Economy
Breaking Barriers: Growth as the EU’s fifth fundamental freedom
In our geo-political times, the EU needs to prioritize find a formula that balances out its long-term strategic goals with the side-effects of an ever-growing body of regulation; the high administrative workload caused by it and the way regulation slows down the Single Market at the cost of Europe’s global competitiveness. While the challenges are many, the EU already has, and can continue building effective tools to tackle this problem in the upcoming term, revitalize the Single Market responsibly, and use growth as a stabilizing factor to consolidate its economic power both internally and externally.
In recent years, the EU finds itself in an increasing struggle of seemingly contradicting goals. While it experienced high expectations to take action across the bench, addressing climate change, reshoring, the pandemic, as well as digitalization – to name but a few – it now faces the challenge of balancing the growing body of regulation with stifling economic growth. The Green Deal, due diligence initiatives, as well as measures to improve digital accountability are the latest additions to the EU rulebook. Since the treaty of Lisbon of 2010, EU integration has caused legislation to increase by more than 100% and overall by more than 700% since the implementation of the Maastricht Treaty 30 years ago.
Recently, it became evident that the rising administrative workload has a slowing effect on market dynamics in Europe. Freedom and responsibility appear more and more contradictory with a hefty regulatory framework. It does not come as a surprise that the period of drastic regulatory increase coincided with sluggish economic growth that many old member states have been facing. In combination, this results in a situation where the previously healthy and stimulating dynamics of the Single Market are stifled. In our geopolitical times, the EU’s sluggishness carries great risk. Economic power, however, continues to be its biggest asset. Without it, the bloc might slowly be lagging behind peers such as theUnited States and China and risk its role as a global rule-maker. The next European Commission needs to substantially simplify the load caused by regulations, particularly for SME,s and has to ensure that the Single Market regains flexibility.
Economic growth as a force to combat populism
European policymakers need to accept the reality: a poorly performing Single Market also transforms the political landscape in the EU. The results of the European parliamentary elections indicate a shift in popular support towards the (especially right) fringes. As examples like France, Germany and Italy have shown, the sluggish economic growth over the last two decades has led to resentment in large parts of the electorate. Although these votes for extreme parties entail a lot more problematic adversity than mere criticism of economic performance, it should not be underestimated that high inflation and stagnating wages were one of the main motivations for voters all across Europe to sympathize with populist parties. The EU institutions need to address this problem if they want to avoid that the fringes grow further and continue to deliberately conceal the underlying complexity of the EU’s economic strategy.
At its core, the EU is a fundamentally a pro-growth invention. Without it, some EU economies could shrink by up to 20.5%. New EU members add economic impetus, and what drove the EU economy over the past decades was integration. This means the EU should focus on harmonization, rather than introduction of new laws.
Unleashing regulation rather than innovation?
Generalising criticism may take advantage of large goals like the Green Deal. New much-debated policies and financial instruments have already caused a huge division and made critics painfully sensitive to any additional set of regulatory measures that largely fall under the umbrella term of ‘sustainability’. Take, for example, the rising popularity of state aid across old EU member states, especially in France, where an increase in state support has largely trended toward green subsidies. If not targeted carefully, these pose significant risks for competition within the Single Market. In particular, they stand to adversely affect new member states, who are not able to outspend their Western counterparts.
It is not only subsidies, but also the high compliance costs of new regulations that impede the competitiveness of the EU. For example, mandatory environmental, social, and governance (ESG) frameworks entail substantial reporting costs for businesses. SMEs in particular report big difficulties shouldering them without a substantial impact on their overall competitiveness.
New digital regulations, such as the Digital Markets Act, the Digital Services Act, and the AI Act, introduced during the last mandate of the European Commission, risk being outpaced in innovation and limit freedoms in digital markets. This disincentivises sectoral growth and innovation made in Europe. The regulatory goal was, of course, the protection of citizens and democracy. Nonetheless, there was an aspiration to contribute to a global solution, nudging other regions to adopt the European framework out of a shared concern for security. It has, however, become evident that other actors worldwide skew in favor of deregulation to promote innovative approaches in the digital sector. This leads to a very serious competitive disadvantage for the EU, and not least to a severely reduced influence on the future turns that digital technology will take. After all, certain turns might ultimately come at a huge cost for European values, which should have been protected by the above regulations in the first place. The EU should strive for smart regulation in the future, finding ways to streamline rules and facilitate their implementation, rather than burdening business.
Recovery through streamlining procedures related to regulation
The European Parliament and Commission needs to reprioritise the Single Market as a key political objective. In recent years, geopolitical challenges, social tensions around migration, and issues around the rule of law have taken priority over economic questions. After all, the previous experience had been long decades of economic stability. The EU should not forget its key strength – its capacity to set the economic agenda of the continent. The task is to promote value-based decision-making whilst also incentivising greater flexibility and economic growth across the Single Market.
The European Commission already has several tools at its disposal to achieve this. It should strengthen its legislation enforcement in member states by streamlining procedures and reducing case backlogs. Within the framework of the Green Deal, it may decrease the regulatory burden by considering a more technology-neutral approach and harmonised permitting systems.
Furthermore, by liberalising some of its trade policies and engaging more in free trade agreements, the EU would ensure better access to global goods and services, and thus increase its own ability to compete on the world market. Similarly, if occupational regulations and labour markets were more liberalised across the EU, this would provide a significant competitive edge over international rivals.
The EU’s foundations are based on four core freedoms that aim to maximise the prosperity and well-being of Europeans. By ensuring that all EU policies respect, reintegrate and further enhance the free movement of labour, goods, services, and capital we can add a fifth freedom to the list: economic growth.
Dr. Nele Fabian, Senior European Affairs Manager, European Dialogue Programme of the Friedrich Naumann Foundation for Freedom (FNF)
Akim van der Voort, Policy Advisor Free Trade, Markets & Globalization, Friedrich Naumann Foundation for Freedom (FNF).