Thijs Jochems: EU, insidious trends, regulation inflation and loss of prosperity

February 25, 2025

_{This column was originally written in Dutch. This is an English translation.}

By Thijs Jochems, Advisor and Private Investor

For years we have seen the EU lose competitiveness. This is one of the reasons why its social democracy is coming under increasing pressure. The oft-cited solution to this is innovation. But what innovations are we talking about and why is the EU's innovative capacity so much less than in the US?

The dominant global trends are well known: ageing populations in all major economies, climate change, digitisation and (since 2015) deglobalisation. The EU is ageing faster than the US, but is that the only explanation for the lower productivity growth? The Draghi report lists a number of reasons why the EU is performing increasingly worse economically compared to the US. This column will highlight a few of these problems.

The EU has tried to solve the ageing problem – read declining labour force – by admitting Turkey, with its young population, into the EU. That has failed. Immigration as a solution to the ageing of the population has also proven too problematic. The ageing problem is also just one of the reasons for the declining competitiveness of the EU.

The ‘home market’ for European companies is not functioning well. The increase in the size of the market, one of the advantages the EU supposedly offers its member states, has proven to be an illusion. Recent research by the EU itself concludes that there are in fact significant trade tariffs within the EU due to time-consuming administrative obligations, licensing procedures, different product specifications and suchlike. These internal ‘tariffs’ amount to 45%, three times as high as between states in the US. Home markets are crucial for business.

Energy costs are another structural disadvantage for the EU. Europe itself has few energy sources, while energy is the ultimate source of prosperity. The energy transition is in fact a transition from liquid fossil fuels to hard metals that are needed for wind turbines, electric cars, the transport and storage of electricity, etc. The metals required for this come largely from countries with non-democratic regimes. China alone accounts for 80% of the global production of refined rare earth metals (2023), which are necessary for many applications in renewable energy, defence and IT. The EU's geopolitical dependence on energy and the associated cost disadvantage affects European companies.

Other reasons mentioned in the Draghi report for the EU's declining competitiveness are a lack of capital for innovation and suffocating rule-based regulation. This leads to high costs for companies (and citizens), ‘regulatory inflation’. In previous columns I have already pointed out the need to make regulation ‘principle based’ in order to reduce the flood of laws and regulations. It appears to be quite a difficult task for the EU to achieve this. Is it unwillingness or incompetence?

Innovation requires capital and entrepreneurship. In the US, the business community invests considerably more in R&D than in the EU. Including venture capital, this is more than six times as much. The limited availability of capital for innovation and the regulatory obstacles to entrepreneurship are the main reasons for the EU's lagging innovative strength.

American shares are expensive from a historical perspective, pension investors are constantly proclaiming. Expensive is a judgement. The aforementioned underlying, long-term and often ‘insidious trends’ indicate that the actual context for the valuation of European companies is structurally deteriorating. European companies are losing their competitive edge within the EU due to the aforementioned ‘insidious trends’, and this is reflected in their valuation. It is a process that can only be stopped if we in the EU set a radically different course in many areas.

More columns by Thijs Jochems