Martin Borowiecki
Federico Giovannelli
Jan Stráský
OECD Economic Surveys: European Union and Euro Area 2025
Abstract
Productivity growth in the EU has been weak, reflecting persistent internal market barriers, rigid labour markets and a largely bank-based financial system. The latter fails to channel high saving rates into investment in young innovative firms. As a result, the EU lags behind the United States and increasingly China in innovation and adoption of new technology. Higher productivity can be achieved through a more integrated Single Market for capital, labour and services. This will require structural reforms to reduce internal market barriers and cut regulatory burden to strengthen competition and unleash business dynamism.
Since 2000, economic growth in the European Union has been driven by employment gains while labour productivity growth has weakened. As a result, the EU’s productivity gap vis-à-vis the United States has widened (Figure 4.1). While productivity growth has been stronger in some EU countries such as Sweden and Poland, many others have seen weak productivity growth. Going forward, population ageing, and the expected shrinking of the working age population implies that employment-driven growth will be more difficult to sustain, leaving the EU more reliant on improvements in productivity (André, Gal and Schief, 2024[1]).
Source: OECD National Accounts database; OECD Productivity database; and OECD calculations.
At the same time, high energy costs, global trade tensions as well as protectionist industrial policies raise risks to competitiveness. Some of the EU’s challenges are attributable to areas where the Single Market is not fully integrated yet. Limited market integration denies the scope for economies of scale of the type US and Chinese firms can benefit from (Letta, 2024[2]; Draghi, 2024[3]). Unduly restrictive regulatory barriers to firm entry and competition still prevail in many countries and sectors, hampering market integration and productivity growth (European Commission, 2023[4]; European Commission, 2023[5]). Similarly, a largely bank-based financial system, segmented along national lines, fails to channel high saving rates into investment in young innovative firms as well as in intangible capital-intensive sectors (Demmou, Stefanescu and Arquie, 2019[6]). As a result, the EU lags behind the United States and increasingly China in innovation, especially in high-tech sectors such as artificial intelligence (AI) (Fuest et al., 2024[7]). In addition, despite the relatively high skills of Europeans, Europe is missing skilled labour where it is most needed, reinforcing the need to improve labour mobility. This Chapter will review policies to strengthen productivity and will focus on Single Market policies. A deeper, more integrated Single Market can be achieved through structural reforms that reduce internal market barriers.
Weak productivity developments reflect a significant decline in multifactor productivity growth, or how efficiently labour and capital are used, and, since the global financial crisis, weaker capital accumulation (Figure 4.2, Panel A and B). EU labour productivity growth has been half a percentage point lower annually than in the United States since 2000. Euro area productivity performance has been weaker still, reflecting weak productivity growth in the largest euro area economies. In contrast, some northern as well as central and eastern European Member States saw stronger productivity growth, with the latter reflecting ongoing convergence. Nonetheless, productivity levels remain relatively low in central and eastern Europe (Panel C and D).
Note: Labour productivity is measured as real GDP per hour worked, USD PPP-adjusted. In Panel A, OECD average weighted by the number of hours worked. In Panel B, the EU aggregate includes 14 EU countries plus Norway, namely AUT, BEL, DEU, DNK, ESP, FIN, FRA, GRC, IRL, ITA, LUX, NLD, NOR, PRT, and SWE.
Source: OECD Productivity database; and OECD calculations.
The productivity slowdown has been broad-based across sectors, although industry structure can partly explain productivity differences (Figure 4.3). Compared to the United States, a noticeable development has been weaker productivity growth in information and communication as well as professional services, two sectors that heavily use digital technologies. This also reflects a greater ability of US firms to create and use digital technologies as well as their bigger size (van Ark, O’Mahony and Timmer, 2008[8]; Schivardi and Schmitz, 2019[9]). In contrast, the EU has failed to reap the benefits of digital technologies, which reflects that many European companies are too small and constrained by regulation to fully exploit new technology (see below).
Note: Labour productivity is measured as real value added per employee, chain-linked volumes 2015.
Source: Eurostat; BEA; and OECD calculations.
