EU Launches Sweeping Economic Deregulation Drive to Restore Competitiveness

The European Union has declared war on its own rulebook. In a series of sweeping legislative packages launched in early 2025, the European Commission is attempting to dismantle what it characterizes as a suffocating regulatory burden on European businesses — one that has contributed to a widening economic gap with the United States and China. The question is whether cutting red tape can fix what ails Europe, or whether this amounts to political theatre that leaves the continent's deeper structural problems intact while exposing citizens to new risks.

The Scale of the Problem

Between 2019 and the first half of 2024, the EU enacted approximately 13,000 laws — more than four times the roughly 3,000 produced by the United States in the same period [1]. Over 60% of EU companies report excessive regulation as a barrier to investment, compared to roughly 20% of US firms [1]. Almost a third of European SMEs dedicate more than 10% of their staff to compliance activities [1].

The economic consequences are stark. Between 2015 and 2024, EU GDP growth averaged approximately 1.9% annually, compared to 2.5% for the United States and 5.8% for China [1]. In 2024, Germany — the EU's largest economy — actually contracted by 0.5%, while the US grew at 2.8% [2].

Source: World Bank Open Data

Data as of Dec 31, 2024CSV

The competitiveness gap extends beyond headline growth numbers. EU companies spend €270 billion less than their US counterparts on research and innovation annually [3]. Europe's R&D intensity has stagnated at 2.24% of GDP, well short of the longstanding 3% target, while the US invests at 3.45% [4]. European venture capital markets lag far behind their American equivalents, and EU-wide lending growth since 2014 is less than half that of the US [3].

The Commission's Response: Omnibus Deregulation

The Commission's response has been the most aggressive simplification effort in EU history. Beginning on 26 February 2025, it unveiled a series of "Omnibus" packages — legislative vehicles that modify multiple laws simultaneously — designed to slash compliance costs by 25% for all businesses and 35% for SMEs by 2029 [5]. The Commission estimates this would save €37.5 billion annually [5].

The flagship Omnibus I package immediately weakened the Corporate Sustainability Due Diligence Directive (CSDDD), which had entered into force only in May 2024. It reduced corporate responsibility for supply chains, eliminated mandatory climate transition plans, and prevented member states from implementing more ambitious national measures [6]. The package removed approximately 80% of companies from the scope of the Corporate Sustainability Reporting Directive (CSRD) [7].

Subsequent Omnibus packages — a fourth was presented on 21 May 2025 — have extended simplification across the Single Market, with the Commission claiming to maintain consumer and environmental protections while cutting compliance costs [8]. The European Council and Parliament reached agreement in December 2025 on the sustainability reporting simplification [9].

The Commission's Competitiveness Compass, published in January 2025, made corporate competitiveness the overarching policy goal for the 2024-2029 mandate, with deregulation positioned as the primary method [6].

The Track Record: Promises vs. Delivery

This is not the EU's first attempt at regulatory relief. The Better Regulation Agenda, launched in 2015, and its predecessor REFIT programme set similarly ambitious targets. The Commission claimed to have achieved its goal of cutting administrative burden by 25%, estimating annual savings of €30.8 billion [10]. In October 2013, it proposed 133 individual simplification actions and committed to 47 "Fitness Checks" [10].

Yet independent assessments paint a less flattering picture. A Bruegel policy brief concluded that "efforts to reduce costs through targets and regulatory budgeting have not brought desired relief for stakeholders and business," noting that estimated savings in Commission proposals are "not tracked and may or may not make it through the legislative process" [11]. The distinction matters: the Commission counts savings when it proposes legislation, not when member states actually implement it or when businesses actually experience relief.

The Centre for European Reform argued in 2024 that better regulation in Europe "needs a fresh start," implying that a decade of prior efforts had fallen short [11]. Despite repeated simplification pledges since 2002, the total stock of EU legislation has continued to grow, and the perceived regulatory burden has not materially decreased for most businesses.

Who's Writing the Rules About Rules?

