In February 2025, the European Commission unveiled the Competitiveness Compass, a political roadmap comprising of initiatives aimed at enhancing the competitiveness of the European Union, as prescribed by the Draghi Report.
The main goal of the Compass is twofold: simplify the regulatory environment and ensure better coordination between policies at both the EU and national levels. While the Draghi Report identified the major imperatives for boosting competitiveness, the Compass aims at translating these imperatives into actionable flagship initiatives. These include closing the innovation and investment gap, developing a joint roadmap for decarbonization and competitiveness, reducing the EU’s external dependencies, and strengthening security.
A Simplification Overhaul and Coordination of Sectoral Policies
As made clear by the Commission President von der Leyen in her address to the European Parliament in July, the primary goal of this Commission is to undertake a major simplification overhaul of the EU regulatory framework. It is indeed well-documented that red tapes and lengthy bureaucratic procedures cost European companies billions of euros annually, leading to a consistent loss of competitiveness compared to global competitors. These factors, coupled with high energy prices and limited access to financing, have hindered Europe’s innovation and growth.
To address these challenges, the first-ever Commissioner for Simplification and Implementation, Valdis Dombrovskis, has been tasked with coordinating a comprehensive review of the EU regulatory framework to identify opportunities for simplification, consolidation, and codification. As outlined by the Competitiveness Compass, a series of Omnibus simplification packages will drive efforts to meet the ambitious targets for reducing reporting burdens; at least 25% for all companies and 35% for SMEs. These efforts align with the priorities of the current Polish Presidency of the Council of the EU. As stated by Polish Prime Minister Donald Tusk in his address to the European Parliament, the Council will focus on simplifying EU legislation to reduce the regulatory burden on enterprises.
Another notable initiative is the Commission’s plan to redefine mid-caps, creating a new category of companies larger than SMEs but smaller than large corporations. This will enable tailored simplification efforts. However, in so doing the Commission must ensure that this doesn’t result in an increased regulatory fragmentation, which could inadvertently result in greater complexity.
To further drive simplification, the Competitiveness Coordination Tool aims to align industrial and research policies and investments at both the EU and national levels. This should prevent overlapping or conflicting regulations, while at the same time reducing legal uncertainty for companies and investors operating in Europe. Additionally, a greater coordination in sectors where Member States retain national prerogatives could enhance the Single Market’s efficiency by fostering interconnectivity and cooperation in key industries. By coordinating selected policy areas, the EU can create a more coherent and harmonized internal market, attracting private investment and boosting cross-border investments between Member States.
The delicate balance: protecting the environment while enhancing competitiveness
As the Draghi Report emphasized, the goals of enhancing competitiveness and decarbonizing the economy are not mutually exclusive but complementary. Decarbonization policies can be a powerful driver of growth when integrated with industrial, competition, economic, and trade policies.
The upcoming Clean Industrial Deal aims to make the EU an attractive location for manufacturing, including for energy-intensive industries, while promoting clean technologies and circular business models. Yet, while the Competitiveness Compass clearly states that competitiveness will not come at the expense of environmental ambitions, which remain high on the EU agenda, it is highly likely that the Commission will face increasing pressure from political influence and industry groups pushing for the delay or rollback of green policies. It is no secret that the largest political group in the European Parliament, the centre-right EPP, which, ironically, is the party of the Commission President, has been working since the beginning of the legislative process to weaken, delay, or even roll back certain elements of the Green Deal. Moreover, in the Strategic Dialogue on the automotive sector, announced in the Compass, the Commission will likely have to strike a delicate balance between environmental objectives and the competitiveness concerns raised by car manufacturers across Europe. This comes at a time when the continent’s largest car producer has already announced plant closures in Europe.
To address these challenges, the Commission will need a bold and ambitious strategy capable of reconciling these pressures, ensuring that both industry and the environment benefit from the green transition.
To achieve these goals, significant investment will be required. The Draghi Report estimated that Europe will need an additional €750-800 billion per year by 2030, requiring an increase in the investment-to-GDP ratio by approximately 5% points annually. The Competitiveness Compass will therefore be assessed based on its ability to mobilize investments, as Europe’s future competitiveness depends on its capacity to innovate, invest, and reduce external dependencies. The key aspect for Europe’s competitiveness is to be able to finance the innovation instead of subsidizing the producers for their losses. If Europe really wants to make the green transition an opportunity, it has to make it appealing for the investors and the producers, encouraging the development of new technologies and enhancing their position in the market. Only by doing so can Europe achieve its long-term goals. Therefore, the central issue will not only be the amount of money the EU can pool, but its choices in sectors to support with that money.
