EU 2024–2029: Creating conditions for the development and competitiveness of enterprises

In the previous post, we launched a series entitled EU 2024-2029: Forging a competitive path, in which we will analyze Telefónica’s vision to strengthen the competitiveness and better position of the European Union society and economy on the global stage. This series coincides with the beginning of the institutional cycle lasting from 2024 to 2029 after the European Parliament elections. Competitiveness will undoubtedly be a top priority for future EU policy and legislative initiatives during this period.

That’s why in the first post we started the series by examining the current state of EU competitiveness. In this second post, we will examine the first key axis of an effective competitiveness strategy for the EU: creating a regulatory environment that enables European businesses to grow and compete.

Regulatory tsunami and complex frameworks?

There is a widespread belief in the European private sector that a “regulatory tsunami” has become one of the main obstacles to their competitiveness over the last decade. This view is shared by 86 percent European Round Table members (ERT) who say that a complex, difficult to understand and inconsistent regulatory environment weakens the competitiveness of their companies.

There appears to be a misconception among policymakers that regulatory action or becoming a global regulator, the so-called The “Brussels effect” provides European companies with a competitive advantage.

However, excessive regulatory complexity results in administrative, legal and political barriers that make it difficult for companies to operate efficiently and make decisions regarding their development in the local or international market, which has a negative impact on their investment and innovation, which may also be a result of what has been observed in the telecommunications sector.

Therefore, the existence of policies and regulations that are often not aligned or interpreted in the same way not only hampers implementation, but also creates uncertainty and inequality between different actors, undermines the single market and hampers innovation.

For example, the e-Privacy Regulation, which applies only to the telecommunications sector, remains in force despite the enactment of the General Data Protection Act (GDPR), which establishes a general framework applicable to all sectors (including telecommunications). In the areas of security, artificial intelligence and the digital market, the number of delegated acts i interaction differences between regulations and implementing bodies abound, often contradicting each other.

In Europe, companies must devote significant resources to comply with complex, exhaustive and prescriptive regulations.

Source: ERT (2023): CEO confidence in Europe falls as regulations restrict competitiveness.

Consequences for growth, prosperity and competitiveness

This situation is reflected in the gap in the scale of European companies, whether in terms of revenues, size in terms of number of employees or geographical spread, compared to companies located in regions with a more flexible and favorable regulatory framework for investment and innovation that allows them develop and compete.

In 2022, the total market capitalization in the US is 2.5 times larger than in Europe, and US companies are almost twice as large (in terms of revenue). This gap reflects lagging economic growth and prosperity in Europe, with consequences for its future competitiveness and the sustainability of its social and economic model.

This scale gap also extends to the field of innovation, where, for example, generative artificial intelligence (GenAI) has the potential to revolutionize societies and economies by significantly increasing productivity and supporting innovation at unprecedented levels. However, according to the McKinsey Global Institute, private investment in generative AI in Europe reached $1.7 billion in 2023 compared to $23 billion in the US, highlighting the lack of momentum in technological innovation.

Regulatory rigidity not only limits innovation capacity in areas such as artificial intelligence (AI), leaving Europe behind competitors such as China and the US, but also increases the risk of relocation of investment and business decision-making centers. Companies seeking a more favorable and flexible environment for their operations may relocate their operations outside the EU, which will have negative consequences for the region’s production potential, investment and strategic autonomy.

This risk was highlighted by the implementation of the so-called Inflation Reduction Act (IRA), which offers the benefits of simplifying and reducing the regulatory, tax and administrative burdens placed on businesses. These policies attract businesses from around the world, creating an environment that promotes efficiency and cost reduction and creating a more favorable environment for investment and business development.

In addition to the potential competitiveness of regulatory frameworks in other regions compared to the European framework, there is the challenge of globalization and digitalization. European companies face the challenge of losing market share and competitiveness, especially in the digital market, both globally and in local markets, due to competition from new international players, some of which are not subject to the same regulations as established companies.

Public policies aimed at supporting an environment conducive to competitiveness

It is therefore imperative that the EU transforms regulation from an obstacle into a competitive advantage, promoting an environment conducive to investment and innovation and strengthening the single market. This is necessary because without investment innovation is not possible and therefore competitiveness cannot be improved.

Therefore, Telefónica considers it necessary:

• Updating competition policy to facilitate business scalability and align the Merger Regulation with competitiveness, digitalization and sustainability objectives.
• Deepen the single market, moving from a simple vision based on harmonization of regulations to a vision based on eliminating legal, administrative and political barriers to the free movement of resources.
• Encouraging better co-governance and public-private dialogue to promote “good regulation” that is targeted and tailored to the needs of business.
• Align competition policy, state aid and regulatory frameworks with future competitiveness goals, ensuring fairness between actors and Member States and improving consistency and application of criteria across the European Commission to support innovation and scale.
• Introduce competitiveness checks on new regulations and review existing ones to remove those that hinder investment or innovation.
• Ensuring a level playing field in European markets to allow European businesses to compete fairly through sectoral deregulation, in line with market developments.

In the next post, we will look at the next strategic axis for a more competitive EU: how to strengthen the telecommunications sector as the backbone of competitiveness in a global environment shaped by the digital economy.