Abstract
This article engages with a central dilemma highlighted in the Draghi Report on European competitiveness: how to protect innovation while avoiding regulatory overreach. While the report accurately identifies market fragmentation and excessive regulation as key obstacles, it stops short of offering a coherent deregulation roadmap. This article addresses that gap by advancing a policy vision grounded in institutional streamlining and market-compatible safeguards, arguing that the EU must shift towards a more innovation-conducive framework that dismantles unnecessary regulatory constraints on entrepreneurial freedom, voluntary exchange, and capital formation. The article proposes a liberalisation agenda to enable dynamic scaling and competitiveness, emphasising procedural safeguards, post-merger innovation benchmarks, and enhanced legal clarity.
Introduction: The battle between regulatory fairness and effectiveness
The current pursuit of global competitiveness in Europe seems to be colliding with a deeply rooted regulatory culture. As international rivals scale and invest rapidly in innovation, the European Union faces a dual challenge: preserving market fairness through regulations, the effectiveness of which is debatable (Shefrin & Statman, 1993; Schwartz, 2010), while enabling firms to grow, adapt, and lead technologically. Regulations, although designed to preserve market fairness, often walk a tightrope between market fairness and economic efficiency. This debate on the fairness–efficiency dichotomy is particularly relevant in the EU’s attempts to ensure a level playing field while at the same time seeking to promote innovation, investment, and growth.[1] On one side is the need for the market economy to grow and flourish; on the other is the need to maintain a level of state oversight to ensure fair development. This tension has led EU institutions to produce a large body of complex legislation. This legislation not only impacts the EU’s legal framework but also shapes the legal systems of Member States through Regulations, which have immediate legal effect, and Directives, which have indirect effects that are often amplified by gold-plating. This regulatory extension has resulted in ‘rules without end’, which need to be reduced and improved in quality (Guinea & du Roy, 2024). At the same time, it has produced ‘regulations that shape the global business environment’, making the EU a leading actor in setting global market standards (Bradford, 2020).
However, regulations that intervene frequently and deeply in markets – often in the name of fairness – can produce various forms of economic inefficiency. The literature has explored the effects of regulatory fairness on economic efficiency. Coffee (1987) examined how regulatory strategies that aim for fairness are often compromised by the practical need to ensure procedural efficiency, showing that even well-intentioned fairness mechanisms can lead to contentious trade-offs. Trebilcock and Howse (1998) argue that efforts to reconcile fairness with competitive trade policies across jurisdictions face significant regulatory complexity, highlighting the difficulty of harmonising fairness in global markets. This trade-off lies at the heart of the EU’s current policy dilemma: how to foster competitiveness without undermining fairness. Initiatives such as the Competitiveness Check and the Better Regulation Agenda reflect efforts to recalibrate this balance.
Nevertheless, the attempt to regulate and grow at the same time has led to the well-documented phenomenon of overregulation in the EU,[2] a symptom of regulatory culture. This overregulation is also accompanied by market fragmentation and rigid competition rules, which risk stifling entrepreneurial ambition and hindering the emergence of firms capable of operating at scale. At the same time, calls to relax these rules raise legitimate concerns about entrenching dominant players and weakening consumer protections. Balancing these priorities, namely encouraging innovation without sliding into protectionism or complacency, is now central to the EU’s economic agenda. In this article, we aim to critically examine the regulatory tensions outlined in the Draghi Report, particularly how to promote innovation and scale without compromising the principles of competition and consumer welfare. To this end, we first examine how financial rigidity has restricted cross-border capital flows and investment for enterprises, as well as how fragmentation and overregulation, in the telecoms and digital sectors, have constrained firm growth by creating barriers to scale through excessive red tape and rigid competition law. Second, we evaluate how current content regulation and delegated enforcement mechanisms under the Digital Services Act risk deepening market fragmentation and disadvantaging smaller actors. Third, we explore the institutional role of national competition authorities (NCAs), proposing a shift towards more flexible, coordinated enforcement to avoid legal asymmetry and duplication. Finally, we offer a comprehensive analysis of the Draghi Report’s approach to EU merger control, and we discuss potential formulas to enable innovation and scaling while protecting against regulatory capture and the entrenchment of complacent oligopolies.
