Economic policy in Europe is visibly shifting towards prioritizing competitiveness over green objectives. Over the past year, former Italian Prime Minister Enrico Letta published an ambitious report in support of the EU single market, followed by Mario Draghi’s widely quoted report on the future of European competitiveness. Just a few days ago, the new European Commission unveiled the Competitiveness Compass, which is set to provide the framework for policies over the next five years.
Competitiveness has become the new buzzword in Brussels. This shift is a logical response to the overstretching of green targets in recent years and the realization that Europe is losing the global economic race. The EU’s share of the world economy has shrunk from 25.8% in 2004 to 17.6% in 2024. Over the past two decades, the EU has fallen behind the U.S. and has been overtaken by China. Now, as China challenges the U.S. in the artificial intelligence world and with Donald Trump potentially adopting an aggressive trade policy towards Europe, Brussels has no choice but to seek a new direction and escape the stagnation caused by low growth, excessive regulations, and high debt levels.
The experience of Central and Eastern European (CEE) countries offers valuable lessons. One of the weaknesses of Draghi’s report is its complete lack of perspective on the new EU Member States. While older EU economies have stagnated and lost ground in the global economy, the newer Member States have grown significantly, increasing their share of the world economy and doubling their share of EU trade over the last two decades. Paradoxically, the phrase “Europe at two speeds” has taken on a new meaning—not as the usual division between center and periphery, but as rapid growth in the new Member States versus stagnation in the continent’s largest economies.
Economies in the CEE region have grown by 60-80% in real terms over the past two decades, with Poland, Romania, Slovakia, Lithuania, and Bulgaria showing the most progress. These countries have consistently maintained higher growth rates, even relative to the U.S. economy, by leveraging competitive advantages, access to the broad EU market, and real labor productivity growth. In contrast, the southern European economies have struggled: Greece has experienced real economic decline, Italy has stagnated, and Portugal, Spain, and France remain at around 115-120 points on a 2005 GDP-based index. Even Germany, the EU’s largest economy and Bulgaria’s main trading partner, stands at 125, indicating weak growth over the past two decades.
The success of the new Member States suggests that the future of European competitiveness is not about increased public spending, subsidies, new green targets, or greater state intervention in economic policies. Instead, winning the global economic race requires aggressive policies that support single-market freedoms, remove barriers and excessive regulations, reduce the tax burden on labor and capital, and encourage innovation and free competition. These principles are at the core of the new IME report, “Europe in the Global Race: Reinventing EU Competitiveness.”
The increasing focus on competitiveness in Brussels is a positive development, but meaningful change will take time, and the shift may not be bold enough. While recent reports signal a fresh perspective on green targets, they do not eliminate them entirely. For example, the proposed ban on the sale of internal combustion engine cars after 2035 may be reconsidered, but emissions trading and the overarching climate neutrality goals are likely to remain. Addressing challenges related to the single market for services, digital services, and capital markets will also take time. This fragmentation in key areas where Europe lags behind will remain a significant obstacle in the coming years.
The ambitious commitments made by the new Commission and leading European parties must be translated into real action. The new Member States, in particular, have an interest in promoting a vision that preserves their competitive advantages within the large European market. This means advocating for lower taxes, more flexible business and labor market regulations, pragmatic social programs, and limiting state aid and policy coordination under the pretext of responding to competition from the U.S. and China. Only by embracing these principles can Europe regain its competitive edge on the global stage.
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