Overall, investment is relatively high as a share of GDP, reflecting high residential investment (Figure 4.4, Panel A). In contrast, productivity-enhancing investment, excluding housing, has expanded less dynamically than in the United States since the early 2000s and investment rates started to diverge significantly between the EU and the United States after the financial crisis (Panel B). The divergence was mainly driven by lower spending on intellectual property products, notably business R&D and information technologies, and encompasses all sectors but is particularly stark in the information and communication technology sector (Panel C and D) (IMF, 2024[10]; EIB, 2024[11]; OECD, 2025[12]). This reflects higher business R&D spending by US high-tech firms as well as their bigger size (Pinkus et al., 2024[13]). In contrast, business R&D spending in the EU is concentrated in medium-tech sectors such as the automotive sector.
Note: In Panel C and Panel D, machinery and equipment and weapons systems include transport equipment, ICT equipment (i.e. computer hardware and telecommunications equipment) and other machinery and equipment and weapons systems; while intellectual property products include computer software and databases, research and development and mineral exploration and evaluation.
Source: OECD National Accounts database; and OECD calculations.
Productivity growth of the most productive EU firms (or frontier firms) was slower than those of US frontier firms across all sectors since 2005, and especially so in information and communication technology (IMF, 2024[10]). While the EU is not specialised in ICT, a concern is weaker productivity developments in important medium to high‑technology sectors, including in the automotive sector and advanced machinery, reflecting lower innovation activity (Modery et al., 2021[14]). Lower innovation activity and specialisation in medium-tech sectors has contributed to the EU lagging the United States and, increasingly, China in innovation in frontier technologies such as artificial intelligence (Filippucci, Gal and Schief, 2024[15]; Fuest et al., 2024[7]; OECD.AI, 2024[16]). A factor behind weak innovation is low investment in young innovative firms.
The labour productivity growth of EU firms has also proven less resilient to economic shocks and rebounds from such shocks have been slower than for US firms. Labour productivity levels of frontier US firms stood 1.7% higher in 2014 than before the financial crisis in 2007. In contrast, labour productivity levels of frontier EU firms were 0.9% lower in 2014 than in 2007. Similarly, labour productivity of US frontier firms rose 1.9% above pre-pandemic levels by 2021. That is more than double the 0.9% rise in labour productivity of frontier EU firms (Figure 4.5, Panel A). The weaker productivity rebound of EU frontier firms may also reflect weaker business dynamism (see below).
Note: Panels A, B and C, calculations based on the methodology of Andrews et al. (2016[17]). Average labour productivity across 2-digit NACE Rev2 sectors using firm-level data. Labour productivity is defined as value added per employee between firms at the top 5% of the productivity distribution (EU “frontier”) and at the median (EU “medium performer”) within each detailed 2-digit NACE Rev2 sector across 20 EU countries for which firm level data is available. The median firm is in 99% of all EU sectors a small and medium-sized enterprise. Manufacturing refers to NACE Rev2 sectors 10-33 and services to NACE Rev2 sectors 45-82 (excluding the financial sector 64-66).
Source: OECD calculations using the Orbis firm-level financial accounts database by Moody’s/BvD (2024).
Weaker productivity growth can also be traced back to declining labour productivity growth of small and medium‑sized enterprises (SMEs, or the median firm) in the EU manufacturing sector since the financial crisis (Figure 4.5, Panel B). The fall in labour productivity of SMEs (or the median firm) in EU services was even more pronounced (Panel C). In contrast, service sector firms at the productivity frontier have continued to perform more strongly than other firms since the financial crisis, pointing to a slowdown in the diffusion of innovation and best management practices across firms (Andrews, Criscuolo and Gal, 2016[17]; André and Gal, 2024[18]). Other factors behind the growing productivity dispersion in services may include weak competition, winner-takes-all markets, and limited services market integration that denies EU firms the scope for economies of scale that US firms can benefit from.