[1] Krawiec (2000) argues, on the insider trading laws case, that such regulations reflect a commitment to fairness more than an empirically supported improvement in market outcomes.
[2] According to Herby (2024), the volume of EU legislation increased 729% during the 1994–2024 period and 101% during the 2010–2024 period (since the Maastricht and Lisbon treaties accordingly).
Institutional barriers to innovation: Fragmented markets, rigid finance, and regulatory overreach
Financial rigidity and the failure of capital market integration
In 2015 the EU launched the Capital Markets Union (CMU) initiative in response to the long-standing weaknesses faced in the European capital market. The CMU aimed to reduce businesses’ reliance on bank financing and to create a true Single Market for raising capital, which would allow firms, namely small and medium-sized (innovative) enterprises (SMEs), to access financing from investors anywhere within the EU (Moloney, 2016). In theory, the CMU mechanism should both boost economic convergence and market resilience and enhance the transmission of innovation for start-ups that require equity financing (Allen & Pastor, 2019). However, the CMU’s theoretical design differs significantly from its practical implementation. Multiple institutional barriers have created regulatory rigidity and restricted cross-border capital flows. Three main factors have contributed to this result: a) according to Véron and Wolff (2016), the disproportionate tax treatment between equity and debt capital encourages debt financing; b) the lack of depth in national capital markets, even in countries such as Germany, prevents the creation of strong secondary markets for new innovative firms (Bhatia et al., 2019); and c) the inefficiency of European pension funds, which rarely invest in equity or venture capital, limits the availability of long-term financial capital (Allen & Pastor, 2019).
The latest figures on EU venture capital investment are disappointing: as a percentage of GDP, it is estimated to be ten times smaller than in the US and seven times smaller than in China (European Commission, 2025). Innovative and fast-growing companies often fail to expand due to risks related to venture capital investments and are therefore forced to either relocate or remain trapped due to limited access to capital. To address these capital flow inefficiencies, the Draghi Report (2024) proposes a series of interventions which target harmonising tax systems to attract investment; strengthening pension schemes via robust funded systems, which can incentivise investment in innovation; and creating European platforms for raising capital. In a similar vein, Philippe et al. (2025) underline the importance of simplifying rules and enhancing transparency so that the CMU becomes a supporting institutional scheme for firms to raise capital.
Fragmented markets and the costs of overregulation
Drawing on recommendations from the Draghi Report and recent EU legislation, such as the Digital Markets Act (DMA), the Digital Services Act (DSA), and state aid frameworks, the dual challenge that the EU faces becomes clear: cutting red tape where it is not needed, and removing barriers that prevent voluntary scaling, investment, and cross-border competition. Addressing the fragmentation of the Single Market, by removing cross-border regulatory barriers, limiting national gold-plating, and eliminating ring-fencing, could become the key drivers to reactivating spontaneous market coordination, lowering entry barriers, and unlocking entrepreneurial freedom across the EU (Letta, 2024).
The cost of regulatory burdens in the EU remains high, although the Single Market was designed to lower such barriers and improve the ease of doing business. Processes and national checks, such as licensing and staff qualification permits among others, can severely delay and hinder investments; the Single Market is not as single as it was originally designed to be. Garicano (2025) identifies three main reasons for the EU’s market fragmentation: a) mutual recognition between EU Member States often breaks down in implementation; b) EU Directives fall short of fully harmonising national legislation across Member States; and c) the European Commission has not adequately enforced the rules underpinning the Single Market. The first issue reflects domestic regulatory obstruction of the principle that products can be sold in every EU Member State if they are sold legally in the Member State of origin – with a few legitimate exceptions. The second highlights gold-plating and multiplying barriers which derive from a single regulation that in principle was designed to repeal domestic overregulation – the AI Act is an example. The third points to weak supranational EU law enforcement, as compliance delays have increased significantly.
