The European Union stands at a crossroads. Despite its strengths—a skilled workforce, a continental Single Market, and a stable legal framework—the bloc has struggled to keep pace with global competitors like the U.S. and China. Productivity growth has stagnated for decades, innovation cycles remain slow, and geopolitical shifts threaten Europe’s economic security. In response, the European Commission has unveiled the A Competitiveness Compass for the EU[1], a bold strategy to reignite Europe’s economic dynamism, secure its industrial future, and safeguard its social market model. This blog post explores the Compass’s key pillars, its transformative vision, and the challenges ahead, drawing on insights from policymakers, industry leaders, and analysts.
A Wake-Up Call for European Competitiveness
The Competitiveness Compass arrives amid urgent warnings. Former ECB President Mario Draghi’s landmark report[2] highlights how Europe’s traditional growth engines—cheap energy, geopolitical stability, and open global trade—are fading. Meanwhile, the EU risks falling behind in critical technologies like AI, quantum computing, and clean tech. The Compass frames competitiveness not merely as an economic metric but as a prerequisite for preserving Europe’s sovereignty, social welfare systems, and global influence.
The Competition Compass details the necessary approaches to address the above-mentioned challenges. It stands on three transformational imperatives to strengthen EU competitiveness, originally identified in the Draghi Report.
Pillar 1: Closing the Innovation Gap
Europe’s innovation paradox is stark: while it produces world-class research, commercialization bottlenecks persist. The Compass targets this disconnect with a Start-up and Scale-up Strategy, aiming to dismantle barriers to entrepreneurship. As part of the strategy, some of the key initiatives include:
– A 28th Legal Regime: A harmonized EU-wide framework for corporate, tax, and insolvency laws to reduce compliance costs.
– TechEU Investment Programme: Mobilizing public and private capital to support scaling firms in AI, biotech, and semiconductors, addressing Europe’s venture capital deficit (just 5% of global VC funding vs. 52% in the U.S.).
– AI Factories Initiative: Leveraging EuroHPC supercomputers to create pan-European AI development hubs, coupled with a Data Union Strategy to streamline secure data sharing.
Critically, the Compass signals a strategic shift in competition policy, prioritizing industrial scaling and innovation in sectors like AI, clean tech, and defense. Revised horizontal merger guidelines (due by 2026) aim to weigh innovation benefits and resilience more heavily, particularly in strategic industries, potentially enabling consolidation to create „European champions” capable of competing globally.[3] This could lead to a more permissive approach to mergers that demonstrate synergies in R&D or cross-border integration, though critics warn it risks diluting traditional competition safeguards.[4]
Concurrently, the Compass expands the use of IPCEIs[5] – transnational R&D initiatives like those in semiconductors and AI – to pool public/private resources for high-risk innovation. While this accelerates strategic investments, concerns persist about market distortions, as IPCEIs often involve state aid exemptions that could favor incumbents over startups. The tension lies in balancing competition principles with industrial policy goals: while the EU seeks to close the innovation gap with the U.S. and China, over-prioritizing scale risks entrenching market dominance and stifling disruptive newcomers. The omission of safeguards against „killer acquisitions” in the Compass further underscores this dilemma.
Pillar 2: Decarbonisation as a Competitive Advantage
The EU’s green transition is recast as an industrial opportunity. The Clean Industrial Deal seeks to align climate goals with economic resilience, focusing on:
– Affordable Energy Action Plan: Accelerating grid investments and long-term power purchase agreements (PPAs) to reduce energy price volatility.
– Industrial Decarbonisation Accelerator: Fast-tracking permits for clean tech projects and deploying contracts-for-difference to de-risk private investment in sectors like steel and chemicals.
– Circular Economy Act: Unlocking a projected €100 billion remanufacturing market by 2030 through standardized waste-to-resource rules.
The automotive sector exemplifies this approach. A strategic dialogue with manufacturers will balance CO2 standards with “technology neutrality”, allowing e-fuels and hydrogen to complement electrification. Meanwhile, a Sustainable Transport Investment Plan targets €200 billion for charging infrastructure and renewable fuel production by 2030. WindEurope CEO Giles Dickson praised the Compass’s focus on clean tech and state aid flexibility, calling it “spot on” for aligning decarbonization with industrial growth.[6] SolarPower Europe highlighted solar energy’s role in reducing fossil fuel dependency, noting solar and wind saved the EU €59 billion in import costs in 2024. [7]
Pillar 3: Securing Strategic Autonomy
Geopolitical tensions and supply chain shocks have exposed Europe’s vulnerabilities. The Compass prioritizes economic security through:
– Critical Raw Materials Platform: Aggregating EU demand for minerals like lithium and rare earths, mirroring the success of AggregateEU in gas procurement.