Weak productivity developments also reflect an increasingly inefficient allocation of resources across firms (ECB, 2024[19]). The reallocation of labour to more productive firms (or allocative efficiency) within a sector has improved between 2000 and the financial crisis. Since then, however, allocative efficiency has weakened. Similarly, entry and exit rates of firms in Europe have declined (Figure 4.6, Panel A to C) (Cho et al., 2024[20]; Calvino, Criscuolo and Verlhac, 2020[21]; Calvino and Criscuolo, 2019[22]). More generally, job reallocation across sectors is also weaker during crises in the EU compared to the United States (Panel D). Much of this rising misallocation stems from rigid labour markets and persistent barriers to firm entry and competition that prevent capital and labour from reaching the most productive companies. Lengthy and inefficient insolvency proceedings may also keep unproductive businesses alive, further weakening productive reallocation. This may also have made the EU economy more vulnerable to economic shocks, which implied long-lasting effects on the structure and sectoral allocation of output.
Reducing regulatory barriers holding back productive firms from growing, and improving insolvency procedures for a faster exit of unproductive businesses, could help revive productivity growth and strengthen the Single Market (Zona Mattioli and Borowiecki, 2025[23]). Such reforms will also be important to raise the capacity of the EU economy to adjust to economic shocks. In addition, reforms that leverage new technologies such as AI will help to revive productivity growth (Filippucci, Gal and Schief, 2024[15]).
Note: Panels A and B, based on OECD DynEmp data for France, Germany, Italy and Spain. Average firm entry and exit rates in percentage of the business population based on firms with at least two persons employed. Entry is defined as the reported birth year in the micro-data when this year is prior to the sample period; otherwise, it is defined as the first year with positive employment. Exit is defined as the last year with positive employment. Large EU economies refer to the unweighted average of Germany, France, Italy and Spain. Panel C, allocative efficiency is the within‑industry covariance between firm size and firms' labour productivity following Olley and Pakes (1996). Firm size is defined as employment and labour productivity as value added per employee. The larger the (positive) covariance between firm size and productivity, the higher the share of employment that goes to more productive firms and the higher the industry productivity. All decompositions are computed within each 2-digit NACE Rev2 sector. The chart shows the employment-weighted average across sectors. Panel D, the reallocation index is calculated using year-over-year growth rates of employment from SIC industry classification.
Source: Garcia-Cabo Herrero et al., (2023) Sectoral shocks, reallocation, and labor market policies, European Economic Review, https://doi.org/10.1016/j.euroecorev.2023.104494; OECD calculations using the 2024 vintage of the Orbis firm-level financial accounts database by Moody’s/BvD; and OECD DynEmp - Measuring job creation by start-ups and young firms.
An important policy lever of the EU to raise productivity growth is by strengthening the Single Market. Market integration has raised intra-EU trade, competition, and investment, and hence economic growth more broadly (Kierzenkowski et al., 2016[24]; in ‘t Veld, 2019[25]; Felbermayr, Gröschl and Heiland, 2022[26]). A larger market offers firms the opportunity to exploit economies of scale. Lower barriers to mobility of labour and capital and the forceful application of competition policies raise the contestability of markets. This, in turn, is beneficial for business dynamism and innovation, and allows efficiency gains through reallocation towards the most productive firms. In addition, lower trade barriers and the harmonisation of legislation and standards reduces costs for businesses (Sondermann and Lehtimäki, 2020[27]). The proper functioning of the Single Market entails competition policy, innovation policy, energy policy, transport policy, telecommunication policy, and trade policy. In addition, the EU is responsible for capital market integration and cross-border banks. Taxation is mainly the domain of EU countries, although the EU sets minimum tax rates for value added tax (VAT) and energy, including transportation and heating fuels. The EU also encourages cooperation between EU countries to combat tax evasion. For example, the Directive on Administrative Cooperation aims to strengthen the automatic exchange of tax information, and the OECD/G20's Pillar Two have been transposed in EU law.
In the 1990s, the EU’s Single Market for goods was furthered through extensive deregulation. EU countries opted for the Single Market for goods as the inefficiencies of fragmented national markets outweighed the regulatory costs of the Single Market. Since then, however, a growing body of EU regulation has added to the regulatory costs of the Single Market. This reflects that regulation in digital sectors, including the General Data Protection Regulation of 2016, as well as sustainable reporting and due diligence rules of 2024, to name a few, have not been subjected to rigorous economic impact assessments. Recent regulations were added on top of older ones, leading to a higher combined burden of regulations that does not incentivise firms to invest and raise productivity. When it is well‑conceived, EU regulation can reduce compliance costs for businesses operating within the Single Market compared to the costs of adhering to 27 different national laws. Hence, to reduce the regulatory cost of the Single Market, the EU should ensure proper economic impact assessment of regulations.