This fragmentation, which derives from a combination of regulatory and administrative barriers, mostly hinders the development of SMEs. The recent SME Relief Package aimed to reduce these burdens by an ambitious target of 25%. According to the Annual Single Market and Competitiveness Report by the European Commission (2025),[1] the key regulatory obstacles facing firms range from restrictions on access to regulated professions and limitations on which entities are authorised to provide services, to inconsistencies in employment and tax legislation across Member States. Regarding the administrative burdens, detailed reporting obligations for posted workers and the certification of social security coverage pose significant challenges to enterprises. Finally, the complexity of company law and the lack of harmonisation among national rules for establishing new businesses or registering subsidiaries continue to hinder service providers that rely on physical proximity to their clients (Figure 1).
Source: European Commission (2025).
A classic example of fragmentation and barriers to economies of scale is the telecommunications market. Since the 1990s, the Common Market has transitioned from an oligopoly of state companies into a competitive and dynamic market comprising private firms. The benefits of competition, which kept prices low, were seen as an achievement for EU consumers, with North America lagging behind on that front (Marques & Portuese, 2023). The situation today is different in respect of technological development: the European telecom companies are incapable of investing in edge technology because they face low profitability as their products become commodities (PwC, 2024). In 5G deployment, for example, the EU has lagged both the US and several Asian countries. Marques and Portuese (2023) argue that there are three main reasons for this: inefficient taxation, anti-growth competition law, and a deficit of savings. The authors support this claim by stating that production taxes net of subsidies constitute about 1% of telecoms revenues – twice as much as in other markets. In Germany, for example, Deutsche Telekom faces an average corporate tax rate of 37%, compared with 28% for other large German companies. Excessive taxation is thus an obstacle to network investment.
Another significant obstacle is the current competition law. With a population of 445 million, the EU has approximately 40 mobile providers. In contrast, the US has just three major providers for a population of 332 million. This fragmentation has resulted in an average return on equity (RoE) in the EU telecoms sector of 10.6% (2002–2022) compared with 14.2% globally and 19.4% in the US (Marques & Portuese, 2023). Still, the average capital intensity of Western European telecom operators, measured as capital expenditures (CapEx) as a percentage of total revenues, was 19–20% (Larsen, 2024), close to that of the US (17–18%) in 2022–2023 (Yahoo Finance, 2024). This indicative comparison reveals that EU operators are proportionally reinvesting more of their revenues into infrastructure than their US counterparts, despite operating in a more fragmented market and under tighter regulatory constraints, whereas in the US, profitability is higher but is not reinvested at the same rate, reflected in stronger RoE rather than infrastructure spending. Nevertheless, the EU investment does not translate into better network infrastructure or innovation outcomes,[2] and the reason for this may be structural inefficiencies such as duplicated infrastructure, lower average revenue per user (ARPU) levels,[3] and heavier regulatory or tax burdens. At the same time, Meyers (2024) argues that telecoms in the EU constitutes a well-functioning market, where innovation is based mostly in slow-moving international initiatives. These two conflicting perspectives on the telecom sector suggest that telecoms in the EU operate within a structurally constrained environment, one where high reinvestment coexists with modest innovation gains. This constrained environment can be partly attributed to the institutional complexity and multilevel governance of the EU, which prioritises coordination and stability, ensuring lower prices for consumers, over a model of rapid, market-driven innovation with more expensive products and services.
A final barrier is the EU’s low total market value of shares for listed companies (market capitalisation), which accounts for one-third of the respective figures for the US (€10.4 and €38 trillion, respectively) (Day, 2023). The EU’s capitalisation-to-GDP ratio stands at 70%, compared with the OECD average of 147%. France, the highest EU performer, achieves only 106% (Marques & Portuese, 2023). The primary reason for this is the underdevelopment of retirement funds, which elsewhere help channel savings into innovation.
