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Reducing the deterrent effects from EU and Member State laws in three key cross-sector policy areas – competition policy, business taxes and VAT, and digital policies – could significantly enhance the business environment within the Single Market and boost the EU’s attractiveness to both domestic and foreign investors.
The EU’s future competitiveness is at risk due to a significant disparity in investments, particularly in technological innovation, compared to the US. Despite having a larger population and labour force, the EU lags behind in large business activities, with US firms consistently outspending their European counterparts in key tech-intensive sectors such as software, computer services, pharmaceuticals, and biotechnology. Moreover, China and other emerging nations are rapidly catching up, dramatically diminishing the EU’s relative economic and political influence on the global stage. The urgency for the EU to bridge these gaps is more critical than ever (Section 2).
The EU’s profound investment gap highlights a systemic advantage for the US in fostering innovation and economic growth. The EU’s regulatory complexity, largely driven by legal fragmentation in horizontal policies, further exacerbate the situation, deterring cross-border activities reducing the region’s attractiveness to global investors (Section 3).
EU Competition Policy in Support of Scale and Productivity
To enhance EU competition policy and reinforce productivity, the European Commission and national governments must distinguish between firms gaining market power through innovation versus firms engaging in anti-competitive practices, such as cartels. Harmonising competition enforcement across the EU will reduce compliance costs, foster a predictable business environment, and eliminate legal uncertainties, particularly critical for the digital economy’s growth. A risk-based prioritisation framework should allocate resources to high-impact cases, such as cartels, ensuring timely and effective enforcement.
Strengthening institutional capabilities of the European Commission and courts is vital to maintain market fairness without stifling large enterprises. Additionally, a balanced, evidence-based approach to mergers accounting for global markets and competition could better promote consumer welfare and market efficiency. Reducing regulatory protectionism and compliance costs across sectors will free up resources for innovation, driving a more dynamic and competitive market environment (Section 4).
Reassessing Taxation in Support of Economic and Technological Change
The EU’s diverse VAT rates, labour income tax regimes, and social security rules create a complex legal environment that results in high compliance costs and administrative burdens, particularly for businesses operating across multiple Member States. This legal diversity encourages tax evasion, undermines government revenues, and distorts economic activities. Simplifying and harmonising tax and social security regimes would significantly reduce these costs and legal risks, making the EU more attractive for investments by businesses of all sizes. It would facilitate smoother cross-border operations, enhance competition, and reduce opportunities for tax avoidance, thereby fostering a fairer economic environment.
Given the significant drawbacks of the current corporate income tax (CIT) systems, there is a strong case for abolishing corporate income taxes in the EU. This move would simplify tax code compliance, reduce administrative burdens, and enhance the EU’s attractiveness for investment. To offset the relatively insignificant revenue loss, the EU could enhance other forms of taxation, such as taxes on capital income, labour income, and sales taxes. Additionally, direct support targeted at critical sectors like green technologies and R&D could replace opaque corporate tax incentives, ensuring funds reach intended sectors and promoting innovation and growth. This approach would support the EU’s economic and environmental goals, while fostering a much more appealing investment climate (Section 5)....
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