Simplification: A Double Edged Sword ?

Today, the EU Commission has launched a Compass to direct Europe to Sustainable Prosperity and Competitiveness. It identifies two “horizontal enables” for policies to better support competitiveness: simplification and coordination. At the same time, the Compass highlights three “transformational imperatives” that will require a smart and targeted approach in how these requirements are applied in practice: 1) closing the innovation gap, - which in turn should support in - 2) delivering a joint roadmap for decarbonisation and competitiveness, - which in turn are key to - 3) reducing dependencies in strategic technologies and increasing security. Then the Compass goes on to emphasise the massive investment needs - public and private - that Europe faces and must address to enable this transformational competitiveness. Draghi estimates these are an additional €450 billion (public and private) just for the green transition.

When deciding on the practicalities of what the Commission deems as “more effective policies through simplification and coordination”, two measures stand out from the Compass own recommendations that, if further developed, could be truly transformational:

Lead markets and policies must reward innovation-driven European companies for being early movers

Being the first continent to decarbonise, and aligning with science, needs markets that value that innovation - and the healthy environment it produces. The Compass positions innovation at the centre of European growth, and highlights the difficult "lab to scale" journey of start-ups. European Member States and companies must therefore be coordinated in their procurement of products and services which embody our shared values and support these innovation pathways. If there are free-riders on the climate mitigation efforts of others, for example, then Europe’s border mechanism has to level that playing field. European companies cannot be undercut by those whose profits are derived from discounting the value of nature, or human rights.

It seems ironic that the last EU Compass designed for simplification was the EU Taxonomy Compass. This other compass simplifies corporate reporting by sector (or industry code) and describes benchmarks and limits to ensure company efforts move the dial for the environment, and don’t inadvertently do harm. European standards and definitions of what is green, and aligned with European values, cannot be lowered for better cosmetics: This will simply undercut European businesses that have been early movers in sustainability, while undermining the efforts from public investments in clean strategic technologies to build a globally competitive European industrial base.? The EIB has found that the market signals provided by the European Green Deal have been key, and continue to be, in building up a strong domestic demand for green techs and products and mobilising private investment towards clean sectors. The benefits delivered to society by responsible businesses must be valued appropriately, and those businesses have to generate shareholder returns commensurate with their efforts. Pan-EU lead markets can address this and deliver these returns to European firms investing and innovating.

An efficient and coordinated Euro 1.1 trillion EU budget is the best opportunity to drive competitiveness

The Communication calls for a refocussed EU budget to fill the investment gaps in clean technologies and other strategic priorities, supported by the new Competitiveness Coordination Tool. This should then translate into better coordinated Member States’ resources (we assume so that EU funds align with, and crowd-in, national funds) through the European Competitiveness Fund. This can be achieved through a set of EU Financial Instruments, designed as a service to Member States to deliver common objectives: The next generation of InvestEU. Through the support of the EIB Group, National Promotional Banks and retail lenders, we envisage a set of “best in class” financial instruments which lever the EU’s balance sheet to finance the roll-out of critical and competitive net-zero aligned investments. By simplifying financial instrument design, and coordinating the regional deployment of public and private finance (through best-in-class instruments as a service), we believe deployment and funding absorption rates can increase dramatically.?

Grants are undoubtedly the most valuable form of public support. They address inequity and exclusion; they fund research and provide technical assistance; and can pay-down a transitioning green premium. Yet we cannot afford to waste grants on renovating second homes, subsidized gas boilers nor when loans or guarantees will do. Europe needs millions of accelerated, small, visible, retail investments in homes and SMEs to underpin its climate and energy transition and build resilience at the community level. The smart design of EU financial instruments that can be drawn down through an EU Competitiveness Guarantee to deliver for regular households, Start-ups, SMEs and innovators is essential. Not to mention? the benefits of the lower borrowing costs at EU-level that Member States can tap into and the advantages of the knowledge and capacity support from EU institutions.

The best thing about a compass is that it consistently tells you the way North, and it is very simple to use. Europe has developed a world-class and transparent policy frame through the European Green Deal, and has provided businesses with very clear signals about its direction of travel. Nothing would hurt European industry and firms more than the volatility caused by flip-flop regulation that would simply undermine the investments already made in the direction of Sustainable Prosperity and Competitiveness, and increase their cost of capital. Entrepreneurs developing AI, chips, cleantech, medicine, software tend to embrace complexity, as once resolved it provides a competitive advantage to breakthrough technologies: Let’s make their go-to-market strategy simple and improve coordination between Member States to allow them access to a single and sustainable market.