The EU Competitiveness Compass: Pointing Europe the Right Way?
“For the past 20-25 years, our business model relied on cheap labour from China, supposedly low-cost energy from Russia, and partially outsourced security investments. Those days are over. Today, we see Europe lagging behind the United States and China in productivity growth. We must address our weaknesses to regain competitiveness,” – Ursula Von Der Leyen, Davos, January 2025.
According to the Competitiveness Compass, the EU has all the assets to lead in the global economy of tomorrow. However, since the conclusion of the Lisbon Agenda—an ambitious programme that aimed to make the EU the world’s most competitive region by 2010—economic competitiveness has seemingly dropped off the EU’s agenda.
Amid ongoing geopolitical uncertainty and evolving global market dynamics, it appears that the EU is moving quickly to update its ruleset and keep pace with emerging global trends and geopolitical developments.
The foundations of the Competitiveness Compass are based on the recommendations outlined in the Draghi and Letta Reports that were published last year. The Draghi report examined the challenges faced by industry and companies in the Single Market. A central theme of the report is the impact of high energy and electricity costs, which are two to three times higher in Europe than in the US, placing a heavy burden on businesses. It highlighted that lagging productivity as a key issue, with EU labour productivity dropping from 95% of the U.S. level in 1995 to below 80% today. This decline is largely due to Europe’s failure to fully capitalise on the digital revolution. The report also highlighted the EU’s weakness in breakthrough technologies like artificial intelligence (AI), noting that 70% of foundational AI models developed since 2017 came from the U.S. It argued that without a dramatic increase in investment and policy reforms, Europe risks compromising its economic model and geopolitical standing.
Additionally, the Letta Report highlighted the lack of integration in the financial, energy and electronic communications sectors as primary reasons for Europe’s declining competitiveness.
Accordingly, the EU Competitiveness Compass has become the Commission’s “guiding star,” aimed at implementing Draghi’s and Letta’s recommendations to steer Europe toward a more competitive and sustainable future.
A Snapshot of the Competitiveness Compass
The EU Competitiveness Compass seeks to craft a more unified Single Market in the wake of mounting external competition from the US and China. It focuses on eliminating market barriers, modernising governance, and accelerating standard-setting in critical sectors such as 5G telecommunications, AI development, and renewable energy. By improving coordination between EU institutions and Member States, the Compass aims to enhance competitiveness and foster innovation in critical sectors of the economy.
Four guiding points of the Compass Strategy:
1) Simplification and Co-ordination: The EU is committed to simplifying and reducing regulatory burdens while ensuring better coordination and harmonisation across Member States.
2) Closing the Innovation Gap with the US and China: The EU plans to strengthen efforts to eliminate barriers within the internal market that prevent companies from scaling up within Europe.
3) A Unified Roadmap for Decarbonisation and Competitiveness: The EU will continue to advance its clean energy agenda, promoting investments in clean energy production. This will include measures such as prioritising European companies in public procurement and offering financial incentives to support sustainable growth. For example, according to the 2025 Competitiveness Report written by the Directorate-General for Energy, the EU remains a global leader in hydropower but has lost market share in turbines and components. The EU trade surplus fell from a peak of €466 million in 2015 to €213 million in 2023.
4) Strengthening Security and Reducing Dependencies: The EU aims to reduce its reliance on imports, particularly in critical sectors such as raw materials and advanced technologies. This will involve developing a more resilient foreign economic policy and reinforcing the strength of supply chains.
Main Challenges to EU Competitiveness
Manufacturing & Energy Costs: EU companies face significantly higher manufacturing and energy costs compared to their competitors in other regions, impacting their overall competitiveness. Additionally, for the production of alternative sustainable fuels, the 2025 Competitiveness Report highlights that production capacity for sustainable alternative fuels is limited and needs to be scaled up to reduce prices for such fuels. Furthermore, the EU lags behind in the manufacturing of hydrogen fuel cells, presenting a competitive challenge to the EU in the hydrogen market.
External Competitive Pressure: The EU faces intense global competition, particularly in the clean energy sector, where production of several key technologies and components is largely concentrated in China. The reliance on cathodes and anodes from China, which are crucial for the production of battery and energy storage technologies, further compounds these challenges.
Innovation Leadership: While the EU remains strong in research on clean energy technologies, its competitive edge in innovation has been diminishing in recent years. The EU used to be the global leader for high-value inventions before being overtaken by China in 2019.
Workforce: A shortage of skilled workers, coupled with an ageing workforce, presents a challenge for the growth and sustainability of the clean energy sector.
Private Finance Barriers: Access to risk capital remains a significant obstacle for EU firms looking to start and scale up in the clean energy technologies sector.
Supply Chain Resilience: Dependence on a limited number of non-EU suppliers for key components and raw materials weakens the resilience of supply chains for many clean energy technologies.
Key Solutions Prescribed by the Competitiveness Compass
Strengthening the Business case of Decarbonisation
According to the Compass, to strengthen the business case for decarbonisation, it is essential to create lead markets and policies that reward European companies for being early movers. This can be achieved through new measures that encourage demand for low-carbon products, such as benchmarking/labelling, preferential treatment in public procurement, or financial incentives like contracts for difference. With an enhanced focus on coordination between the EU and Member States, the Commission will promote demand aggregation and facilitate coordinated action, including through broader and more accessible use of “auction-as-a-service” schemes.