Liberalisation of services markets happened later than for goods markets. The Services Directive established a single regulatory framework for the Single Market for services in 2006, covering around two-thirds of services activity within the EU or 45% of EU GDP. This includes retail, construction, and tourism. Services outside the scope of the Directive benefit from EU specific regulation, including financial services, network services (energy and telecommunications), and transport services. To strengthen labour mobility, the Professional Qualifications Directive creates rules to facilitate the recognition of qualifications between EU countries.
Despite progress in the Single Market for services, however, market integration remains lower than for goods. EU countries have retained a large room for manoeuvre in the implementation of the Services Directive. This reflects that some services are not tradeable, cultural and language barriers (Parsons and Smith, 2022[28]; Jacobs, Parsons and Moland, 2024[29]) but also that the aim of the Services Directive is not to fully harmonise national regulations. Instead, it aims at removing disproportionate, discriminating or unjustified barriers.
However, some EU countries are far less ambitious in the implementation of the Services Directive than others. Mutual recognition of qualifications remains limited for professional services, hindering cross-border labour mobility and the provision of services. As a result, cross-country differences persist in regulations for professional services, retail, telecommunication, and transport services, among other sectors (Letta, 2024[2]). Such barriers to entry and growth protect the rents of incumbents, constrain the entry of young innovative firms and hamper efficient reallocation of resources to the most productive firms (Sorbe, Gal and Millot, 2018[30]).
Importantly, a fragmented Single Market puts European businesses at a disadvantage as firms operating in larger markets can more easily build economies of scale and tend be more innovative and productive (Draghi, 2024[3]). The EU needs a more integrated Single Market with fewer regulatory roadblocks for companies to scale up and innovate. As EU countries have a key role in implementing Single Market Law, the EU could help facilitate closer collaboration between EU countries to help identify best practice that reduces burdens and drive consistent approaches across the Single Market (see below).
In 2025, the EU announced a simplification of state aid rules for clean technology and energy-intensive manufacturing until 2030 to support national industrial policy in these areas. Specifically, the proposed new Clean Industrial State Aid Framework aims to make state aid rules simpler and more flexible to incentivise national investment in areas aligned with EU priorities (Box 4.1). The new state aid framework would build on the experience of the Temporary Crisis and Transition Framework, which temporarily loosened state aid rules during the COVID-19 pandemic and the energy crisis using the flexibility foreseen in the Treaty to remedy serious economic disturbances.
However, these simpler and more flexible state aid rules for strategic sectors, together with stronger use of national industrial policy, could result in a relaxation of state aid rules, which can have implications for competition and the level playing field in the Single Market (OECD, 2023[31]). For instance, countries with more fiscal space may provide excessive support, putting at risk the integrity of the Single Market. This increased flexibility may also weaken incentives for greater coordination across national-level initiatives in line with EU objectives (Hodge et al., 2024[32]; Piechucka, Sauri-Romero and Smulders, 2024[33]). To protect the Single Market, the EU should refrain from a continued relaxation of state aid rules. The existing EU legal framework, particularly the 2022 Guidelines on State aid for climate, environmental protection and energy, already allows for green subsidies justified by environmental externalities and climate protection. If the EU engages in industrial policy, a European scope and stringent cost‑benefit analysis can be most efficient (see below).
Industrial policy has been partly motivated by the perceived need to increase economic security and resilience in the context of geopolitical fragmentation, and substantial intensification of industrial policy action globally. However, there are trade-offs between efficiency and resilience. On the one hand, protection of national incumbents may slow down productivity and structural change. On the other hand, economic security and resilience are important in the context of growing geopolitical risks, such as in security of supply of critical materials. Some forms of national industrial policy can have positive cross-border spillovers if they are motivated by well-defined market failures such as support for security, new technologies and decarbonisation. This requires non-distortive industrial policy that fosters innovation and competition, avoids favouring incumbents, and emphasises policy evaluation. Hence, design and implementation of such policies should be considered carefully through a cost‑benefit analysis and follow-up evaluations, including Single Market implications (Millot and Rawdanowicz, 2024[34]). Moreover, the existing state aid framework already allows support for industrial policy in cases of well‑defined market failures, such as new technologies. A way to minimise the trade-off between industrial policy and productivity would be to finance industrial policies from EU funds.
