Just about one month ago, I found myself writing about the need for an efficient European financial structure. This was in the context of the reforms proposed by Mario Draghi to improve European competitiveness, where much needed actions need to be taken to improve the EU economy not only within its internal market, but also in the world standings.

At the end of that article, I made sure to mention that Europe, although struggling with growth in recent years, still places importance on its social model and the welfare state, but that economic growth is necessary if the EU wants to sustain the quality of life of its citizens.

Furthermore, it is not just imperative for Europe to focus on growth as a driver for quality of life, it is now a must in 2025 to be able to compete in the geopolitical stage with increasingly hostile powerhouses such as the USA and China. That, or face the “existential challenge” Draghi talked about in his report. In the current global climate, experts point to the fact that Europe cannot rely on a purely economic perspective, which would entail rising domestic productivity and forgetting about out-competing other powers. Geopolitical questions need to be answered, as the “logic of conflict” has now imposed itself over the “grammar of commerce”. In addition, data shows that since 2022, there has been a divergence between the US and Europe in GDP at PPP, a valuable measure for quantifying the standard of living. Therefore, there is a possibility that there does not actually exist a trade-off between a focus in high living standards driven by productivity and competitiveness.

What all of this means is that a paradigm shift may be needed from European regulators and policymakers to reconsider their position on the global stage. Actually, the US has already been changing the focus of its foreign economic policy. By leveraging its position as the superpower of the world after WWII, the US was able to impose a liberal international order which continued through the Cold War and offered the opportunity to partner countries to exchange economic benefits of trade for alignment with US security interests. Nowadays, however, this is not the case anymore. The North American country has recently seen a shift from free trade to an increasingly protectionist economic policy, as the already low tariffs of 1.5% on average could not sustain considerable gains from further decreases.

On the contrary, the US focus is now on winning the artificial intelligence race, the competition for capturing the market for the invention carrying US growth with potential to revolutionise whole markets, and which is already playing a big role in the functioning of companies. According to a McKinsey survey, 65% of respondents report that their organizations regularly use generative AI. And although Donald Trump’s policies can fire up global markets and impose disruptive conditions for international trade, this protectionist wave started before his arrival to the White House.

Going back to Europe, the Commission released at the end of January a proposal for a “Competitiveness Compass”, which builds on the reports provided by Dragui and former Italian prime minister Enrico Letta. Some of its more important proposals include retaining European talent in R&D and technology, making it easier for businesses to access private funding (and finalising the “long-discussed but never-completed” capital markets union), and boosting local companies, following the generalised trend of protectionism.

These reforms all seem to point in the right direction. Of course, there are numerous obstacles in the way of achieving a higher growth rate in Europe, from the division in political directions and priorities between member states (and the political division within them, which would make difficult the needed shared funding and concrete, ambitious regulation), to critiques of the proposal for not offering any clear target or numerical promises, being vague in its wording, and rising worries that it will not be applied fast enough.

There is, however, one historically difficult point of EU competitiveness which has been brought up by European business confederations in recent years: the excessive burden of complexity of EU regulation put on enterprises. According to Business Europe, “regulation is seen by more than 60% of EU companies as an obstacle to investment, with 55% of SMEs considering regulatory obstacles and the administrative burden as their greatest challenge”.

On the other hand, the European Union is in fact known for drafting regulations, which oftentimes does in fact achieve real protection of European consumers. This regulatory approach has oftentimes served to influence global trade through the “Brussels Effect”, which refers to the EU’s power to regulate global markets unilaterally, by ensuring that only goods and services which are up to the standards of EU regulation can enter its massive 450 million consumer market. This power, though, has been less evident in some key areas of recent innovation, such as the aforementioned AI, for which the EU created the AI Act in 2024, and even before that, through the General Data Protection Regulation (GDPR), which has applied since 2018. Some think tanks, such as Brookings, have pointed out that the former may have a limited “Brussels Effect” as a consequence of the hurry in which it was developed and the specificities of some of its points, and for the latter, some researchers have found that compliance costs as a result of the GDPR could discourage new ventures to attract investment. This type of venture capital investment is nevertheless one that the Commission seeks to attract in this new age of EU competitiveness.

Moreover, the high standards of online consumer protection and market competition set by the EU for its internal market has made the digital technologies and social media giants dominating Silicon Valley as well as Wall Street unhappy with the Old Continent. These companies, such as Meta, Apple, or Amazon, are the ones that hold even more political power with the new Trump administration. For the moment, it seems that the Commission is waiting to see how the situation will evolve with the US in the following months, with Ursula von der Leyen telling the World Economic Forum that Europe would remain “pragmatic” in its new relations with them.

But the cutting of red tape is not directed at pleasing the American tech superpowers. As this article by the Wall Street Journal states, “There is a trade-off between consumer protection and the profit motive that drives investment and innovation, and the EU might be getting that trade-off wrong”. An example of this is the market for mobile phone carriers: where Europe “has 43 groups running 102 mobile operators serving a population of 474 million, (…) the U.S. has three major networks serving a population of 335 million”. This makes mobile services ≈67% times cheaper in Europe than in the US, but EU carriers invest 50% less in their networks. This particular case has been brought up by the Swedish telecommunications firm Ericsson in numerous occasions.

Finally, excessive regulation is of course not the only reason to explain the sluggish growth of the European economy and its lack of big innovative firms present in other countries, but it is an important point that is rightfully being addressed by the Commission. The EU has in its hands the power to strike a balance between consumer and competition protection, areas in which it should not fall behind, and the fostering of an innovation culture for entrepreneurs and investors.