The deregulation push has attracted scrutiny over who is shaping its direction. According to Corporate Europe Observatory, 84% of Commissioner meetings related to the Omnibus packages in 2025 were held with business groups, compared to 7.8% with civil society organizations [12]. Implementation Dialogues — a new mechanism where stakeholders advise the Commission on which laws to change — saw 71.1% business participation, while "Reality Checks" averaged 79% business representation, with some sessions involving only industry participants [12].

The priorities now being pursued align closely with longstanding demands from BusinessEurope, the European Round Table for Industry (ERT), and sector-specific lobbies [12]. BusinessEurope has campaigned for over a decade against "gold-plating" — member states exceeding minimum EU standards — and this principle has now effectively become official policy [12].

Corporate Europe Observatory describes the process as "a direct pipeline from lobbying to lawmaking," noting that specific proposals put forward by business groups in meetings and consultations are reflected in the content of the Omnibus laws [12]. Big Tech companies have also shaped the rollback of digital rights protections, with article-by-article analysis showing their influence on the Commission's proposals [13].

The European Ombudsman issued a ruling against the Commission's omnibus approach, labeling it maladministration and insisting that the Commission cannot bypass democratic checks and balances [6].

The Structural Argument: Regulation as Scapegoat

A growing body of analysis suggests that regulation — while genuinely burdensome — is a secondary driver of Europe's competitiveness gap. The Draghi Report, published in September 2024 by former ECB President Mario Draghi, identified three primary challenges: the innovation gap with the US and China, decarbonization costs, and security requirements [3]. It called for €800 billion in annual investment — equivalent to 4-5% of EU GDP — to address these structural deficiencies [3].

The more fundamental barriers include:

Energy costs. EU industrial electricity prices averaged 18.5 EUR cents/kWh in 2024, compared to 7.2 cents in the United States and 10.8 cents in China [14]. German industrial users paid 22.1 cents. Natural gas prices in Europe were five times higher than in the US [14]. No amount of deregulation addresses the fact that the US sits on abundant cheap shale gas while Europe imports its energy.

Source: Eurostat / IEA

Data as of Dec 1, 2024CSV

Capital market fragmentation. Europe holds €33 trillion in savings, but fragmented national capital markets prevent efficient allocation. The IMF estimates that internal trade barriers between EU member states equate to an import duty of 45% for goods and 110% for services — three times higher than in the US [1]. Enrico Letta's 2024 report "Much More than a Market" documented how a "patchwork of national regulations" and fragmented state aid rules undermine the single market from within [15].

R&D underinvestment. Only six EU countries — Sweden (3.6%), Belgium (3.4%), Austria (3.3%), Finland (3.2%), Germany (3.1%), and Denmark (3.0%) — meet the 3% R&D target [4]. The remaining 21 member states fall short, many dramatically so: Romania and Malta invest just 0.5% of GDP [4].

The New Economics Foundation argued in February 2026 that "the EU is betting on deregulation — here's why that won't work," pointing out that removing regulations does not create capital markets, lower energy prices, or stimulate private R&D spending [16].

Cross-Country Evidence Within the EU

If regulation were the primary constraint on competitiveness, countries with the lightest regulatory touch should outperform those with heavier regulation. The evidence is ambiguous at best.

Sweden, the Netherlands, and Denmark — consistently among Europe's most competitive economies — also rank among its highest on regulatory quality indicators. The World Bank's regulatory quality metric for EU countries averaged 1.08 in 2023, with top performers like Luxembourg (1.93) and the Netherlands far above laggards like Hungary (0.32) [17]. Yet these high-performing economies combine strong regulatory quality with high wages, extensive labor protections, and ambitious environmental standards.

Germany, with the EU's second-highest industrial electricity prices and substantial regulatory requirements, maintained an R&D intensity of 3.1% of GDP — above the EU target [4]. Its economic contraction in 2024 owes more to energy price shocks, Chinese competition in automotive and industrial sectors, and weak global demand than to regulatory paperwork.

The IMD World Competitiveness Ranking 2025 places Denmark, Sweden, and the Netherlands among the global top performers — countries that regulate extensively but do so with high quality and institutional efficiency [17].