Industrial policy can pose risks to third countries by distorting markets, harming innovation, and raising prices. These risks grow when competition is limited and protectionism rises, potentially undermining market contestability and the rules-based trading system. In this regard, industrial policy need not restrict competition. The EU should aim to continue supporting international cooperation and rules-based trade (Millot and Rawdanowicz, 2024[34]).
Industrial policy is mostly national and not aligned with EU priorities. Despite the EU’s strategy to support decarbonisation and innovation (Box 4.1), most EU countries continue providing environmentally harmful fossil fuel subsidies such as tax exemptions and deductions for diesel. Public subsidies are also mostly allocated to firms operating in low and medium-technology sectors, with the exception of the Nordic countries (EIB, 2025[35]). The focus on national priorities comes with the risk of spreading support too thinly over too many sectors and underfunding EU priorities such as security and the energy transition.
National industrial policy also fails to take advantage of the economies of scale of the Single Market. For instance, some countries include environmental conditions in their support for electric vehicles, while others subsidise Chinese vehicles which already received subsidies in China. These disparities give inconsistent signals to car manufacturers.
To better align national spending with EU objectives, the Commission announced a new Clean Industrial Deal in February 2025 (Box 4.1) (European Commission, 2025[36]). The Commission also proposed a new Competitiveness Coordination Tool to coordinate with EU countries on investment in selected key areas of strategic importance and of common European interest. Higher levels of EU funding for such investment, including the announced Competitiveness Fund, aim to enhance alignment between national and European policy objectives. However, previous experience with the Net-Zero Industry Act suggests that prioritisation could be strengthened, with about 50 sectors deemed as strategic (European Commission, 2023[37]).
The ‘Competitiveness Compass’ of January 2025 is a set of proposed measures to raise productivity and competitiveness and follows up on the recommendations of the Draghi report (Draghi, 2024[3]). It includes, among other things, the following policy proposals:
In the next multiannual financial framework starting in 2028, a new European Competitiveness Fund will be formed, funded from the EU budget. The Fund will establish an EU-level investment capacity that will support national investment in EU strategic priorities to enhance European competitiveness, including research and innovation, energy-intensive manufacturing, and strategic technologies such as AI, clean tech, biotech and space, in return for EU countries’ commitment to reforms.
Innovation policy: The Commission proposes the establishment of a European Code of Business Law or “28th legal regime” that co-exists with national corporate law. In addition, measures to strengthen venture capital for start-ups include the European Investment Bank’s scale-up TechEU investment programme and the European Tech-Champions Initiative 2.0. The EU Startup and Scaleup Strategy will address barriers faced by startups, including access to finance, markets, talent, infrastructure and harmonised innovation policy. The European Innovation Act will address the regulatory framework applicable to innovative companies, in particular startups and scale-ups, to reduce administrative burden. A European Research Area Act will focus on aligning EU R&D funding with strategic EU priorities. The AI Continent strategy and the EU Cloud and AI Development Act aim to encourage private investment in AI infrastructure.
Competition policy: The Commission announced that it will simplify state aid rules for clean technology and energy-intensive manufacturing to incentivise investment until 2030 (Draft Clean Industrial State Aid Framework or CISAF). CISAF is currently in public consultation and sets out the conditions under which state aid for certain investments supporting the objectives of the Clean Industrial Deal will be considered compatible with the Single Market and state aid rules, notably in clean technology and energy-intensive manufacturing. It is planned to be adopted for June 2025, after closing the public consultation, and will build on the experience of the Temporary Crisis and Transition Framework (TCTF), which loosened state aid rules during the COVID-19 pandemic and the energy crisis. As in the TCTF, the proposed state aid rules would ease standard requirements, like the mandatory bidding process to allocate state aid for less mature clean technologies such as hydrogen. In addition, mandatory open tenders would not be required anymore for state aid supporting investment in the decarbonisation of energy-intensive manufacturing, with view to accelerating the use of state aid by EU countries. The Commission will also revise guidelines for assessing mergers, giving more weight to investment considerations to ensure that innovation and resilience in strategic sectors are given adequate weight. Competition policy will also promote a simpler and faster assessment of Important Projects of Common European Interest (IPCEIs), although further details were not announced. A Digital Networks Act will aim to enhance harmonisation of national spectrum assignment, giving greater weight to investment considerations vis-à-vis competition concerns.
