Navigating the Regulatory Burden: Challenges and Opportunities within the EU Framework

Over extended periods, relative economic prospects are heavily influenced by productivity trends. Since the early 2000s, both the euro area and the EU have experienced a slowdown in labor productivity growth, a trend shared with other advanced economies. However, this slowdown has been more pronounced in Europe compared to the United States, thereby widening the productivity gap between the two regions. There is also considerable heterogeneity in productivity growth among EU Member States. Meanwhile, China has been rapidly closing the gap in labor productivity with both the EU and the US, demonstrating significant convergence. Despite this progress, a substantial economywide productivity gap still remains between China and these advanced economies. This divergence in productivity trends underscores the urgent need for the EU to implement policies that boost productivity growth to enhance its global economic competitiveness. In the context of an increasingly complex economic landscape, EU's declining competitiveness poses a significant threat to the bloc's long-term prosperity. Businesses across the EU cite high energy prices, limited access to finance, and shortages of skilled labor as major challenges. However, the regulatory burden stands out as a primary obstacle to investment, innovation, and productivity. This issue has intensified as the EU has responded to recent crises with an unprecedented regulatory push aimed at advancing its green and digital transitions. While these goals are essential components of the European Commission's long-term strategy, they impose considerable costs on European firms. The critical question is how to balance these ambitious objectives with a regulatory environment that supports and enhances business competitiveness. Addressing this challenge is vital for ensuring that the EU's economic policies foster a thriving, innovative, and sustainable business landscape.

In recent years, the rise of environmental, social, and governance (ESG) legislation and reporting requirements has positioned Europe as a global leader in sustainability and social rights. However, this progress has also come with significant challenges for European companies, impacting their competitiveness. The increased regulatory burden has hindered investment, employment, and growth opportunities, complicating their ability to operate in an already complex global economic environment. Business associations have raised concerns about the potential for de-industrialization, with companies relocating production outside Europe and experiencing a surge in bankruptcies. For instance, 58% of mid-sized companies have reported that they no longer invest in Germany due to excessive red tape. One major issue is the proliferation of highly complex and detailed reporting requirements from existing and forthcoming EU regulations, such as the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). These obligations impose substantial costs, particularly on non-capitalmarket-oriented firms like industrial companies, which are crucial to the EU’s transition goals. As a result, these companies face significant financial and administrative burdens that threaten their sustainability and long-term viability.

For decades, EU leaders have pledged to improve the law-making process. These promises generally aim to ensure that regulations are evidence-based, transparent, well-consulted, and as simple and targeted as possible. Such measures are crucial for ensuring regulations have clear objectives, achieve those objectives effectively and efficiently, and minimize unintended consequences. While Europe has made significant progress in this area, there is still considerable room for improvement. As Europe seeks to boost economic growth and worries about its competitiveness, the EU must ensure its regulations promote better productivity and increased innovation. Better regulation involves not only the process of law-making but also the content, implementation, and enforcement of EU laws. Laws need to be targeted, proportionate, predictable, and clear, as should their enforcement and implementation. To achieve this, the Commission should focus less on maximizing its powers and discretion, instead relying more on self-regulation and co-regulation. It should also be ready to ensure the consistent application of EU laws, even when it is politically unpopular, and limit its own powers to alter how laws are applied. The advancement of improved regulation within the EU The EU’s better regulation agenda has evolved and strengthened over time. A significant milestone in this journey was the 2001 Commission white paper, which initiated substantial reforms. Among these were commitments by the Commission to increase consultations and perform impact assessments (IAs). In 2006, to further improve the quality of IAs, the Commission established the 'Impact Assessment Board'. This board, composed of senior Commission staff working part-time, was tasked with independently scrutinizing the Commission’s IAs. By 2009, the EU began assessing the impact of proposed laws on small businesses. Then, in 2012, the Regulatory Fitness and Performance Programme (REFIT) was launched, aimed at identifying and eliminating unnecessary regulatory burdens. The Commission also committed to reviewing the existing regulatory regime in a given area before proposing new laws.