[1] The data is provided by Single Market Barriers Tracker dashboard, using Your Europe, SME feedback survey, SOLVIT and Your Europe Advice (YEA) data, during the period 2022 and 2024 (October).
[2] Although there is a debate on the quality and coverage of telecoms networks in the EU and the US (see Duso et al., 2024), their 5G coverage of households at the end of 2024 was similar, as EU countries averaged 94.3%, China 95%, the US 97%, and Japan 99% (European Commission, 2025).
[3] ARPU in Europe declined by 5.9% in 2023 compared with 2022 in real terms, while mobile ARPU in the US, South Korea, and Japan significantly exceeded Europe’s, by +182%, +76%, and +53%, respectively (Wood & Sherrington, 2025).
Digital regulation and the paradox of control: Innovation at the mercy of fragmented governance
Conflicting mandates in the Digital Services Act and Digital Markets Act
Of particular significance are the threats posed by fragmented and discretionary regulatory interventions, including extraterritorial content regulation, over-removal of content through delegated enforcement,[1] and punitive tax policies that distort price signals and suppress capital formation.
The DSA allows national governments to establish ‘administrative authorities’ with the aim of flagging illegal content, and these will also be able to impose their rulings on other EU countries. If a company (or user) in one EU country has their content removed due to a decision made by a ‘trusted flagger’ or authority in another Member State, then the DSA requires them to seek redress through the appropriate authority in the latter country. This requirement creates several challenges, as users (individuals or SMEs) must pursue foreign legal procedures and face potentially hostile regulatory environments, raising concerns about access to justice and procedural fairness across the Single Market.[2] This mechanism for filtering out content raises a twofold concern by giving an excess of power to flaggers and establishing a troublesome process for challenging unfair rulings (Barczentewicz, 2024).
If a company or an individual considers their content to have been unfairly flagged, they must take their complaint to the administrative authority, which, given that it chose to side with the flagger in the first step of the procedure, may be unwilling to change its verdict. From here there are two routes forward: accept the unfair ruling and move on or take it to the courts. The latter option is usually unavailable to individuals or SMEs that cannot afford the legal expenses. Despite the DMA’s stated aim being to regulate big technology firms, this decision poses an unfair disadvantage to smaller actors in the sector (Azguridienė & Bakula, 2024; Husovec, 2021).
Additionally, the goals of these two pieces of legislation seem to conflict. The DMA aims to centralise control of regulation in the tech sector to avoid market fragmentation and strengthen the Single Market. By turning digital platforms into ‘gatekeepers’ and subjecting them to a uniform set of ex ante obligations (prohibiting self-preferencing, ensuring data portability), they allow interoperability. The rules are enforced exclusively by the European Commission and not domestically by Member States, to prevent regulatory fragmentation and ensure a harmonised legal framework across the Single Market. At the same time, the DSA gives discretion to national authorities to take down (‘flag’) whatever content they deem to violate the law or the platform’s guidelines, with little room for creators to fight back if they think they have been treated unfairly. The first Act pushes for more central control whereas the second pushes for less, and this apparent conflict is difficult to explain. Perhaps it stems from factors related to politics more than economics. When such institutional inconsistency occurs, it often risks reinforcing fragmentation of the Single Market, encouraging divergent enforcement practices across Member States, and creating legal uncertainty. Moreover, it can increase the compliance burden for firms operating across borders, raising barriers to scale and weakening the EU’s digital competitiveness.
[1] Platforms, fearing liability or sanction, choose censorship over freedom when decisions stem from politically influenced regulators. What is considered illegal or inappropriate in one country, such as anti-abortion content, may lead to the removal of lawful speech in other countries.
[2] Since decisions will affect other EU countries, it is possible that content that is legal in one country but illegal in another will be flagged. For example, a post about a woman talking about abortion in Greece (where abortion is legal) will be marked as inappropriate by a moderator in Poland (where abortion is illegal except in cases of maternal health risk or rape) and as a result the post will be taken down. There is also the possibility that a flagger motivated by ideological inclinations and acting in bad faith will try to silence opposing content (posts that are pro LGBTQ+ or right wing, for example). An independent flagger may not cause a lot of damage, but imagine a national authority being organised and heavily guided by the ruling party of a country that systematically attacks content of a specific kind to push its agenda.