Reducing dependencies and funding innovation
The Competitiveness Fund will be an essential tool for addressing these investment needs in an integrated manner. It will support strategic technologies and manufacturing sectors, ranging from AI to space, clean tech to biotech, which are critical to European competitiveness, including in research, innovation, and Important Projects of Common European Interest (IPCEIs).
Beyond this, the Competitiveness Compass highlights the need to mobilize private capital through a deeper and more integrated capital markets. This is why it calls for a Strategy on a Savings and Investment Union and for fully leveraging the potential of the European Investment Bank (EIB) to crowd in private investments and bridge Europe’s investment gaps in priority areas, from decarbonization to defence. These initiatives not only channel key investments into the real economy but also seek structural changes in the EU financial system, transitioning away from a bank-centric model towards a capital-based system.
However, while these recommendations are well-founded, their effectiveness will depend on multiple variables. A Competitiveness Fund is welcome, but its need was urgent yesterday, not tomorrow. Even if funding is secured in the next MFF, the first investments in strategic sectors will likely not materialize before 2028, a delay Europe cannot afford. Likewise, while a Savings and Investment Union and a greater role for the EIB are commendable, the full potential of private capital will remain untapped until the EU establishes a Capital Markets Union. The Capital Markets Union (CMU) is an EU initiative aimed at integrating and deepening capital markets across Member States to facilitate investment, improve access to funding (especially for SMEs), and enhance financial stability. It seeks to reduce market fragmentation, diversify financing sources beyond banks, and make cross-border investments easier.
Surprisingly, the Competitiveness Compass does not mention this crucial project and neither there is an expected date for its presentation, despite it being a key priority in the Commission’s policy guidelines and the mandate of the Commissioner for Financial Services. A Capital Markets Union would unlock the full potential of a Savings and Investment Union and enhance the role of the EIB, making private capital more accessible and impactful.
Addressing external dependencies
The Competitiveness Compass rightly prioritizes reducing Europe’s external dependencies in critical sectors such as defence, telecommunications, energy, raw materials, and the supply of essential medicines. To achieve these goals, the Commission has proposed several initiatives, including the Critical Medicines Act, the revision of public procurement directives, the Electrification Action Plan and Grids Package, the Innovation Act, the Factories Initiative, the Space Act, and the White Paper on European Defence.
While the aim of these plans is to build a more resilient and independent Europe, it is legitimate to ask whether a more structural and integrated approach would have been preferable to tackling these dependencies, rather than the proliferation of separate strategies and plans. In the end, such an approach risks adding complexity to EU legislation without effectively achieving the goal of making Europe structurally independent from external suppliers. For this reason, it will be crucial for the omnibus simplification package to ensure effective coordination among these new legislative initiatives, avoiding overlapping requirements and contradictory obligations for Member States.
Implications and opportunities for SMEs
As Executive Vice President of the Commission, Stéphane Séjourné, pointed out, if one agrees with the recommendations of the Draghi and Letta Reports, it is difficult not to align with those of the Strategic Compass. Nearly 80% of the document consists of copying and pasting their recommendations. The Compass outlines a roadmap that enhances competitiveness and simplifies regulations while preserving the EU’s climate ambitions.
The Compass is a forward-looking document. Most, if not all, of the new priorities are reflected, such as the need to advance European defence, boost EU technological sovereignty, secure independence in advanced and raw materials, strengthen and build a resilient steel and metal industry, and transition towards sustainable agriculture, ensuring farmers play a central role. Additionally, it highlights the necessity of making Europe more resilient to climate challenges, while urging to bring down the energy prices for companies and households.
For SMEs, the Compass could be a great opportunity, serving as a strong ally in their longstanding call to be freed from excessive reporting and red tape while ensuring a level playing field against external competition. It also has the potential to attract more investments and increase EU-level attention in key sectors that will be critical to building Europe’s future independence and resilience.
Betting on the potential of our SMEs to achieve the EU’s ultimate goals in defence, technology, health, agriculture, climate resilience, and energy means betting on Europe’s future; its independence, prosperity, and growth. However, it is still too early to claim victory. These initiatives must now translate into concrete actions, and the greatest challenge for Europe will be ensuring that adequate funding and investment are mobilized to support innovation and, ultimately, economic growth. In the same spirit, if SMEs want to seize and benefit from these opportunities, they must prepare to engage with relevant stakeholders and ensure their voices are heard.
At Lykke Advice, we help SMEs navigate EU policies and ensure their voices are heard in Brussels. With the new legislative cycle beginning, now is the crucial moment to engage with policymakers and shape the upcoming initiatives. Contact us to receive tailored support and strategic insights to influence the decisions that matter to your business.
by Farweb