Why Market Liberals Must Win in Brussels and National Capitals

The European Union is currently attempting to reverse a long-term decline in economic competitiveness by reducing regulatory burdens on businesses, though analysts argue these efforts remain insufficient to close the productivity gap with the United States and China.

The push for deregulation follows the findings of a comprehensive report on EU competitiveness authored by former European Central Bank President Mario Draghi and submitted to the European Commission in September 2024.

The report identified a systemic productivity slowdown and argued that the EU must fundamentally reform its economic model to avoid a permanent decline in its global standing.

A central thesis of the current debate is that while the European Commission in Brussels is initiating “unshackling” measures, these efforts are often neutralized by restrictive policies maintained within individual national capitals.

The economic divergence is most evident in the technology and energy sectors, where European firms face higher operational costs and more stringent compliance requirements than their global counterparts.

The Draghi report estimated that the EU requires additional annual investments of approximately 800 billion euros to achieve its goals for decarbonization and digital transformation.

However, the report noted that the European Union lacks the integrated capital markets necessary to mobilize this funding, leaving companies overly reliant on bank lending rather than equity markets.

The failure to complete the Capital Markets Union remains a primary hurdle for European startups and mid-sized enterprises attempting to scale.

In the United States, a more permissive regulatory environment allows for rapid iteration and deployment of new technologies, particularly in artificial intelligence.

Conversely, the EU has prioritized a precautionary principle, leading to the implementation of the AI Act and the Digital Markets Act (DMA), which impose strict compliance frameworks before products reach the market.

While these regulations aim to protect consumer privacy and prevent monopolies, critics argue they create a barrier to entry for smaller European firms that cannot afford the high cost of legal compliance.

The struggle for market liberalization is not limited to supranational laws in Brussels; it extends to the national bureaucracies of member states.

National governments frequently engage in gold-plating, a process where they add additional requirements to EU directives when transposing them into national law, further complicating the business environment.

This fragmentation prevents the creation of a truly single market, forcing companies to navigate 27 different sets of administrative rules for a single economic zone.

Energy costs also represent a critical divergence point. European industry faces significantly higher electricity and gas prices than US manufacturers, largely due to the transition away from Russian energy and a slower integration of the continental energy grid.

The result has been a trend of deindustrialization, with some European manufacturers relocating production to regions with lower energy costs and fewer regulatory constraints.

To counter this, market liberals advocate for a shift toward a more competitive framework that prioritizes growth over precautionary regulation.

The necessary reforms involve several key pillars:

• The completion of the Capital Markets Union to allow seamless cross-border investment.
• A streamlined regulatory process that reduces the time and cost of compliance for new technologies.
• The harmonization of national tax and labor laws to reduce the friction of operating across multiple EU borders.
• A strategic shift in energy policy to ensure long-term price stability for heavy industry.

The tension remains between the desire for high social and environmental standards and the economic reality of global competition.

Without a coordinated effort between Brussels and national capitals to prioritize market openness, the EU risks becoming a regulatory superpower that lacks the industrial capacity to implement its own standards.

The outcome of this battle will determine whether Europe remains a primary hub for global business or becomes a secondary market dependent on foreign technology and capital.