The role of NCAs: Coordination or fragmentation?
Regarding national competition authorities, too, it is important to examine how they can limit regulatory sprawl and decentralise enforcement while avoiding legal fragmentation. This article, in arguing that innovation and regulation are not necessarily at loggerheads, offers a model of ‘regulatory transformation’ based on the ideals of legal certainty, institutional prudence, and openness to market-led experimentation. Flexible instruments, such as regulatory sandboxes, simplified merger guidelines, and cross-border coordination mechanisms, are not only administrative tweaks but also key tools to reduce uncertainty and unlock innovation in complex, high-growth sectors. Regulatory sandboxes allow for the development of new business models for start-ups and scale-ups, under regulatory supervision, without directly imposing full compliance burdens. This process can rapidly boost evolving sectors such as fintech and digital health. In addition, improved coordination among domestic authorities would help prevent legal conflicts and delayed market access for cross-border innovators. The shift in the rigid regulatory framework can be achieved, via such an adaptive, innovation-enabling framework, in sectors where Europe is found to be falling behind the US and Asia in scale, investment, and competitiveness. To unlock such reforms, measures are needed to determine whether politics is aligned with economic priorities. To this end, a ‘Competitiveness First’ agenda could add a binding ex ante competitiveness check as a requirement for major EU legislation and its ex post evaluation, removing burdens identified as major obstacles. Aligning regulatory streamlining produced by politicians with widely supported EU goals recommended by experts, such as green innovation or digital sovereignty, could help build the consensus needed to overcome institutional inertia.
For a company to attain the status of gatekeeper, it needs to have a significant influence on the EU internal market, maintain an entrenched position, and act as a bridge connecting business users with end users. Quantitatively, the Commission has spelled out the following criteria: 1) the company had an annual turnover in the European Economic Area above €7.5 billion in each of the last three financial years in at least three Member States; 2) the company operates a core platform service (CPS) with more than 45 million monthly active end users and 10,000 active business users yearly; and 3) the company met the second criteria for the last three financial years (Grant Thornton, 2024).
Two issues immediately arise. Firstly, incentives to innovate and increase the consumer base are decreased, since taking full advantage of economies of scale can lead to a company being more closely monitored by antitrust authorities. Furthermore, resources that could otherwise be spent on research and development (R&D) or other productive activities will be redirected towards compliance in order to stay within the tight legal framework. Secondly, it is assumed that by strangling large enterprises, more SMEs will be able to innovate and grow. This is not necessarily the case. Some SMEs take advantage of the economies of scale provided by larger firms, and it is likely that only a handful of them will benefit while the majority will be negatively impacted. By only looking at the small number of new technology firms that may or may not pop up, not enough attention is paid to the many non-technology-related SMEs that will lose from this arrangement. For example, if Google is not allowed to promote its services to quickly identify nearby restaurants, then independent restaurants will not be easy to find, consumers will have trouble finding a place to eat, and chain restaurants that are more well known will be easier to track.
Given these difficulties, there is an important role to be played by NCAs. Their prior experience and swiftness to act can be useful in a transition period, until compliance rates on competition rules are significantly higher and a more centralised form of regulation is in place. They could be used for emergency situations and, when actions need to be taken against gatekeepers, act only in coordination at the EU level in order not to fracture the Single Market (Santacruz & Stagnaro, 2024). Certainly, not all competition authorities are equally competent or well equipped to deal with digital regulation, and for this reason cross-border cooperation is essential.
