The European Commission has unveiled its Competitiveness Compass—a five-year blueprint to boost innovation and strengthen Europe’s economy—which gets the diagnosis right but prescribes the wrong cure. While it rightly flags excessive red tape, lagging innovation, and strategic vulnerabilities to China and Russia, it doubles down on the Digital Markets Act (DMA)—a regulation imposing strict rules on large tech firms—embraces protectionism, and wrongly equates U.S. and Chinese tech threats, undermining Europe’s own competitiveness.  

The Good

The Commission has correctly diagnosed the consequences of its flawed economic policies when it comes to thinking about tech: heavy-handed regulation—exemplified by more than 100 tech-focused laws alone—has stifled innovation and hindered competitiveness. In addition, Europe’s inability to scale businesses, long aided and abetted by a competition policy that aims to protect small firms, further weakens its competitiveness. Faced with regulatory barriers and bad competition policy, it’s not hard to see why firms like Algolia, Klarna, Kyriba, and Aircall have moved their headquarters to the U.S. for a more business-friendly environment as well as better access to capital. Taken with Europe’s recognition of its economic dependency on foreign actors—Russia for energy, the U.S. for defense, and China for critical supply chains—the Compass is a necessary step forward in creating better policies to make Europe stronger. Indeed, before Russia’s invasion of Ukraine, the EU imported 40% of its natural gas from Russia. What’s more, NATO would be toothless without the U.S., which contributes nearly two-thirds of its defense spending. And in trade, while the EU and the U.S. represent almost a third of global trade, Europe remains heavily reliant on China for critical raw materials, from whom it sources over 90% of its rare earths.

The Bad:

The Commission wrongly treats all foreign dependencies as equally problematic. While addressing risks from China and Russia are justified, lumping in the U.S. with these authoritarian regimes undermines Europe’s interests. In addition to security, the EU relies heavily on U.S. firms for critical technologies like cloud computing, artificial intelligence and semiconductors that it needs to make Europe more prosperous and secure. The U.S. is also the EU’s largest trading partner, with transatlantic trade exceeding €1.5 trillion in 2023. Beyond security and economics, the U.S. and EU also share foundational democratic values—unlike China and Russia. Treating all foreign dependencies the same is not just misguided, it is a strategic mistake for Europe to make.

Despite claiming to reduce red tape, the Compass doubles down on the Digital Markets Act, which it insists will “open up closed ecosystems” and “create opportunities for innovative businesses.” But this wrongly assumes that restricting foreign tech firms will help European players “level up.” Indeed, while the DMA remains in its infancy, there is no evidence to suggest that it has led to an increase in European startups. In reality, the DMA adds yet another layer of restrictions that—if it were fairly enforced—would ultimately likely burden any future European technology champions. And, by targeting American firms for now, the DMA exemplifies protectionism, shielding domestic players instead of helping them grow globally

The Ugly:

The Commission’s blessing of the DMA is likely to prove counterproductive. Europe’s problem isn’t American tech giants, it’s Europe’s failure to build its own. Worse, the EU lacks a clear plan for working with its closest ally, the U.S., to counter China’s tech dominance or continue to reduce dependence on Russian energy. Strengthening ties with the U.S. could help solve both. And yet, instead of deepening cooperation, the EU continues to push for “digital sovereignty,” risking alienation from the only global tech leader that shares its values and defends the continent.

With Donald Trump back in the White House, alienation rather than partnership may be Europe’s riskiest bet yet: not only has President Trump already imposed tariffs that will reduce trade with Europe, but he recently issued a memorandum that explicitly stated that “regulations that dictate how American companies interact with consumers in the European Union, like the Digital Markets Act and the Digital Services Act, will face scrutiny from the Administration.” Instead of getting into a mutually destructive tit for tat, America and Europe must use the current moment to prioritize even closer cooperation that limits regulations and opens up trade to confront China.

Lilla Nóra Kiss, PhD, is a Senior Policy Analyst for the Information Technology and Innovation Foundation, where her research focuses on international antitrust law, innovation policy, and the regulation of digital platforms. She also serves as an Adjunct Faculty Member at the Global Antitrust Institute of Antonin Scalia Law School, George Mason University. In this role, she teaches Antitrust Law and Consumer Protection Law in the LLM in Global Antitrust Law & Economics program.  @lillanorakiss