Competitive Harmonisation to Liberate Europe's Economic Potential

by Dr Matthias Bauer

The EU has recently tabled two big reports (Draghi and Letta), offering a blunt and alarming assessment of Europe's poor economic performance and uncertain future. While the findings are shocking, they are far from new. What’s most surprising is the reliance on a mix of outdated solutions – failed initiatives from the past such as the Capital Markets Union, a unified EU Telecoms Market, and the Energy Union – alongside a massive push for increased government spending.

For more than a decade, we’ve been promised that these initiatives would propel the EU to global leadership in innovation, productivity, and prosperity. Instead, the opposite has unfolded: Europe has fallen further behind, with economic convergence stalled as Member States are weighed down by bureaucracy and excessive regulation, while global competitors continue to surge ahead.

The liberalisation and harmonisation agendas that once drove the EU’s Single Market and the Lisbon Strategy have seemingly faded into the background. Meanwhile, regulation and state-driven interventions have become dominant forces, suffocating economic freedom and competitiveness.

Many newly elected MEPs likely lack a deeper understanding of where the EU's economic vision originally came from or the key pillars of the Lisbon Competitiveness Agenda from 2000. As these foundational principles have faded from memory, Europe risks further stagnation. But to revive its large and broad economy, the EU must rediscover its roots in liberalisation and harmonisation, or face continued decline.

Brussels must stop deceiving itself – and the public – with the illusion that its current path will lead to global leadership in economic performance, technological innovation and prosperity. A cautionary example lies in Walter Ulbricht’s 1969 slogan, "Overtaking without catching up," which epitomised the failure of a centrally planned economy. East Germany, led by a political class obsessed with industrial planning and restrictions on economic freedom, trade, and knowledge exchange, never achieved sustainable growth. Even after massive financial support from West Germany during 30 years post-reunification, the East's broad economy still lags substantially behind, performing at just 75% of West Germany's productivity level. While this is better than many former Soviet-run countries, it falls short of the grand promises that bold state-led industrial policies would close the gap.

And let’s not overlook this: The perceived economic stagnation and inequality in regions like former East Germany, driven in part by lingering collectivist mindsets, have fueled the rise of extreme left- and right-wing movements, further deepening political polarisation across society.

The EU and national goverments should take heed of these lessons. Recent data reveals that Europe’s productivity continues to trail behind that of the United States and other global leaders. The EU also lags significantly in research and development spending, and its overly complex regulatory frameworks are holding back innovation and investment. The competitive edge that Europe once sought through the Single Market is being blunted by layers of layers of Member State bureaucracy and an overreliance on discriminatroy state aid. With its growth prospects dimming, the EU needs to move away from these outdated models if it is serious about regaining economic momentum.

But what are the chances that Brussels and Member States will shift course? Can they embrace broad regulatory simpification and competitive harmonisation, especially in horizontal policies affecting businesses across the EU? More importantly, are policymakers ready to rethink their protectionist interpretations of "European Sovereignty"? This concept has increasingly decoupled the EU from the global economy, leading to stagnation in productivity, income, and technological adoption.

The current trajectory as well as the EU’s institutional setting must be reevaluated if Europe is to keep pace with global competitors and create a more dynamic economic environment.

Europe’s path to revival may lie in a "Grand Deal" for Competitive Harmonisation. This deal would slash regulatory burdens by simplifying and harmonising labour, tax, and digital rules while promoting CSR and green goals for long-term competitiveness.

Institutional change may be necessary, moving away from the traditional Franco-German-centric model of EU policymaking. Instead, coalitions of willing Member States, alongside like-minded nations outside the EU, should push for liberalisation and regulatory cooperation. Allowing smaller groups of countries to advance in legal integration could provide much-needed flexibility and agility, bypassing the rigid voting structures that have stalled progress. Safeguards would be essential to ensure this process doesn’t create divisions within the Union, but the potential for innovation and competitiveness would be vast. Europe’s future depends on embracing this forward-looking approach, one that balances liberalisation, legal harmonisation and institutional reforms with the core foundational principles of the EU.