Despite the recommendation for more collaboration between NCAs, any strengthening of excessive independence of these authorities should be avoided. Although in theory this could enhance regulatory efficiency, in practice such institutional expansion could lead to the overlapping of their powers with those of the DMA, DSA, and Digital Governance and, in the absence of clear jurisdictional boundaries, questions would inevitably arise over which authority has ultimate responsibility for market regulation, a problem that inconsistent enforcement would further exacerbate.
Merger policy in an age of innovation: Balancing scale, competition, and strategic autonomy
Scaling without entrenchment: Rethinking EU merger control
The main legislative framework regulating business concentrations within the EU is Regulation (EC) No. 139/2004, commonly referred to as the EU Merger Regulation (EUMR). The regulation establishes quantitative thresholds, which are based on revenue and market share, that determine whether a proposed merger requires notification and approval by the European Commission’s Directorate-General for Competition (DG COMP) (Council of the European Union, 2004). The shift from the ‘dominance’ test to the significant impediment to effective competition (SIEC) test under the EUMR marks a significant change in EU merger control, as it broadens the scope of what counts as anti-competitive if no dominant position emerges (Jones & Sufrin, 2016).
In support of this regulatory framework, the Commission has issued interpretative guidelines, most notably on horizontal and non-horizontal mergers, which outline the primary ‘theories of harm’ considered during merger assessments. These include unilateral effects (where the merged firm gains power to act independently of competitors), coordinated effects (where the merger facilitates tacit collusion among remaining firms), and foreclosure (where rivals are denied access to key markets or inputs). These theories of harm guide how the Commission evaluates market dynamics, entry barriers, and claimed efficiencies, particularly under the SIEC test framework introduced in 2004 (Whish & Bailey, 2018). The legislative texts and guidance are publicly available through EUR-Lex,[1] and academic commentary such as that published in the Oxford Journal of European Competition Law offers critical perspectives on their application.[2]
The Draghi Report from 2024 highlights critical concerns about the potential rigidity of current EU merger rules. The report argues that stringent application of competition law may inadvertently stifle the creation of so-called European Champions, firms with sufficient scale and integration to compete globally with dominant US and Chinese corporations.
To address this, the report advocates for the adoption of an ‘innovation defence’. The EU could allow mergers that enhance investment in R&D, although they could result in a temporary decline in competition metrics (Cleary Gottlieb, 2025). This rationale aligns with a broader policy shift which recognises dynamic efficiency and long-term innovation as vital components of competitive markets.
Moreover, the report recommends blending ex ante merger controls with robust ex post assessments, a hybrid model that would permit conditional approvals, contingent upon post-merger performance in innovation and consumer welfare. Such an approach is consistent with calls from both academic and policy circles for more adaptive regulatory mechanisms, particularly in fast-evolving industries such as technology and biotech (Cleary Gottlieb, 2025; European Commission – Competition Policy, 2025).
[1] https://eur-lex.europa.eu.
[2] https://academic.oup.com.
Navigating the trade-off: Scale versus lazy oligopolies
The current policy debate is focused on how to navigate the trade-off between enabling economies of scale and guarding against the emergence of ‘lazy oligopolies’. On the one hand, large firms can be significantly more efficient, through channels such as integrated supply chains, increased R&D capacity, and global market reach that are crucial in industries marked by high fixed costs and technological intensity. On the other hand, excessive concentration can dampen competitive incentives, leading to reduced pressure to innovate or improve productivity once market dominance is achieved.
This concern is vividly illustrated in academic and policy debates on dynamic competition. Mergers that create stable, dominant players can, over time, lead to market complacency, reduced innovation, and diminished consumer welfare, hallmarks of what economists refer to as ‘lazy oligopolies’ (Stigler Center, 2023). Therefore, designing frameworks that incentivise efficiency without sacrificing market dynamism is the real challenge for regulators.
In this context, merger review must operate not merely as a legal threshold exercise, but as a strategic economic assessment, which could balance short-term gains with long-term sectoral health. Adaptive tools such as conditional approvals, innovation benchmarks, and post-merger audits, as proposed in the Draghi Report, are crucial to addressing this delicate balance in modern competition policy.
