20 thoughts on the Competitiveness Compass
If you care about growth in Europe, Thursday was an important day. The EU’s leaders announced their plan to fix the Continent’s problems: the ‘Competitiveness Compass’. We wanted to share some thoughts. This week’s regular post will arrive in your inboxes at 9:00 CET on Friday.
The Commission makes a great case for growth. It explicitly acknowledges it is necessary for Europe to survive. This is a big win — Von der Leyen spoke at an EU Parliament-organized degrowth conference (!) less than two years ago (!!).
The plan does not acknowledge that growth requires real trade-offs to get there. The Compass simultaneously wants a ‘clean economy,’ ‘sustainable prosperity,’ and a ‘unique social market economy.’ A real growth preference means accepting that it will come at the expense of other objectives.
The Compass does not come with money. There are many references to ‘creating funds’, ‘improving relations’ , strategic ‘action plans’ (eight are referred) and ‘creating better prospects’ but little concrete indication of the new funding available to accomplish all these aims.
The best idea of the plan is the ‘28th legal regime’: new streamlined labour, bankruptcy and tax rules for ‘innovative companies’ (unclear what that means) across the union.
We fear the 28th legal regime is unlikely to work:
Member states (and unions) have given no indication of being willing to support such an immense transfer of competences and power to the Commission. But it is wroth trying.
If it is only relevant to bankruptcy it still leaves major frictions in place.
By focusing the laws on ‘scaling up’, it could worsen the extreme threshold effects that keep European firms small. For example, if a rule does not apply to companies below 50 workers, firms are induced to stay below 50 workers (see e.g. Garicano, Lelarge, Van Reenen, 2016). The effort to simplify rules by introducing thresholds is a key barrier to firm growth.
The Compass implies that the desire of planners, rather than actions of private enterprise, are the primary driver of growth. E.g.: ‘the EU Bioeconomy Strategy will position the EU in the rapidly expanding bioeconomy market with a significant growth potential in bio-based materials, biomanufacturing, biochemicals and agri-biotech sectors, reduce our reliance on fossil fuels and improve the economic perspectives of our rural areas’. A magic strategy, indeed.
Rather than removing the burdens they face, the proposed way to improve the woes of EU industry is crafting ‘action plans’ for Steel, Metals and Chemicals. We remain skeptical. The EU adopted less than a year ago the Net-Zero Industry Act, which aims to increase EU manufacturing of clean technologies by streamlining permitting, encouraging investment, and targeting at least 40% domestic production of strategic net-zero technologies by 2030. However, it lacks major new funding, fails to address Europe's high energy costs, and relies on regulatory incentives.
We welcome the idea that the EU should ‘mobilize public and private initiative to establish new AI Gigafactories specialised in training of very large AI models.’ However, there is no mention of the Kafkaesque AI Act, which we analyzed here, and which will make it impossible for EU firms to succeed in AI.
Cheap energy is critical for Europe’s growth prospects and currently the binding constraint on data center construction. Unfortunately, the Commission remains committed to the idea that more renewables will be ‘secure’ and ‘bring down energy prices in a lasting way’. So far, the opposite has been the case. As we have written on this blog before, problems with intermittency mean that prices are likely to increase rather than decrease in the future. Nuclear and storage are mentioned 0 times in the compass.
On decarbonization, the ‘zero trade-offs’ view of the world is reasserted, against all evidence: “decarbonisation policies are a powerful driver of growth.” As we have argued here, while some of these policies are desirable for climate purposes, they replace existing productive capacity, rather than creating new capacity. The objective of decarbonisation is to decarbonise. These policies do not create jobs. By our count, there are 36 pieces of environmental legislation passed in the 2019-24 period. Things will be productive just because we wish them to be: ‘boosting circular use of materials helps decarbonisation, competitiveness, and economic security.’ Announcing a Circular Economy Act, with ‘eco-design requirements on important product groups,’ is unserious in the context of competitiveness—adding a 37th piece of regulation to the Green Deal will certainly not increase growth.
Expanding and reinforcing the Carbon Border Adjustment Mechanism is a good idea, as we argued here.
The compass continues down the (misguided) path of Draghi on competition law and merger guidelines. Antitrust and state aid have been a big success for Europe. Mergers such as Stellantis have gone through — creating big state champions is not the way to return to growth.
The Commission should make an effort to improve and de-bureaucratize naming of its efforts. Competitiveness Coordination Tool, AggregateEU, Global Gateway, TechEU do not inspire much confidence. There is a tendency to prioritize optics over execution (see Garicano/Hayer/Verhofstadt’s critique of magical thinking in the early Commission response to the pandemic).
Success will depend on the member states, not the Commission. This is true throughout the document. For example, the conclusion of Mercosur is mentioned as a success and an example — but the chances of its ratification, particularly given France’s explicit opposition, appear slim.
The simplification effort seems admirable (“This Commission will deliver an unprecedented simplification effort”). It remains to be seen if the same President who oversaw the creation of a vast regulatory and administrative mountain will lead its demolition. We would have liked to see a long list of laws the Commission is proposing to eliminate (including among the just approved 38 environmental ones).
After the lackadaisical effort of commissioner Breton, who must have thought this was smaller fry and never paid much attention, the commitment to pursue a forceful approach to enforcement of the single market is good. Indeed, the document recognises the back sliding here, with a drop in trade between member states. There is a specific mention of full harmonisation as objective — what is wrong with mutual recognition?
The Capital Markets Union is rechristened as Savings and Investments Union. The main content seems to be to facilitate the creation of “savings and investment products at EU level.” A good effort.
The extension to 7 years of fiscal adjustment paths and the talk of allowing more “fiscal space” needs to be seriously weighted with fiscal sustainability considerations in the case of many EU countries–e.g. Italy, France and Spain’s debt levels are concerning.
The Competitiveness Coordination Tool is entirely unnecessary. The Commission already has the European Semester. This runs counter to the simplification spirit of the document.
Whoever designed their graphic does not understand how a compass works.
References:
Garicano, Luis, Claire Lelarge, and John Van Reenen. "Firm size distortions and the productivity distribution: Evidence from France." American Economic Review 106, no. 11 (2016): 3439-3479.
Anything short of the dismemberment of most EU instances will lead to 0 progress. Willing to make a bet the EU competitiveness will worse in 5Y than now.