Europe’s competitiveness problem is not a lack of strategies, reports, or political ambition. It is a growing willingness to weaken market discipline while expanding industrial subsidies. Germany’s rapidly expanding subsidy policies illustrate the risk particularly clearly. When governments replace competitive pressure with public funding, firms begin to adapt their strategies to ministries rather than markets. If this trajectory continues, Europe will end up with more industrial policy but less industrial competitiveness. And if that happens, the next flagship report explaining Europe’s competitiveness problem will practically write itself.
Europe Does Not Suffer from a Shortage of Competitiveness Reports. It Suffers from Too Many of Them.
Every decade produces another flagship diagnosis explaining why Europe is falling behind – why productivity growth is weak, why innovation struggles to scale, why European companies remain smaller than their American or Asian counterparts, and why the continent’s economic structure appears increasingly fragile in a world of technological and geopolitical competition.
The conclusions are remarkably consistent. From the Cecchini Report (The European Challenge 1992) in the late 1980s to Sapir (An Agenda for a Growing Europe), Kok (The Lisbon strategy for growth and employment) and Monti (New Strategy for the Single Market) in the 2000s, and now the Letta and Draghi reports, the central diagnosis has barely changed: Europe underperforms not because it lacks industrial strategies or political ambition, but because it continues to tolerate fragmentation inside its own market.
Yet every time the diagnosis returns, the political response looks strikingly familiar.
More subsidies. More state aid flexibility. More industrial policy instruments. More defensive trade measures. And occasionally, a few administrative simplification initiatives presented as structural reform.
What Europe still avoids is the harder agenda: completing the single market, opening services sectors, integrating capital markets, and removing the legal fragmentation that prevents companies from scaling across intra-EU borders.
This gap between diagnosis and policy response is at the heart of Europe’s competitiveness problem.
The European Competitiveness Narrative
Across Europe, governments broadly agree that competitiveness matters. But their policy narratives differ in ways that explain why reforms rarely go far enough.
The pattern is clear. The rhetoric is European. The policy instinct remains national.
At first glance, this debate appears to reflect different political philosophies about how Europe should compete. But the real dividing line is often not between governments – it is between political rhetoric and administrative reality.
Politicians frequently speak the language of competitiveness, reform, and market integration. They endorse ambitious reports, support declarations on strengthening the single market, and promise regulatory simplification.
Yet the practical design of policies rarely rests in the hands of political leaders alone. In most member states, the technical details of economic policy are primarily shaped within ministries and regulatory agencies – institutions whose incentives tend to favour stability, regulatory continuity, and the protection of existing policy frameworks.
These officials are typically deeply knowledgeable about the sectors they oversee. But precisely because they manage complex regulatory systems, they also become the guardians of those systems. Structural reforms that would dismantle national regulatory frameworks, merge supervisory competences, or shift authority to the European level often encounter resistance not primarily from elected politicians but from the administrative structures responsible for implementing existing rules.
This dynamic helps explain a recurring pattern in European economic policy. Political leaders endorse competitiveness reforms at the level of strategy and narrative. But when policies are translated into legislation and regulatory practice, the outcome often gravitates back towards the status quo – supplemented by subsidies, new funding instruments, or incremental regulatory adjustments.
Even the member states that traditionally present themselves as champions of open markets rarely advocate the deeper legal integration that would make the single market function more like a genuine domestic market. They support simplification, better regulation and capital markets integration, but stop short of pushing for the politically difficult steps – stronger supranational enforcement of horizontal rules for businesses, market standards, binding mutual recognition, or the removal of national licensing regimes that fragment services markets.
The Missing Majority for Real Reform
As a result, the coalition for structural reform remains weak.
Larger economies resist integration where it threatens domestic incumbents, while smaller economies often avoid political confrontation with larger member states on which many of their export markets depend.
The European Commission now speaks the language of competitiveness more clearly than before. The Draghi report highlighted the need for scale, investment and productivity growth. The Letta report emphasised the need to deepen the single market. Even the IMF has repeatedly pointed out that internal EU barriers function like large implicit trade costs.
But the political reflex across many capitals remains the same: when competitiveness weakens, governments reach first for subsidies rather than structural market integration.
Germany’s Subsidy Turn
Germany illustrates this dynamic particularly well.
For decades, Germany’s economic success rested on a combination of industrial excellence, export orientation, and strong exposure to global competition. Market discipline – the pressure to innovate, commercialise technology, and compete internationally – played a central role in that model.
Today, that discipline is increasingly being softened.
According to recent estimates from the Kiel Institute for the World Economy, total subsidies in Germany reached roughly €285 billion in 2024, equivalent to around 6.6 per cent of GDP. Federal financial aid alone amounted to approximately €127 billion, a sharp increase compared with just a few years earlier.
Even more striking is the lack of systematic evaluation of these programmes. In Germany’s own federal subsidy reporting, a significant share of support measures still lacks completed evaluation regarding their effectiveness or economic impact.
