From Stability to Competitiveness: Rethinking Regulation and Supervision

The report “Europe’s Competitiveness at Crossroads”, prepared by The European House- Ambrosseti, assesses how the recommendations of the Draghi and Letta reports (2024) have been taken up by EU policymakers, providing proposals to close the gap between initial ambition and effective delivery. In its view, despite strong political momentum, progress remains slow and fragmented, with Single Market barriers and regulatory complexity still holding back competitiveness. A central theme in the report is the regulatory burden, with particular focus on the financial system and sustainability frameworks. Beyond the simplification efforts already underway, the report highlights a proposal, first introduced in the UK, that could serve as a model for the EU: establishing a secondary objective for regulators and supervisors, centred on growth and competitiveness. This, it argues, would help ensure that regulation fosters economic development without undermining financial stability.

• Banking regulation and supervision are central to competitiveness:
  
  - Two-thirds of corporate debt in the EU is financed through banks, compared with only 20% in the US, amplifying the effect of prudential rules on the real economy. The implementation of Basel requirements, along with additional complementary supervisory layers (additional Level 2 and Level 3 requirements), has strengthened stability but constrained banks’ ability to expand lending, particularly to SMEs and scale-ups.
  
  - According to the report, the EU’s supervisory and regulatory framework has materially increased capital and compliance requirements for credit institutions affecting the cost and availability of finance for firms, particularly SMEs and scale-ups that are more dependent on bank lending than on capital markets. Higher capital demands and complex prudential standards shape credit pricing, especially in sectors exposed to the energy transition or technological uncertainty, limiting investment, slowing innovation and reducing firms’ ability to scale globally.
  
  - To address this situation, the report highlights a proposal, already implemented in UK, where financial supervisor is subject to secondary statutory objectives such as fostering economic growth, international competitiveness, or facilitating competition and innovation. Such goals are legally subordinated to the primary objective of safety and soundness but nonetheless provide a normative framework to guide the regulator’s broader conduct.  “A secondary goal for regulators and supervisors, focusing on growth and competitiveness, which should allow for ensuring growth without sacrificing financial stability”.

• Sustainability reporting and due diligence (CSRD and CS3D/CSDDD) have also become decisive factors for competitiveness, where compliance costs may determine whether companies expand or are held back. To ease the burden, the European Commission introduced the Omnibus I package (February 2025), which:
  
  - Postpones application deadlines for CSRD and CS3D, giving firms more time to adapt.
  
  - Narrows the CSRD’s scope to large companies (over 1,000 employees and financial thresholds), exempting around 80% of firms, and introduces a voluntary SME standard (VSME).
  
  - Simplifies obligations by removing sector-specific standards, reducing assurance requirements, limiting the “trickle-down effect” on SMEs, and aligning CSRD and CS3D to avoid duplication.
  
  - Adjusts CS3D by restricting full due diligence to direct business partners unless risks are evident, extending review intervals, and removing the EU-wide liability regime in favor of national frameworks.