In its Competitiveness Compass published in January 2025, the European Commission delivers a stark diagnosis: whilst the EU boasts numerous economic strengths, it has fallen behind other major global powers. To reclaim its position in the global race, the Commission argues, Europe must focus on innovation-driven productivity—with regulatory simplification as the central driver.
Yet by dressing up deregulation as mere “simplification”, the Commission obscures the profound policy shift it is pursuing. The Compass represents far more than an innocuous exercise in cutting red tape and removing bureaucratic obstacles. It reveals an identity crisis at the heart of the European project and marks a historic realignment of priorities—one that favours corporate interests whilst abandoning the foundational values that have long distinguished Europe: equality, human dignity, social protection, and democratic accountability.
The Innovation Paradox
Dismantling legal requirements for ESG standards, due diligence, and democratic scrutiny will not merely harm EU citizens, workers, and the environment. It will likely fail in its stated aim of accelerating innovation. The Commission’s approach threatens the very foundations upon which innovation thrives, particularly in emerging technology sectors: legal certainty and coherence, public trust, robust public investment in infrastructure and education, and a stable climate for private investment.
Economist Mariana Mazzucato demonstrates this paradox powerfully in The Entrepreneurial State: Debunking Public vs. Private Sector Myths. She shows how major technological breakthroughs—from the internet to green technology—emerged when the public sector took the lead and shouldered the greatest risks. Innovation flourishes, she argues, when the state actively creates and shapes markets, not when it merely retreats to the sidelines.
Science and Technology Studies scholars reinforce this insight. Sheila Jasanoff of Harvard emphasises that regulation is not innovation’s enemy but its essential partner. Regulation enables, shapes, and stabilises new technologies. Public debate and democratic oversight ensure that innovation serves society’s needs, not just corporate profits.
Europe’s AI Advantage Under Threat
The technology sector exemplifies Europe’s successful positioning as a global standard-setter for responsible innovation. This leadership is particularly evident in artificial intelligence regulation. The AI Act—arguably the world’s most ambitious attempt to regulate AI in the public interest—now faces pressure for “simplification” in the name of competitiveness.
Though the Act officially entered into force in 2024, several chapters and articles have staggered implementation dates. Full effectiveness is scheduled for 2027. Yet mounting industry resistance and the Commission’s own deregulatory agenda have already sparked calls to postpone and pause implementation. Some provisions may face dilution or outright repeal.
The deregulation offensive will unfold through a series of Omnibus legislative packages—developed with minimal transparency and scant input from stakeholders beyond industry representatives. The scope is breathtaking: the Commission aims to slash administrative burdens by at least 25 per cent overall and 35 per cent for small and medium-sized enterprises by the end of its current mandate.
Four packages have already been announced, targeting sustainability regulations (including the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive), investment instruments, the Common Agricultural Policy, and small mid-cap companies. A fifth defence-specific simplification package is in preparation. A digital package should be published in December, containing an omnibus that will target the AI Act, the General Data Protection Regulation (GDPR), the Cybersecurity Act, the Digital Networks Act, and the European Business Wallet.
Learning the Wrong Lessons
This deregulatory turn arrives just as the global AI race reaches fever pitch. The Trump administration may trumpet its ambition to “unleash prosperity through deregulation“, but the United States continues to rely heavily on state-led strategies and targeted investment. The Defense Advanced Research Projects Agency (DARPA) remains a powerhouse of innovation, whilst the CHIPS and Science Act of 2022 channels massive public investment into strategic sectors.
China offers an even starker contrast. The central state actively coordinates public and private resources through five-year plans and provides robust institutional support for national champions in artificial intelligence, electric vehicles, batteries, and solar panels. In both superpowers, active state intervention remains the cornerstone of large-scale innovation, even as regulatory frameworks are streamlined for efficiency.
The EU, by contrast, risks squandering its reputation for trustworthy, responsible, and rights-respecting innovation. Trading robust regulation for short-term administrative relief represents a dangerous miscalculation. No European innovation strategy can succeed without long-term credibility, investor confidence, and public trust—all of which the Omnibus packages jeopardise.
These packages create damaging uncertainty by reopening democratically established legal frameworks that businesses had already adapted to. They signal policy instability at the worst possible moment. Most fundamentally, they reflect a profound misunderstanding of what innovation actually requires: not regulatory chaos, but a clear, coherent, and democratically legitimated set of rules that provide the foundation for sustainable technological progress.
Aida Ponce Del Castillo is a senior researcher at the European Trade Union Institute.
