Over the past decade, the European Union has faced stagnant productivity, declining investment, and a widening competitiveness gap compared to global rivals. The COVID-19 pandemic exposed vulnerabilities in European industries, while the war in Ukraine heightened concerns over energy security and economic stability. At the same time, the US Inflation Reduction Act and China’s state-backed industrial policies have intensified the global competition, prompting fears that Europe is falling behind in key sectors like green technology, digital innovation, and advanced manufacturing. Businesses have long criticized regulatory complexity and slow investment approval processes as barriers to growth. In response, in January 2025, European Commission President Ursula von der Leyen unveiled the Competitiveness Compass, a new strategic framework designed to boost the EU’s standing on the global stage. But will this initiative be enough to help the EU get ahead in the current geopolitical competition vis-à-vis China and the US?
Filip Křenek
Project Coordinator and Analyst (EUROPEUM)
The Competitiveness Compass lays down the foundations for the EU’s economic policy for the next five years, building heavily on the reports by Enrico Letta, Mario Draghi, and Sauli Niinistö. Backed by these three major European policy figures, it gains momentum for decisive policy action to address the bloc’s most pressing economic challenges, including lagging innovation, critical dependencies, and energy security. The Compass offers a roadmap for strengthening the EU’s economic standing as a response to these vulnerabilities, seeking to position the EU as a stronger global competitor. However, its ability to help the EU outpace China and the US remains uncertain.
A core pillar of the Competitiveness Compass is closing the innovation gap between the EU and its global rivals. Despite its strong research base, the Union struggles to commercialize its technological breakthroughs into market leadership. The introduction of an ARPA-style fund is a promising step for sectors like AI, clean tech, and biotech. However, while public funding can kickstart the process, without a true Capital Markets Union and sufficient private investments, European startups will continue to face higher barriers to scaling up, forcing them out of Europe.
Addressing critical dependencies is another key aspect. The EU remains heavily reliant on China-controlled supply chains, particularly for critical materials and clean technologies. The Compass seeks to mitigate these vulnerabilities through diversification and investments in local production, introducing joint purchases of critical raw materials and a ‘Buy European Act’, prioritizing domestic suppliers. However, full decoupling seems unlikely anytime soon, primarily due to Europe’s limited natural resources. And while these measures may enhance resilience, they also risk further escalating tensions with partners whilst trade relations are already deteriorating.
Energy security is arguably the biggest and most pressing issue to be tackled. High energy prices remain the EU’s biggest competitive disadvantage, with European industries facing costs up to 158% higher than those in the US. The Compass includes plans for scaling up clean energy sources, accelerating permitting, enhancing market integration, and expanding long-term Power Purchase Agreements (PPAs), but these solutions won’t provide immediate relief. Without timely reforms in electricity pricing, energy-intensive industries may relocate outside the EU.
Finally, the Compass promises a 25% reduction in reporting requirements for companies (35% for SMEs). While ‘deregulation’ may resonate strongly with some people, it does not address the root causes holding back Europe’s economic potential outlined above. Ultimately, the success of the Compass will depend on the swiftness of its implementation and the degree to which Member States can align on all the key policy actions without cherry picking, overcoming the biggest hurdle that has historically slowed down European economic reforms.
Martin Šebeňa
Chief Economist (CEIAS)
The EU’s Competitiveness Compass intends to implement several key recommendations from Mario Draghi’s 2024 report on EU competitiveness. Unlike Draghi’s report, however, the Competitiveness Compass pales in scope and ambition and, given the European Commission’s powers and limitations, reduces its toolkit primarily to the removal of regulations.
The four policy directions of action (strengthening the single market, boosting strategic investments, developing workforce skills, and ensuring economic security) are appropriately chosen, even if not exhaustive, priorities for European policymakers. Yet the compass itself identifies certain limitations, such as the need to find a compromise between competition rules and industrial policy.
While it is true that European businesses could benefit from a reduction in red tape and reporting obligations, an overly ambitious dismantling of what is perceived as a regulatory burden may seriously undermine other projects, such as the Green Deal. Considering that the major European shortcomings–the inability to contain energy prices and allocate sufficient fiscal support to the economy–remain virtually untouched, starting with regulation does not appear a sensible and winning strategy. Yet, since this is where the powers of the Commission lie, the EU will commence with what in the large scheme of things are cosmetic adjustments.
Will this be the solution the EU needs to stop sliding down in competitiveness rankings and enhancing its position vis-à-vis main economic competitors such as the US and China? The history of the past 17 years–since at least the global financial crisis–has told us that the EU has mostly addressed crises and challenges by doubling down on previous policies. The European policymakers’ inability to break out of the path dependent thinking–abetted by the European institutional structure–has left it squarely within the neoliberal paradigm. In this, the EU is also left alone. Both China and the US have moved on, and while in both cases it is hard to neatly define or even pinpoint their new economic governance, the one common feature they share is the determination of the governments to actively and decisively shape economic structures in their countries. The Commission’s cautious, piecemeal evolution will likely result in the EU lagging even further behind its main geoeconomic competitors.