The Draghi Report calls for a looser merger policy (not to be revised in isolation, however, but to include some safeguards), a streamlined EU-level review, and a more dynamic focus on R&D, which indicates greater efficiency (Killick et al., 2024). This change is driven mainly by the argument that since the EU lags in innovation, companies should be able to consolidate in order to expand, innovate, and be able to compete outside the EU, even if this means higher prices for consumers for now. This drawback is expected to be offset by future innovative products.
Nevertheless, this vision also risks politicising competition policy by legitimising the so-called European Champions under the notion of resilience. The weakening of competition enforcement cannot contribute to a boost in EU competitiveness, simply because competition policy is not the ultimate cause of the EU’s innovation gap or investment shortages.[1] If competition enforcement is severely relaxed, there is a danger that competition law will become a vehicle for state-sponsored consolidation, allowing EU or domestic government institutions to favour specific enterprises under the guise of competitiveness. This opens the door for less efficient firms to seek state support and regulatory shelter rather than market discipline. To address this, a more robust institutional equilibrium that preserves the autonomy and impartiality of competition enforcement is required. A first measure could be a post-merger mechanism, where a merger should be subject to mandatory and transparent economic impact reports, which would also include long-term consumer welfare and innovation effects. A second measure could institutionally insulate the European Commission’s DG COMP from broader political pressures by following advice from a body of independent economists and legal experts, whose assessments would be made public and would in part be binding (with a certain formula where DG COMP could still freely decide).
In order to navigate the trade-off between enabling economies of scale and preventing the entrenchment of lazy oligopolies, a market-compatible approach could strike a tight balance: an innovation-constrained merger review model, where innovation defences must be supported by verifiable evidence (i.e., specific R&D investment commitments), regulatory transparency is strengthened through public disclosure and audits (i.e., public access to non-confidential versions of economic models), and consumer welfare remains at the epicentre of such decision-making. This would ensure lower prices, freedom of choice, and quality for consumers. This approach aims to preserve dynamic efficiency without compromising competition or enabling unchecked consolidation.
Draghi’s policy proposals reflect a growing consensus that the EU must adjust its competition framework to better respond to industrial pressures coming mostly from the US and China. Embedding R&D considerations and strategic autonomy into the assessment of merger policy introduces a highly subjective criterion into antitrust action. Examples such as the blocking of the Siemens–Alstom merger showcase the difficulty between balancing long-term innovation with short-term market contestability. This particular merger was prohibited by the Commission due to concerns over reduced competition in rail signalling and high-speed trains, while its supporters argued that the merger was vital to creating a European Champion capable of competing globally, especially against China’s CRRC (European Commission, 2019). This case shows that there are risks associated with weakening merger standards. Short-term loss of market contestability might not be compensated by long-term innovation gains unless they are backed by firm, evidence-based commitments which will not be reversed in the future.
Promoting European Champions to boost the industrial output of the EU may pave the way for protectionist measures that will undermine market competition in the long run. It is important that resilience and international competitiveness do not become excuses for tariffs, subsidies to artificially lower prices and boost output or impose high entry barriers to other firms trying to operate in the same markets as the Champions. Furthermore, it may lead to an antitrust policy that is too relaxed and allows European Champions to acquire or merge with any company with little to no supervision under the pretence of boosting competitiveness.
To operationalise Draghi’s vision without the sacrifice of competition law or the commitment to free trade, it is essential to maintain certain procedural safeguards. Judicial review and oversight bodies can guarantee that industrial policy does not tread on the principles of free competition. Currently, the General Court and the Court of Justice of the EU assess, in certain cases, whether state aid measures or mergers violate Articles 101–109 of the Treaty on the Functioning of the European Union. Such bodies can evaluate, through legal scrutiny, whether interventions genuinely address market failures or instead disproportionately distort competition, and rule accordingly, ensuring fair competition against protectionist excesses. Furthermore, the European Commission should have a firm commitment to protect consumer welfare based on notions not of static but of dynamic efficiency by trying to see not only the current distribution of market power but also the future potential benefits in areas such as innovation and product diversification. The shift towards a more innovation-friendly merger framework needs to be accompanied by a robust ex post enforcement programme by the EU bodies. Firms should not be granted a free pass to do whatever they wish based on the possibility that they may in the future provide some vague sort of innovation; rather, a series of predefined benchmarks will have to be clearly demonstrated, and in case they are not met without a valid reason, such vis maior, corrective actions will be taken.