Source: World Bank / IMF

Data as of Jan 1, 2025CSV

What's at Stake: The Cost of Deregulation

The 470 organizations that signed a joint statement denouncing the deregulation campaign in 2025 warned of concrete harms [18]. Environmental NGOs argued that weakening environmental regulation would slow the energy transition "at precisely the moment when renewable investment is critical for security" [19].

The European Environmental Bureau warned that the Commission "cannot deregulate its way out of crisis," noting that deregulation "puts public health at risk, particularly where air quality, water protection and chemical-safety standards are concerned" [20]. The risks include:

Environmental externalities. The regulations targeted for simplification — including the CSRD, CSDDD, and elements of the EU Green Deal — were designed to internalize costs that would otherwise fall on the public. Pollution, biodiversity loss, and climate damage do not disappear when reporting requirements are relaxed; they simply become invisible to markets and policymakers.

Labor protections. Corporate Europe Observatory has documented plans for "an unprecedented wave of cuts to regulations protecting labour, social, and human rights" over the 2025-2029 mandate [12]. The European Coalition for Corporate Justice described the Omnibus proposal as "deprioritising human rights, workers' rights and environmental protections" [21].

Financial stability. Finance Watch warned that the Omnibus approach "sets the foundation for a deregulation agenda" that extends beyond sustainability into financial regulation, potentially recreating conditions that preceded previous crises [22].

The fundamental economic question is straightforward: if the regulations being rolled back were designed to prevent specific harms — supply chain abuses, environmental destruction, financial instability — then removing those regulations does not eliminate the costs. It transfers them from corporate compliance budgets to workers, communities, and taxpayers who bear the consequences.

The Political Economy

The deregulation push reflects a political calculation as much as an economic one. The Commission under Ursula von der Leyen faces pressure from multiple directions: US protectionism under renewed tariff threats, Chinese industrial competition, and growing populist discontent within member states.

Regulatory simplification offers a visible response that does not require new spending, fiscal transfers between member states, or the politically explosive creation of a fiscal union. By contrast, the Draghi Report's more ambitious proposals — €800 billion in annual investment, genuine capital markets union, coordinated industrial policy — require member state agreement and fiscal commitments that remain politically impossible.

The result may be that Europe pursues the achievable reform (deregulation) rather than the necessary ones (investment, integration, energy independence), creating an illusion of action while the underlying competitiveness gap continues to widen.

What Would Actually Work?

The evidence suggests that Europe's competitiveness challenge requires solutions in at least four areas that deregulation does not address:

1. Closing the energy price gap through accelerated renewable deployment, grid integration, and strategic energy partnerships — reducing dependence on expensive imported gas.

2. Capital markets union that allows European savings to flow to European innovation rather than being trapped in national banking systems or flowing to US markets.

3. Coordinated R&D investment that raises the EU average from 2.24% to at least 3% of GDP, with particular focus on AI, biotech, and clean energy technologies where the US and China lead.

4. Single market completion that reduces the internal trade barriers Letta documented — the equivalent of 45-110% tariffs between member states — which represent a far larger drag on competitiveness than any individual regulation.

None of these require deregulation. Some — particularly the energy transition — require more and better regulation, not less.

Conclusion

The EU's deregulation drive is real, substantial, and proceeding rapidly. Whether it delivers meaningful competitiveness gains depends on whether regulation is actually the binding constraint on European economic performance. The evidence suggests it is a contributing factor — but a secondary one, overshadowed by energy costs, capital market fragmentation, R&D underinvestment, and incomplete single market integration.

Meanwhile, the process by which deregulation is being pursued — with overwhelming corporate access, limited civil society input, and expedited legislative procedures that the European Ombudsman has called maladministration — raises questions about whose interests are actually being served. The €37.5 billion in projected compliance savings must be weighed against the uncounted costs of the externalities those regulations were designed to prevent.

Europe faces a genuine competitiveness crisis. The question is whether cutting the rulebook is a serious response to that crisis, or a politically convenient substitute for the harder reforms that might actually close the gap.