The European Competitiveness Compass

by Sebastien GOULARD

At the Davos Forum, European Commission President Ursula von der Leyen unveiled a new strategy to make Europe more business-friendly and boost innovation. While the details of this strategy will be revealed gradually, the European Commission has already outlined its main priorities, many of which align with proposals from the Draghi Report.

The Pillars of the European Competitiveness Compass

The Competitiveness Compass defines three key priorities for Europe:

1. Reviving innovation and supporting reindustrialization efforts, particularly in high-tech sectors;
2. Advancing decarbonization while ensuring that energy remains affordable for businesses;
3. Enhancing Europe’s strategic autonomy by diversifying partnerships and reducing external dependencies.

Reviving Innovation

A major focus of this initiative is the development of artificial intelligence (AI)—a field that will shape the future of economies and in which Europe is falling behind the US.

In the coming months, the Commission is expected to unveil several action plans related to biotechnology, robotics, and space technologies.

Decarbonization

One of the core challenges of the Competitiveness Compass is ensuring that industries can continue their decarbonization efforts while mitigating high energy costs. This is crucial to maintaining strategic sectors within the EU, particularly the automotive industry, which is struggling with the transition to fully electric vehicles.

The nuclear sector is also expected to benefit from renewed development under this competitiveness strategy.

Reducing External Dependencies

The EU aims to continue diversifying its trade partnerships beyond Europe through new trade agreements. This push for strategic autonomy will also extend to the defense sector, especially as external threats continue to increase.

Key Initiatives

To achieve these objectives, several major continent-wide projects are set to be launched:

• Cutting Bureaucracy: On February 26, 2025, the Commission will present the Omnibus Regulation to simplify business operations and reduce reporting requirements. The Corporate Sustainability Reporting Directive (CSRD)—adopted in 2022—may also be scaled back. Additionally, this simplification effort could impact the EU Green Deal, particularly for the agricultural sector.
• Strengthening the Single Market: European businesses—especially startups—must be able to operate and scale easily across the EU. A new legal framework recognized by all member states is under consideration to facilitate this.
• Creating a Capital Market: The EU seeks to transform European savings into investments to support innovative companies. Currently, venture capital remains limited for European startups compared to their American and Chinese counterparts.
• Recognizing Skills & Retaining Talent: The Competitiveness Compass aims to ensure better recognition of skills across the EU, improve compensation, and prevent European talent from relocating to the US.
• Improving Coordination Between Member States: The Commission also aims to strengthen economic and industrial coordination through shared policy instruments.

The Context

This initiative comes at a time when businesses are increasingly criticizing EU regulations, who see them as obstacles to competitiveness—especially when compared to the US, where Donald Trump’s administration is expected to deregulate and streamline economic activity.

The need for greater strategic autonomy is another key driver behind the Competitiveness Compass. Russia’s invasion of Ukraine and rising trade tensions with the US have highlighted Europe’s dependence on external partners. Building strong domestic industries is now a priority to reduce reliance on unpredictable geopolitical actors.

However, this strategy does not abandon the EU’s commitment to free trade. As von der Leyen stated at Davos, the goal is “not to break the bonds of the global economy” but rather to modernize regulations and adapt to global challenges. The EU has often been accused of naïveté in international trade—upholding rules that other major powers do not follow.

The Draghi Report

The Competitiveness Compass is heavily influenced by the Draghi Report, presented in September 2024 by Mario Draghi, former Italian Prime Minister and European Central Bank President. This highly ambitious report calls for greater economic and industrial coordination to prevent Europe from falling behind the US and China.

The report focuses on three core themes:

1. Strengthening innovation;
2. Coordinating decarbonization efforts;
3. Enhancing security.

To achieve these goals, Mario Draghi proposed 170 measures, including:

• Prioritizing AI development to help Europe close the gap with the US;
• Accelerating legal harmonization by creating a unified legal status for European startups.

To fund these initiatives, Draghi advocates leveraging European savings and issuing EU bonds—a measure opposed by “frugal” EU members reluctant to mutualize debt.

Met initially with mixed reactions, the Draghi Report has gained traction due to fears that Europe is falling behind the US. Trump’s deregulation agenda and threats of trade wars have pushed the European Commission to integrate key Draghi proposals into its Competitiveness Compass.

A Rapid Implementation

To convince investors and entrepreneurs, the EU must act quickly. This presents a major challenge for a bloc of 27 member states, but the EU has previously demonstrated its ability to respond swiftly in times of crisis.