In other words, large public funds are being distributed without clear evidence that they actually strengthen international competitiveness.
This matters because subsidies do not automatically generate innovation, productivity, or export success. In most cases, they simply shift income from taxpayers to firms while weakening the market discipline that drives competitiveness.
When Industrial Policy Becomes Industrial Insurance
Several recent flagship projects illustrate the challenge.
Germany committed roughly €10 billion in subsidies to support Intel’s planned semiconductor plant in Magdeburg. The project was announced as a major strategic investment in Europe’s technological sovereignty. Yet the company later postponed construction indefinitely amid changing market conditions.
Similarly, the German government and the EU approved around €900 million in support for Northvolt’s battery factory in Heide. The project was presented as a cornerstone of Europe’s electric vehicle supply chain. But the parent company in Sweden subsequently entered financial distress, leaving the long-term commercial viability of the project uncertain.
These examples do not prove that such investments will fail. But they reveal a deeper problem: governments increasingly celebrate competitiveness victories the moment subsidies are announced.
Where is the proof that billions in public grants improve the global competitiveness of firms such as Bosch, Siemens, Volkswagen, BMW or BASF? Where is the evidence that these subsidies will produce technologies that companies can commercialise successfully in world markets?
So far, the answer is uncomfortable: there is no convincing proof. What exists instead are glossy announcements, optimistic projections and a great many PowerPoint slides.
The Missing Ingredient: Market Discipline
The core issue is not whether governments should ever support innovation or strategic industries. Public policy can play a role in enabling new technologies, improving infrastructure, or addressing genuine market failures.
The real issue is the absence of market discipline.
Competitive economies depend on firms facing strong incentives to innovate, commercialise technologies quickly, allocate capital efficiently, and respond to international competition. When governments repeatedly intervene with large discretionary subsidies, these incentives weaken.
Instead of competing for customers, companies increasingly compete for political support.
Instead of proving commercial viability in markets, firms increasingly present themselves as strategically indispensable in ministries.
Over time, this dynamic risks creating a subsidy equilibrium in which firms adapt their strategies around public funding rather than around global competition.
That equilibrium is not unique to Germany. It is emerging across Europe as governments respond to geopolitical pressure, industrial competition from China, and large subsidy programmes in the United States.
But Germany’s role is particularly important. As Europe’s largest economy, its policy choices shape the broader trajectory of the European economic model.
Europe’s Real Competitiveness Agenda
If Europe truly wanted to strengthen competitiveness, the policy agenda would look very different.
The first priority would be improving the horizontal rules that shape competitiveness for every firm – regardless of sector or size. Tax systems, labour markets, contract law, and social security frameworks determine how easily businesses can invest, hire, innovate, and expand across borders. Yet many of these rules remain largely national, forcing companies operating across Europe to navigate a patchwork of legal regimes and administrative procedures rather than a truly unified market.
Closely linked to this is the need to finally complete the Single Market for services. Services markets remain deeply fragmented, preventing firms from scaling across borders. Regulatory duplication, inconsistent enforcement, and national licensing regimes continue to impose substantial costs on companies operating in multiple member states.
Second, Europe would finally create genuinely integrated capital markets. Compared with the United States, European firms still face structural financing constraints that make it harder to scale innovative companies and commercialise new technologies. Yet many of these constraints are themselves a consequence of Europe’s fragmented economic landscape. A truly integrated Single Market – with more aligned legal, regulatory, and supervisory frameworks – would already remove many of the barriers that prevent capital from flowing efficiently across borders.
None of these reforms are politically easy. Each of them challenges entrenched national interests, regulatory structures, and long-standing administrative arrangements.
That is precisely why they are repeatedly postponed.
The Theatre of Competitiveness
Europe today has developed highly sophisticated narratives about competitiveness.
Policymakers speak about industrial transformation, technological sovereignty, resilience, and strategic autonomy. Each new report promises to strengthen Europe’s economic position in an increasingly competitive global economy.
But narratives do not create competitiveness.
Markets do – when firms are subject to market discipline.
Competitiveness emerges when firms can scale across large integrated markets, when capital flows efficiently to new technologies, and when companies must constantly prove their viability under strong competitive pressure.
Europe still pursues a different path.
Instead of expanding market integration, Europe increasingly multiplies state aid and protectionist strategies. Instead of strengthening competition, it expands subsidy programmes. Instead of dismantling regulatory barriers, it adds new regulatory frameworks designed to manage industrial transformation.
The proposed Industrial Accelerator Act is a case in point. Marketed as a tool to accelerate European industry, it is more likely to accelerate something else – the bureaucratic management of European firms.
The result is a growing gap between Europe’s competitiveness rhetoric and its economic reality.
Germany’s expanding subsidy policies illustrate the risk particularly clearly. If governments continue to weaken market discipline while expanding industrial subsidies, Europe may end up with even more industrial policy but less industrial competitiveness.
And if that happens, the next flagship report explaining Europe’s competitiveness problem will already be writing itself.
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