20 December, 2024 by Paola Tamma and Alice Hancock in Brussels
The rules were meant to give certainty. To ensure Europe’s car industry hit the EU’s ambitious green goals, in 2021 lawmakers in Brussels set strict emission standards and an effective ban on new combustion engines by 2035.
But since then, “quite a lot has happened,” says Benjamin Krieger, secretary-general of the European automotive parts industry body Clepa. “There’s conflict, there was a pandemic.”
Energy costs have shot up, demand for electric vehicles has dropped and cheaper Chinese cars are flooding the market. Europe’s automotive parts sector has suffered 30,000 net jobs losses in the year to November.
The inflexible EU rules set up Europe’s car industry for failure, critics say. Since the regulations do not allow for plug-in hybrids or fuel-based range extenders that allow battery vehicles to go for longer, “many [companies] started to throw away the combustion engines business and put everything on e-mobility”, says Matthias Zink, chief executive of automotive technologies at car parts manufacturer Schaeffler.
The car rules, which the industry and several EU governments are now pushing to loosen, are just one piece of a legislative outpouring from the previous European Commission’s mandate that ended with elections in June. The EU executive proposed hundreds of laws governing the green transition, the financial industry and the digital world.
Now, conservative and far-right lawmakers across Europe accuse the bloc’s ambitious green and digital agendas of punishing citizens and businesses, as well as raising costs.
“The complexity of the current regulatory framework and the excessive reporting obligations are one of the biggest barriers to innovation and growth within Europe,” the centre-right European People’s party, the EU’s biggest political group, wrote in a recent paper on the car industry.
Having spent her first term as European Commission president driving the EU’s ambitious green agenda, Ursula von der Leyen looks set to spend the next five years rowing it back.
The slump of EU industry is not the only precipitating factor. The US President-elect Donald Trump has promised his own deregulation drive, appointing the billionaire entrepreneur Elon Musk as co-head of a new Department of Government Efficiency.
Diplomats and officials in Brussels fear that Musk will prompt a race to the bottom on regulation. European companies, meanwhile, worry that they are so entangled in red tape that they will fall even further behind their US counterparts.
“Do we need an Elon Musk for deregulation here in Europe? Well, I would leave the choice of personnel to those who are to take these decisions,” Krieger says. “But even the European Commission themselves, and Ursula von der Leyen, have said that there is merit in thinking about reducing the bureaucratic burden on industries.”
The US is also challenging Europe’s right to enforce its ambitious rules. For example, Trump’s vice-president JD Vance recently linked US support for the Nato military alliance to more benign EU enforcement of its platform moderation rules, which have pitted Musk’s X against Brussels.
“It is definitely a very strong point of challenge for the whole European Union,” says Czech transport minister Martin Kupka. “It will be necessary to follow and to monitor all steps on the side of the United States of America.”
For years, the EU has traded on the so-called “Brussels effect”: leveraging its power as the largest single market in the world to try and raise global standards. But that reputation is wearing thin as the administrative burden of complying with its rules takes its toll on companies in and outside the bloc.
Between 2019 and 2024, the EU produced 13,942 legal acts. By contrast, over a similar period, the US produced just 3,725 pieces of legislation and passed 2,202 resolutions.
“We created the legal framework and the targets during the last mandate,” says Stéphane Séjourné, the EU’s executive vice-president tasked with Europe’s industrial revival, adding that the challenge is to make those systems “a global standard”.
But critics argue that this is leading to a loss of competitiveness, especially if the US opts for even less and looser legislation. “Between getting stuck on the rules and the excess of ambitious targets, we are compromising the ability to be protagonists,” says Emanuele Orsini, president of Italy’s business lobby Confindustria. “Nobody will follow Europe’s example.”
The EU’s climate and environmental policies are the biggest source of frustration. Since June, member states and EU lawmakers have already agreed to postpone a landmark law to cut deforestation following complaints from trading partners, including Indonesia and Brazil, about too much bureaucracy. Even the Biden administration — much friendlier to Europe than Trump and Musk — warned Brussels in May that the deforestation law posed “critical challenges” to US businesses.
Another part of the EU’s climate law that has come under attack is its administratively complex carbon border tax, which requires importers to account for the emissions embedded in products they bring in. Then there are several directives that ask companies to account for and act on social and environmental abuses in their supply chains.
Reporting rules will initially only be compulsory for EU companies that have a turnover of above €150mn, but small and sometimes micro enterprises are forced to adopt the same standards in order to keep their clients.
Michel Ceyssens, the owner of a small soap and cosmetics manufacturer based in Belgium, says his family-run business has already received a request from the Belgian multinational supermarket chain Delhaize to report on their environmental impact. “We don’t need to do it,” he adds. “But if one of your major customers demands it, it’s clear that you have to.”
Ceyssens has invested in solar panels, electrified the company’s fleet, switched to LED lights and paid $1,350 to report the information to Delhaize. He has also spent €450 on consultancy fees and is concerned the system will become only more complicated and costly over time.
The commission has sought to simplify things by trialling a simplified version of the reporting system for smaller businesses. But even green-minded entrepreneurs find it difficult to comply.
The speed is gone, also the readiness of anyone to invest is so low . . . This is not a very good business environment
Stefan Borgas, CEO RHI Magnesita
“It’s totally not user-friendly,” says Max Arnold, who owns a printing business in Potsdam, Germany and volunteered to test it. Without the help of expensive consultancies, it takes months to understand, he adds, calling it “a regulation with no benefit.”
The reporting directive is “a total disaster”, agrees Stefan Borgas, chief executive of the FTSE 250 specialised refractory manufacturer RHI Magnesita. “It was put in place in order to tackle CO₂ emission reporting and it has ended up to be this massive monster . . . You have 1000 different things you should report.”
