innovative sectors, like pharma, innovation is hindered by a complex regulatory framework. In 2022, the approval time for new medicines in Europe on average was 430 days, while the same is 334 days in the US. In the field of decarbonization, Draghi suggests that a unified procedure should be established, a special legal framework outside of the 27 national ones for projects deemed to be important for common European interest, which would shorten the length of procedures and integrate them into a single one.

The Draghi report recommends setting up a “Competitiveness Coordination Network”. The EU has tools to coordinate policies, like the European Semester, the National Energy and Climate Plans, etc. However, these processes are bureaucratic and ineffective. This new framework would be adopted by the European Council and at the beginning of each political cycle, priorities would be adopted. The current methods and tools would be thus integrated into one framework, helping to simplify EU and national administrations alike.

Diagnosis complete, time to start healing

The report establishes the problem: Europe’s competitiveness and productivity are in decline compared to the competition in the world, but also in absolute terms as well, with an extensive amount of background data. There are many steps needed to change these tendencies and according to Draghi, the EU is running out of time. After the diagnosis, it does give some ideas for treatment, although not comprehensively for all fields and sectors, but it is still a thorough compendium of suggestions. The whole document could very well be a program for the next five years of the European Commission as well, no wonder, that the Commission ordered the report in the first place. The report should indeed be on the must-read list of all European politicians.

This article referenced some of the points of the report with a legal focus. One of the main problems is the regulatory burden for companies within the EU. The tax regimes, the bureaucratic procedures, different rules for public procurement, the obstacles to entering the market, the factory-like legislation in the EU, the many different European regulations and administrative bodies, and the fragmented national regulations are all against the functioning of the common market and cross-border active companies must keep their eye on all of these obstacles during their work. Draghi makes a sensible proposal by stating that each college of commissioners should start their work by focusing for 6 months on deregulation and all legislative acts should be scrutinized with a competitiveness focus. A unified political approach to this problem through coordination through guidelines of the European Council could also prove useful.

Draghi identified the problems. The only question is, will Europe wake up in time?

Árpád Lapu is an adviser at the Minister’s Cabinet of the Ministry of European Affairs of Hungary and an assistant research fellow at the Károli Gáspár University of the Reformed Church in Hungary. He was a policy adviser on constitutional issues at the European Parliament between 2019-2024. Between 2017 and 2019, he worked as an adviser at the Cabinet of the Minister of Justice of Hungary, conducting comparative constitutional analyses. He has earned his JD at the Pázmány Péter Catholic University in Hungary, has a BA in international relations from the University of Szeged, and an MA in European and international administration from Andrássy Gyula German Speaking University in Budapest. He has completed an LLM in international law at the Catholic University of Louvain (UCLouvain). His field of research is neutrality and non-participation in armed conflicts in international law and constitutional norms regarding permanent neutrality. He has written publications regarding the future of the EU ETS system of the European Union, institutional reform proposals and policies of the EU, and research in the field of social sciences.