Regulatory frameworks are essential for economies to function but their design and complexity can either support or hinder productivity gains. However, there is emerging consensus about an optimal regulatory threshold.

Frameworks are necessary to establish standards, agree upon rules, properly align incentives and ensure appropriate conditions for economic activity. Without these, regulation results in excessive bureaucracy that hampers competitiveness and, ultimately, hampers private initiative and productivity.

A useful analogy is the Laffer Curve in tax theory, which posits that beyond a certain threshold, further increases in tax rates reduce revenue due to disincentives to work and invest. The regulatory Laffer Curve suggests that there is an optimal level of regulation that maximises its positive impact on economic activity.

When there is insufficient regulation, market failures prevail, while over-regulation creates high compliance costs, entry barriers to competition, excessive bureaucracy and resource allocation inefficiencies.

According to The Future of European Competitiveness, a report by Mario Draghi commissioned by the European Commission, the US enacted approximately 5,500 regulations between 2009 and 2024, while the EU brought in around 13,000 over the same period.

In response, the so-called Competitiveness Compass, presented by the European Commission in early 2025, aims to restore Europe’s dynamism and boost its competitiveness and economic growth.

Another important step taken by the European Commission is the Omnibus Simplification plan, the goal of which is to reduce sustainability reporting requirements by at least 25% for all companies and up to 35% for SMEs in order to strengthen their competitiveness against the US and China.

This would save around €6 billion annually in administrative costs, according to Commission estimates.

This focus on reducing bureaucratic burden is warranted. More than 60% of EU firms view regulation as a barrier to investment, according to Business Europe, and 55% of SMEs cite regulatory and administrative hurdles as their primary challenge.

Sometimes, the issue is not only overregulation but also a lack of harmonisation or administrative complexity. Intra-EU trade barriers might be equivalent to tariffs of about 44% on average for goods trade, according to the International Monetary Fund (IMF) – or three times higher than trade barriers between US states.

For services, these estimated barriers are even steeper, equivalent to a 110% tariff, while the figure for financial services could be close to 100%. As economic activity increasingly shifts toward services, their overall drag on growth becomes greater.

Lowering intra-EU trade barriers to US levels could raise productivity by nearly seven percentage points in the long term, according to the IMF. This would halve the current productivity gap between advanced EU economies and the US.

Productivity improvements – commonly measured as total factor productivity (TFP) – are driven by issues such as technology, labour force training, innovation and the development of an ecosystem that fosters entrepreneurship.

Moving the level of barriers to entry in some European countries towards the Organisation for Economic Co-operation and Development average over ten years might have a two-fold effect.

Lowering regulatory barriers in service industries is estimated to boost annual TFP growth in the overall business sector by approximately 0.1 to 0.2 percentage points in countries like Portugal, Greece and Italy. 

In some heavily-regulated manufacturing industries, such reforms could boost annual productivity growth by 0.1-0.2 percentage points in countries like Germany, France, Italy and Greece.

Taking data from various sources, Santander developed two statistical methods to examine the relationship between regulation and productivity and GDP per capita. The results indicate a close relationship between productivity growth performance and regulatory quality.

Regulation plays a foundational role in economic development, but its effectiveness depends on clarity, proportionality and coordination. Simplifying frameworks and enhancing regulatory quality could unlock productivity gains that are crucial for long-term growth, particularly in Europe and Latin America.