By Alessandro Bertoldi, Executive Director of the Milton Friedman Institute
There is something profoundly contradictory about Europe’s economic debate. On the one hand, we say we are concerned because Europe is growing too slowly, losing competitiveness, and falling further behind the United States and China. On the other, we continue to build a regulatory system that makes it more expensive to invest, produce, innovate, and do business on our continent.
We cannot continue to complain about Europe’s weak growth while simultaneously standing in the way of the very people and businesses expected to generate that growth, nor should we consider the export of our poor practices a solution to levelling the playing field.
The Corporate Sustainability Due Diligence Directive, the now well-known CSDDD, is perhaps one of the clearest examples of this contradiction. It is a regulation built around that typically dirigiste belief that every economic or social problem must necessarily be met with a new obligation, a new control, a new procedure – oftentimes one based purely on precaution.
The result is predictable: costs rise, uncertainty increases, and businesses have less freedom to invest and compete.
What is interesting is that even Brussels now seems to have realized this.
And if anyone thinks this is merely the usual ideological battle waged by liberals like us against excessive regulation, they should listen to Mario Draghi. He is hardly a radical free marketeer, nor is he a theorist of the minimal state. Quite the opposite: Draghi is a man of the European institutions, an expression of the technocratic culture that has played a central role in building and managing the Union. And yet even he has put it in black and white: the problem exists.
And our decline persists.
In his report on competitiveness, Draghi warns that Europe faces a widening competitiveness gap, driven by slowing productivity growth, high energy costs, demographic pressures, and growing competition from the United States and China. And when presenting the Omnibus legislation last fall, the European Commission itself referred to his warning about the significant compliance costs generated by the CSDDD and the Corporate Sustainability Reporting Directive (CSRD).
Now is the time to take the issue seriously.
After all, the figures in the Commission’s simplification agenda speak for themselves. Brussels has committed to reducing administrative burdens by 25% for businesses overall and by 35% for small and medium-sized enterprises (SMEs).
An obvious question follows: if we need to reduce administrative burdens by a quarter—and by more than a third for SMEs—does that not suggest that we went too far in creating them in the first place?
The changes to the CSDDD make the problem even clearer. Required monitoring has been reduced from annually to once every five years. The maximum penalty framework has been lowered from at least 5% to 3% of net worldwide turnover. The requirement for companies to adopt and effectively implement climate transition plans has been removed, while the civil liability regime has been narrowed by eliminating the harmonized EU-wide approach.
Those were reasonable changes that amounted, implicitly, to an admission that the original framework was too intrusive. While such corrections are welcome, we cannot be satisfied with them because they are not enough.
The Omnibus package at least represented political recognition of the reality we have been warning about for years: there can be no economic growth without economic freedom, and competitiveness cannot be built by burying businesses under compliance obligations.
Yet the Omnibus does not solve the CSDDD’s fundamental problem. Even after the changes, companies are still required to conduct risk-based due diligence covering not only their own operations but also those of their subsidiaries and the activities of business partners connected to their supply chains.
For a company operating in international markets, this means dealing with enormously complex supply chains, hundreds or thousands of counterparties, different jurisdictions, and a resulting increase in compliance burdens and legal uncertainty.
These are difficult burdens to sustain.
The Commission itself has acknowledged that the CSDDD is being implemented in a “new and difficult context,” marked by trade tensions, geopolitical instability, and concerns about the competitive position of European companies.
Should we not, then, muster the courage to follow the argument to its logical conclusion: radical change is needed.
We cannot ask our companies to compete with the United States while simultaneously burdening them with costs that risk undermining their ability to compete. We cannot talk every day about European strategic autonomy and then make Europe a less attractive place to invest. We cannot call for growth with one hand while holding it back with the other.
Every cost imposed on a business ends up somewhere. It can mean lower investment, higher prices, less innovation, thinner margins, suppliers being pushed out of the market, or products simply no longer being sold.
The estimates cited regarding the CSDDD are striking: our allies in the United States could face nearly $1 trillion in compliance costs once the directive is fully implemented.
That figure should give even the most committed advocate of regulation pause. Should it really be surprising that the US administration may feel the way it does?
There comes a point at which the cost of accessing the European market can become so high that some companies may begin to question whether it is still worth selling certain products on our continent.
And it would not be only American multinationals paying the price for that decision. European consumers would pay it too.
Fewer companies willing to operate in our market potentially means less competition, less choice, less innovation, reduced access to essential products and supplies, and higher prices.
It is entirely possible to believe in environmental protection, corporate responsibility, and respect for rights while also believing that not every objective should be pursued through the growth of bureaucratic apparatus.
The market is not the enemy of sustainability—quite the opposite. Technological innovation, private investment, and competition can be extraordinarily powerful tools for achieving environmental and social goals. But for them to work, we must give innovators room to innovate.
Europe’s answer cannot always be the same: regulate, mandate, control, sanction. While Brussels is drafting another directive, somewhere else in the world someone is starting a company, raising capital, developing technology, and capturing a market.
Europe needs to rediscover a culture of economic freedom and, above all, an understanding of the limits of government intervention.
The European Commission has already taken a first step by implicitly acknowledging the excesses of the CSDDD’s original framework. Now it needs to show greater courage.
The provisions that create extraterritorial effects, impose open-ended compliance obligations, and unnecessarily increase the risks facing those who want to invest in Europe must be narrowed—and, where necessary, eliminated.
Brussels should therefore focus on growth, not on managing decline.