Because of regulations like this, it makes it harder to get projects off the ground in Europe, says Borgas. “The speed is gone, also the readiness of anyone to invest is so low . . . it’s so uncertain,” he adds. “This is not a very good business environment.”
The German government this month wrote to Brussels seeking to roll back some of the reporting requirements, which they say pose “unreasonable administrative burdens” to companies, according to a letter seen by the FT.
Von der Leyen is responding to the discontent with a promise to tackle the onerous reporting requirements in a new “omnibus” legislation due in late February.
One suggestion to combat deregulatory pressure from the US is to show that the cost of compliance with EU rules is less than the practice of having to put money aside for any litigation costs in the US, according to people with knowledge of the discussions.
The goal of the omnibus is to “ensure consistency and alignment on across different pieces of legislation in terms of definitions, requirements, because there are certain inconsistencies, there are certain overlaps,” Valdis Dombrovskis, the EU commissioner in charge of steering its new simplification drive, told the FT.
“There are groups which are very much in favour of simplification, if not the deregulation, and others which are more cautious. So we need to find the right balance,” he adds. “We are not moving away from our policy targets . . . but rather looking [at] how to [make] this less of a burden and less cost for the economy, in terms specifically of reporting requirements.”
Posting about his new position in the US government, the American entrepreneur Vivek Ramaswamy — appointed alongside Musk to lead the new Doge — says “the only right answer is a massive downsizing”.
One of the solutions proposed by the pair is for the government not to enforce environmental rules. “This would liberate individuals and businesses from illicit regulations never passed by Congress and stimulate the US economy,” they wrote in an op-ed last month in the Wall Street Journal.
The US Environmental Protection Agency is likely to be one of the first targets, having come into conflict several times with Musk over permits and restrictions for his many businesses. But it is not the only area that the SpaceX founder has in his crosshairs. Musk has often clashed with the Securities and Exchange Commission, the US agency that polices market manipulation, which is currently investigating his purchase of X, formerly Twitter.
Trump’s return is also expected to lead to an even looser approach to regulating US banks and other financial market actors, widening an already large gap with those in the EU that are subject to tighter standards.
Following the 2008 financial crisis, the EU implemented international banking standards — the Basel framework — across all lenders, while the US only applies that framework to a subset of international banks. This has given EU industry less liquidity, according to some critics.
“The EU’s prudential regulation — not replicated elsewhere — limits the EU capital available to finance innovation,” wrote Mario Draghi, former European Central Bank president, in a report on European competitiveness.
The final phase of the framework, known as Basel III Endgame, will come into effect in the bloc from January 1, 2025. But it is likely to be substantively watered down by the incoming US administration, leaving the EU, UK and other lenders at a disadvantage.
There is a need for more simple, less restrictive rules without giving up financial stability
Wim Mijs, CEO European Banking Federation
This “will make the strength of the US financial system even more competitive,” says Karel Lannoo, CEO of CEPS, a Brussels-based think-tank.
While the EU has already postponed parts of the new requirements related to investment banking by a year, a more substantial rethink is likely if the US fundamentally rewrites or rejects the rules altogether.
“This is not a race to the bottom where I would participate,” said Maria Luís Albuquerque, the EU’s new financial regulation commissioner, in October.
As a result, European banks are pushing regulators to review their own implementation of Basel III, and prudential requirements more widely.
“The EU’s regulatory approach has been on one hand successful [in preventing financial crises]. On the other hand, it has gone too far,” says Wim Mijs, CEO of the European Banking Federation. “There is a need for more simple, less restrictive rules without giving up financial stability.”
Calls for deregulation in Europe could also extend to nascent technologies such as artificial intelligence and Big Tech.
The EU’s Digital Services Act and the upcoming AI Act have been accused of smothering sectors that are barely in existence in Europe, which has a fraction of the tech investments, patents and global market share enjoyed by the US.
EU rules “create the risk of European companies being excluded from early AI innovations because of uncertainty of regulatory frameworks as well as higher burdens for EU researchers and innovators to develop homegrown AI,” Draghi wrote in his report.
“While smart regulation is essential to build long-term trust, it is the fragmentation and complexity of regulations that could create additional burdens for start-ups,” says Audrey Herblin-Stoop, head of public affairs at the French-based start-up Mistral AI.
But others argue that EU regulation in the field of AI is carefully designed to avoid stifling innovation. “The legislation in Europe is very smart in the way that the framework is proposed, because it is not a flat-out regulation for everybody . . . There is a lot of inbuilt flexibility that actually allows the legislation to go with the pace of AI,” says Sandra Wachter, professor of technology and regulation at the University of Oxford.
There are others who argue that Europe’s approach could be an area of opportunity. Christian Ehler, a German MEP, says that the uncertainty over the fate of current US President Joe Biden’s landmark decarbonisation bill, the Inflation Reduction Act, could encourage investors to look to the EU instead.
“The Trump administration’s economic agenda will bring about significant uncertainty for clean tech companies and investors in the US . . . The EU, remaining firmly committed to climate neutrality by 2050, stands to benefit,” he says.
Oxford’s Wachter agrees. “There’s so many tools that help new companies to come here, grow and get support. It’s a much more nuanced story than saying [EU regulation] is going to completely wipe out newcomers,” she adds.
This is the moment for the EU to either “quit or double down”, warns the EU’s Séjourné. “Either we win at the end of the five years and we will consider that Europe was a pioneer, or we will not be able to make our industries competitive in an international environment that has closed off,” he says.
“That’s why we don’t have the right to make mistakes during this mandate.”
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