[1] In line with most analyses (as seen above), Meyers (2024) identifies two major structural obstacles that hinder innovation in the EU: bank-based financing and Single Market fragmentation. Firstly, European firms are disproportionately dependent on bank-based financing, which tends to favour projects with short-term return horizons. This discourages smaller firms from investing in long-term technological upgrades, unlike their US counterparts, who have greater access to equity markets. Secondly, the EU suffers from an incomplete and fragmented Single Market, limiting firms’ ability to scale rapidly across borders. As a result, many promising European companies are constrained in their growth and fail to reach the continental or global scale often achieved by their US competitors.
Conclusions and policy pathways
To restore Europe’s competitiveness, the EU must move away from a reactive and interventionist model of regulation towards a more balanced institutional framework – one that protects entrepreneurial freedom, encourages decentralised problem-solving, and aligns regulation with real market dynamics. This does not mean abandoning oversight, but rather recalibrating it to support the economic processes that drive innovation and productivity. A more adaptive approach must ensure that firms can scale efficiently and compete globally, without solidifying dominant positions or distorting consumer outcomes.
The challenge is to find a careful balance that allows large firms to develop and exploit economies of scale while maintaining oversight of them so that markets do not become too concentrated and complacency and market ossification do not set in. This takes some discipline in regulation design but also confidence in the ability of the market to self-correct.
Although content moderation is already the norm for platforms, the status quo enforcement introduces gratuitous legal asymmetry and privileges larger incumbents with more compliance resources. A smarter approach would be to streamline instead of multiplying the levers of regulation.
These challenges stem from a broader European regulatory mindset that treats markets as static entities which need to be managed, rather than dynamic systems of discovery and adaptation which need to be overseen. As long as EU policymaking continues to be guided by an anti-competitive reflex and a distrust of market forces, similar regulatory frictions will continue to appear across sectors.
To support a modest but effective deregulation agenda, a few practical reforms can boost the EU’s regulatory framework without abandoning its commitment to market oversight. Firstly, merger review processes should be streamlined by incorporating post-merger innovation benchmarks, allowing conditional approvals based on firms meeting clear R&D or consumer welfare goals. This approach would maintain accountability mechanisms and at the same time encourage investment and scaling. In the same vein, a rebalancing should be pursued in content moderation under the DSA, by placing the (bare minimum) burden of moderation primarily on platforms themselves, where it already exists to some extent, and by improving transparency and redress mechanisms. This would reduce legal asymmetries across borders and mitigate the risks of politically motivated censorship. The role of NCAs should also be clarified, focusing them on coordination and rapid response rather than parallel enforcement, to avoid unnecessary fragmentation of the Single Market. The use of regulatory sandboxes should be encouraged, and pilot schemes would give firms the ability to test innovations under lighter regulatory conditions, generating a real-world feedback mechanism and leading to more responsive policymaking. Finally, reforms to deepen European capital markets, through more active use of pension funds and retail investment tools, could help redirect domestic savings towards innovation, reducing reliance on state aid. We should note that these reforms are not about deregulation for its own sake, but about refining and realigning regulation to work with, rather than against, the entrepreneurial and competitive forces Europe needs to thrive in an era of intensified competition and free market retrenchment. Each of these steps seeks to favour flexibility over rigidity, discretion over doctrine, and evidence-based policymaking over ideology. This blueprint of a liberalisation agenda, which is modest in ambition but potentially transformative in outcome, reinforces Europe’s capacity to compete, innovate, and grow without surrendering the core values of its Single Market.
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