When Jean-Claude Juncker became European Commission president in 2015, he sought to create a 'political Commission' while also implementing measures to enhance the Commission’s accountability and responsibility. He aimed to reduce unnecessary initiatives and launched broader reforms to improve the Commission’s legitimacy. These reforms included restructuring the Impact Assessment Board into the current Regulatory Scrutiny Board (RSB), which, while still part of the Commission, included more board members from outside and was given a broader mandate. This shift acknowledged the need for new and more independent bodies to provide accountability as the Commission was increasingly seen as less of a neutral arbiter. Juncker’s Commission also pledged to increase transparency in consultations and involve stakeholders at more stages of the policy-making cycle, including the inception stage of new initiatives. Additionally, the Commission began preparing IAs for some delegated acts—tools that the Commission can use to supplement or amend primary EU laws by adding necessary details. However, these steps were often tentative, and IAs for delegated acts remain rare to this day When Ursula von der Leyen became Commission president in 2019, she continued to navigate the tension between the Commission's increasingly political role and the need for better regulation to demonstrate restraint. She appointed Frans Timmermans, who had previously led better regulation efforts under the Juncker Commission, as Executive Vice President. Her directives to Commissioners and communications to Commission staff emphasized the importance of better regulation. This included adopting a 'one in, one out' principle, where the Commission would seeek to remove one regulatory burden for every new one added by a legislative proposal. Von der Leyen's Commission also spearheaded reforms to streamline consultation processes and better integrate sustainability, digitization, and long-term strategic foresight into the Commission's impact assessments (IAs). Additionally, REFIT program was replaced with 'Fit for Future,' aimed at identifying ways to simplify and modernize legislation and reduce regulatory burdens. The Commission's current practices are largely codified in its better regulation guidelines and a more detailed better regulation toolbox, which offers guidance, tips, and best practices for Commission staff. At the request of Commission President Ursula von der Leyen, the 'one in, one out' (OIOO) approach is set to become a central element of European Union (EU) policy from 2022 onwards. This principle mandates that any new regulatory burdens introduced by the Commission’s legislative proposals must be offset by an equivalent reduction in existing burdens within the same policy area. Initially delayed several times, it took nearly 18 months for this policy announcement to be put into practice. In April 2021, the College of Commissioners adopted a comprehensive Communication, which included the OIOO approach as part of 'new instruments for further simplification and burden reduction' among other initiatives aimed at enhancing stakeholder consultation, transparency, and the regulatory toolbox. Simultaneously with the release of the 'one in, one out' Communication, the Commission introduced packages of proposals related to the 'European Green Deal,' 'Fit for 55,' digital transition, mobility and transport, and various initiatives aimed at revitalizing the EU. These proposals encompassed dozens of legislative and non-legislative acts that were set to expand the acquis communautaire, adding new obligations for businesses, public authorities, stakeholders, and citizens. This juxtaposition of the OIOO policy with a significant influx of new regulations underscores the complexity and challenge of reducing regulatory burdens while pursuing ambitious policy goals.

Over the years, the European Parliament and the Council have been less proactive in enhancing EU law-making, despite their crucial roles in amending and approving Commission proposals. In 2003, the Parliament, Council, and Commission reached an inter-institutional agreement on better law-making, aiming to streamline the legislative process and improve the quality of legislation. However, while the Commission has consistently pushed for better regulation through various initiatives and reforms, the Parliament and the Council have not matched this level of commitment. Their involvement has largely been limited to reacting to and modifying the Commission's proposals rather than actively driving the better regulation agenda forward. An agreement signed in 2003 was a significant step toward cooperation among the EU institutions. It set out principles for transparent and efficient law-making, encouraging evidence-based legislation and improved consultation processes. Nevertheless, the implementation and ongoing commitment from the Parliament and the Council have not always been as robust as the Commission's efforts. The Parliament and the Council's less active role in this area suggests a need for a more balanced approach, where all EU institutions are equally engaged in the pursuit of better regulation. This would ensure that the legislative process is not only efficient and transparent but also produces high-quality, effective laws that serve the EU's long-term interest.

The Parliament, Council, and Commission pledged to ensure transparency and recognized that substantial amendments proposed by the Parliament and the Council to Commission proposals should also undergo impact assessments (IAs). However, this 2003 inter-institutional agreement had minimal impact on improving transparency and the thorough assessment of amendments. Recognizing the need for more effective measures, Jean-Claude Juncker secured a new interinstitutional agreement (IIA) in 2016. This agreement reiterated the importance of transparency and aimed to persuade the Council and Parliament to engage more actively in properly assessing substantial amendments. It emphasized the necessity for both institutions to conduct IAs on significant changes to ensure that all legislative modifications are carefully evaluated for their potential impacts. Juncker's 2016 IIA sought to enhance the law-making process by fostering greater cooperation and accountability among the EU institutions. It aimed to ensure that all parties involved in the legislative process adhered to the principles of better regulation, thereby producing more coherent and effective EU laws. Despite these efforts, challenges remain in achieving the desired level of transparency and comprehensive assessment across all EU institutions.

Examining the unfulfilled potential of the EU’s Single Market and Better Regulation agenda, key challenges facing the EU's regulatory landscape and the existing specific needs can be identified and addressed: Prioritize Competitiveness in Policymaking Make competitiveness an overarching goal to mitigate the cumulative regulatory burden on all European firms, regardless of size. This burden arises from legislative uncertainty and complex reporting requirements. By streamlining regulations and providing clearer guidelines, the EU can create a more predictable and business-friendly environment. Tailor Regulation to Business Size Develop regulations that account for business size to alleviate the disproportionate burden on small businesses and mid-caps. These 'hidden champions,' which fall just above the largecompany threshold, have been overlooked by current policies. Strengthen the Single Market Reinforce the Single Market as a top priority to ensure a level playing field across member states. This involves ramping up enforcement, harmonizing service markets, and reducing state aid where asymmetric fiscal capacities threaten competition. Enhance International Regulatory Cooperation Increase international efforts to limit the potential negative impacts of supply chain regulations and maintain Europe’s 'Brussels effect.' This can be achieved by supporting regulatory initiatives with international partnerships and adopting a more integrated approach to regulatory, trade, foreign, and development policies.