By Vaibhav Tandon

A compass is a fundamental tool for getting one’s bearings.  Some historians think that the compass originated in China and traveled to Europe through trade routes, while others believe that European explorers developed the instrument independently.  Whatever its origin, the compass brought Europe to the new world and began a new Age of Discovery.

With modern-day Europe trying to get its bearings, the focus is on inventing a new compass that could help the continent find its true economic north.

Last month, the European Commission (EC) presented a reform agenda called the Competitiveness Compass. It is designed to direct the continent’s growth and reverse its industrial decline.  The report builds on imperatives set out in a report by Mario Draghi in September 2024 that offered recommendations on how Europe can boost its fortunes.

The overarching objective is to address the existential challenges facing the European economy.  These include high energy costs, security, global competition, exposure to trade risks, a growing innovation gap and aging demographics.

The Compass proposes measures to reduce regulatory burdens and foster a more integrated single market.  The strategy seeks to lower trade barriers, boost investment flows between member states and improve access to funding.  In the area of industrial policy, the report aims to promote clean tech, support the decarbonization of energy-intensive industry, mitigate dependencies linked to critical materials and support strategic sectors that are essential to the bloc’s economic security.

High regulatory barriers, limited access to capital and fragmented markets have been the main roadblocks to starting or scaling up businesses in Europe.  These have been key factors behind the continent’s lagged adoption and breakthroughs of new technologies.  Currently, there are only four European tech companies out of the world’s top 50, and European productivity growth has been sluggish.

Cutting red tape will be an early priority for the European Union (EU). Delivering greater funding for defense also seems likely, with the EC hinting at triggering “national escape clauses” that allow it to suspend budget deficit limits under extraordinary circumstances.

The Competitiveness Compass says all the right things, but is light on details. The Draghi report had pegged Europe's additional investment needs at a whopping €800 billion per annum; the Compass plan has no detail on how these funds would be raised.  Given stretched fiscal positions, state-based funding is unlikely to generate the required volumes of public expenditure needed to fulfill broader goals.  

It took a crisis of the scale of COVID-19 to prompt member states to issue common EU debt. The €800 billion New Generation European Union recovery fund will expire in 2026.  Frugal member states may not support another round of common borrowing on that scale. 

Focus on deregulation or simplification of the regulatory environment could help foster innovation and growth.  But political support for this action in all 27 European capitals is far from certain.  Concerns over revisions that undermine existing laws and targets, particularly on climate, will likely make for tough negotiations.

Europe has a long tradition of announcing transformative proposals that do not live up to their lofty ambitions.  However, a sense of urgency to deal with emerging challenges is accumulating.  Perhaps a new Compass will help the continent map a new path to prosperity.