– Public Procurement Reforms: Introducing a “European preference” clause to prioritize EU-made goods in strategic sectors, leveraging the €2 trillion annual public procurement market.
– Defense Industrial Strategy: Coordinating joint R&D and procurement to reduce reliance on non-EU suppliers, with a White Paper on European Defence due in 2025.
Trade policy plays a dual role in securing strategic autonomy. On the one hand, the EU has recently finalized agreements like EU-Mercosur free trade agreement, affecting nearly 800 million people and projected to save €4 billion/year in tariffs[8]. All the while, the EU plans on rigorously enforcing the Foreign Subsidies Regulation to counter distortive state aid from rivals. Trade policy will act as one of the key tools to maintaining trade openness without allowing for it to be weaponized against the Union.
Horizontal Enablers: Building the Foundations
Regulatory Simplification
The Compass acknowledges that red tape costs EU firms €150 billion annually. A 25% burden reduction target for SMEs and a new “small mid-cap” category aim to ease compliance associated costs. The first Simplification Omnibus (set to be published by February 2025) will streamline sustainability reporting and taxonomy rules, addressing complaints of “trickle-down bureaucracy” for suppliers.
Single Market 2.0
Persistent fragmentation costs the EU economy up to 110% in equivalent trade taxes for services. A Horizontal Single Market Strategy will harmonize rules in energy, digital, and defense markets, while accelerated accession talks for candidate countries (e.g., Ukraine) could expand the consumer base to 500 million.
Financing the Transition
Considered to be one of the most crucial keys to solving the competitiveness issue, the lack of private and public funding in the Union makes implementing any ambitious policy unfeasible.[9] The proposed Savings and Investments Union seeks to redirect €300 billion/year in EU household savings toward productive investments via capital market reforms and pan-European pension products. A Competitiveness Fund under the next EU budget will consolidate fragmented programs into a €750 billion/year vehicle for strategic tech and infrastructure. This draws similarities with the US approach to funding technological innovation and infrastructure, where $500 billion is planned to be injected into project Stargate, an initiative by the Trump administration backed by tech giants.[10]
Skills and Labor Mobility
With 79% of SMEs reporting skills shortages, the Union of Skills initiative will prioritize STEM education, vocational training, and the EU Talent Pool to attract third-country professionals. A Skills Portability Initiative aims to mutualize qualifications across member states.
The Road Ahead: Coordination or Fragmentation?
The Compass’s success hinges on unprecedented EU-national coordination. The Competitiveness Coordination Tool will align industrial policies in pilot sectors like biotech and energy grids, while a revamped European Semester[11] links fiscal reforms to competitiveness goals. However, some challenges still loom:
– Funding Gaps: The €750–800 billion/year investment target requires buy-in from fiscally conservative states.
– Geopolitical Risks: Overreliance on “derisking” trade partnerships could strain relations with the Global South.
– Social Equity: Balancing industrial policy with just transition principles remains contentious, particularly in coal-dependent regions.
Conclusion
The Competitiveness Compass is more than a policy roadmap—it’s a societal treaty. By tying innovation with decarbonization, leveraging scale without sacrificing solidarity, and defending openness while building resilience, the EU aims to prove that its social market model can thrive in an age of crises. As Draghi warns, the alternative is a “slow agony” of declining influence and intergenerational inequity. The coming years will test whether Europe’s institutions can move at the speed of disruption.
[1] https://commission.europa.eu/document/download/10017eb1-4722-4333-add2-e0ed18105a34_en
[2] https://commission.europa.eu/topics/eu-competitiveness/draghi-report_en#paragraph_47059
[3] https://www.linklaters.com/en/insights/blogs/linkingcompetition/2025/january/competitiveness-compass
[4] https://uk.practicallaw.thomsonreuters.com/w-044-3651?transitionType=Default&contextData=(sc.Default)&firstPage=true
[5] https://competition-policy.ec.europa.eu/state-aid/ipcei_en
[6] https://windeurope.org/newsroom/press-releases/eu-commission-sets-the-direction-for-its-competitiveness-strategy/
[7] https://www.solarpowereurope.org/press-releases/european-commission-publishes-eu-competitiveness-compass-1
[8] https://ceuli.com/eu-mercosur-deal-boosting-europes-strategic-autonomy-or-a-threat-to-domestic-welfare/
[9] https://ecfr.eu/article/the-eus-competitive-compass-needs-funding-and-ambitious-legislation-to-work/
[10] https://openai.com/index/announcing-the-stargate-project/
[11] https://commission.europa.eu/business-economy-euro/european-semester_en