Revision of State Aid Rules
The Compass Strategy announces the introduction of a new State Aid Framework by Q2 2025, as part of the Clean Industrial Deal. This framework is expected to outline how well-targeted, simplified state aid can be adopted by Member States to promote investment in decarbonisation while minimising market distortions. As a result, businesses can anticipate more state aid opportunities for renewable energy projects, industrial decarbonisation initiatives, and expanding manufacturing capacity in clean technologies, crucial for bolstering the EU’s ability to compete on the international stage.
Additionally, the European Commission (EC) plans to propose a “Competitiveness Coordination Tool” aimed at fostering better coordination among EU Member States and setting common competitiveness priorities in crucial areas such as energy infrastructure, digital infrastructure, AI, and other critical manufacturing sectors. This tool will also establish a unified EU governance framework for industrial and investment policies.
The key elements of the Competitiveness Coordination Tool will include identifying joint competitiveness priorities, collaborating with Member States and key stakeholders on action plans, and aligning national plans with EU targets. The tool will work in tandem with a streamlined European Semester process, ensuring that national strategies and EU goals are more closely coordinated. The EC envisions that the new coordination tool will apply not only to state aid provided by Member States but also to EU funding and private capital.
Promoting Wider Use of EU Funds for Strategic Sectors
With a focus on streamlining EU regulatory and legal processes, the Compass outlines plans to simplify, expedite, and reduce the costs of accessing EU funds, which are currently perceived as fragmented across too many EU programmes. The primary goal is to encourage more businesses to invest in the EU’s key sectors by expanding and simplifying existing or upcoming tools, such as the Net Zero Industry Act, the proposed Decarbonisation Accelerator Act, and the Important Projects of Common European Interest (IPCEI) procedure.
The Compass Strategy reaffirms the launch of the European Competitiveness Fund, which will be integrated into the next Multiannual Financial Framework. This fund aims to provide companies with greater access to financing for investments and R&D in strategic sectors, including AI, space, clean technology, and biotechnology.
Stronger Enforcement of the Single Market
The Compass Strategy underscores the crucial need to eliminate any remaining trade barriers within the EU to enhance and expand the Single Market. This will be achieved through the implementation of a new Horizontal Single Market Strategy, which aims to modernise the governance framework of the Single Market and prevent the creation of new barriers between Member States.
In emerging sectors such as AI, green energy, and mobility, strict coordination between Member States and the EU will be essential to avoid barriers that could disrupt the internal market, particularly by obstructing the free movement of goods and services.
Specifically, the Net Zero Industry Act, the planned Decarbonisation Accelerator Act will extend accelerated permitting to more energy intensive sectors in transition.
The European Commission’s Omnibus Simplification Package introduces amendments and clarifications to key sustainability regulations, aiming to streamline requirements and reduce administrative burdens. The Commission plans to cut reporting burdens by 25% for large companies and 35% for SMEs, simplifying sustainability disclosures while maintaining the EU’s ambitious environmental objectives.
The Impact on the Energy Sector
The scale of the challenge facing this Commission is considerable. However, the growing pressure to adjust its approach to industry is proving effective in driving change particularly as the consequences of inaction are significant for European security.
A major positive is that renewables accounted for 48% of the EU’s electricity mix in 2024, with the EU also leading in biogas and biomethane production. However, the Compass highlights that significant changes are needed in areas where the EU lags behind its competitors. If the Commission follows the Compass’s principles and takes action to boost EU innovation and production in critical sectors, EU countries can advance the rollout of low-carbon technologies and place themselves on track for carbon neutrality by 2050.
The alignment of decarbonisation and competitiveness is key. As the Draghi report highlights, decarbonisation policies can drive growth when integrated with industrial, competition, economic, and trade policies. This shift in the EU’s approach to decarbonisation will be crucial in accelerating the deployment of low-carbon technologies, such as heat pumps and solar panels, across the region.
Ultimately, by simplifying EU regulations, strengthening the EU institutions and co-ordinating investment into critical sectors, the EU can better address challenges related to energy security, decarbonisation, and sustainability, while ensuring that all Member States can access affordable and clean energy.
Key Initiatives in the EU 2025 Work Plan Shaping the Energy Sector
• Clean Industrial Deal & Affordable Energy Plan (Q1 2025): Supports low-emission industrial production with investment incentives and streamlined permitting.
• Industrial Decarbonization Accelerator Act (Q4 2025): Provides funding for clean tech adoption and public-private research partnerships.
• European Grids & Electrification Plan (Q1 2026): Enhances electricity grids and boosts renewable energy integration.
• Revised State Aid Framework (Q2 2025): Makes it easier for governments to fund green technology projects.
• European Ports & Maritime Strategy (2025): Develops hydrogen and renewable gas hubs in European ports.
• High-Speed Rail Plan (2025): Invests in rail expansion to reduce short-haul air travel emissions.
• Revised Climate Law (2025): Updates the EU’s 2040 emissions reduction targets.
• Trans-Mediterranean Energy & Clean Tech Initiative (Q4 2025): Strengthens partnerships for hydrogen and renewable energy with Mediterranean countries.
• Joint Procurement Platform for Critical Raw Materials (Q2-3 2025): To secure vital minerals and energy resources, the European Union is getting ready to award a 9 million euro contract for the creation of a single purchasing platform.
Sources:
1) The Draghi report on EU competitiveness
2) Letta Report “Much More Than a Market” (April 2024) | European Research Area Platform
3) Europe and the global economic order | Centre for European Reform
4) EU competitiveness – European Commission
5) 2025 Competitiveness Progress Report: Opportunities to boost EU clean tech
6) Commission work programme 2025 – European Commission
7) https://energy.ec.europa.eu/publications/2025-progress-report-competitiveness-clean-energy-technologies_en