Industrial policy and decarbonisation: Under the “Clean Industrial Deal”, the Commission proposes to establish an Industrial Decarbonisation Bank, aiming for EUR 100 billion (or 0.6% of EU GDP) in funding from the EU budget, funded by budgetary reallocations from the Innovation Fund, parts of EU ETS revenues and the investment programme InvestEU. The Bank will be placed within the governance of the future Competitiveness Fund (see above). It also announced an increase in the amount of financial guarantees that InvestEU can provide to support investments so as to mobilise up to EUR 50 billion (or 0.3% of EU GDP) (European Commission, 2025[36]). The Clean Industrial Deal also includes the sharpened use of trade defence instruments in sectors exposed to unfair global competition, and public procurement rules with EU content requirements. The Commission will also recommend EU countries to incentivise energy investment via depreciation rules and tax credits. The industrial action plan for the automotive sector encourages more competitive and resilient automotive supply chains, stronger uptake of electric vehicles and autonomous driving. It will also grant car producers more flexibility to meet CO2 emission targets in the coming three years without changing the actual targets (European Commission, 2025[38]). A forthcoming review of the Carbon Border Adjustment Mechanism will look into extending carbon levies on non-EU importers further into downstream sectors.
Energy policy: The Action Plan for Affordable Energy will provide EUR 0.5 billion in guarantees for the European Investment Bank to counter-guarantee long-term power purchase agreements undertaken by companies. The Commission will provide EU countries with recommendations to lower electricity taxation and guidance on network tariffs with a view to lowering them for industry. The Plan also includes measures to facilitate permitting of renewable projects and electricity grids. EU countries are encouraged to use contracts for difference auctions to allocate renewable capacity, thus providing a government-guaranteed price floor and price cap for renewable energy, while the Commission will advocate for an EU-wide auction framework for hydrogen and other new clean technologies. A review of the Emission Trade System in 2026 will analyse whether to include carbon removals to compensate for emissions in hard to abate sectors, including energy-intensive industry and agriculture.
Trade policy and economic security: Trade diversification with a wide range of countries and regions will be pursued through classical free-trade agreement such as the EU-Mercosur Agreement and the EU-Mexico Global Agreement, among others, as well as new types of trade instruments, such as the Clean Trade and Investment Partnerships and the Sustainable Investment Facilitation Agreements. The Economic Security Strategy from 2023 identified ten technologies critical for the EU’s economic security, including AI, quantum technologies, and biotechnologies, and proposed increased scrutiny for foreign investment under the EU foreign subsidies regulations, export controls and outward investment monitoring. The Security Strategy also supports risk assessments related to the resilience of supply chains, critical infrastructure, technology leakage and economic coercion. The Critical Raw Materials Act facilitates shorter permitting processes for rare earths, such as lithium, and envisages joint purchases, stockpiling and import diversification of rare earths.
Reducing red tape: Between 2024 and 2029, the objective is to reduce administrative burdens on businesses by 25% in terms of costs, and 35% for SMEs, starting with a review of sustainable finance reporting and due diligence rules. Companies will only have to report on their direct suppliers and business customers. Smaller EU companies will be exempted from the carbon border tax. There will also be a push for stronger digitalisation of business procedures, including moving reporting online.
Reducing internal market barriers: The Single Market Enforcement Taskforce will be reinforced to tackle more effectively the most significant barriers within the Single Market that hinder the EU's competitiveness.
Deepening capital markets: In early 2025, the Commission presented a Strategy on a Savings and Investments Union with measures to mobilise private savings for long-term investment and ease access to equity finance, including via a blueprint savings and investments account and actions to strengthen the uptake of private and occupational pensions, and more unified EU supervision of capital markets such as larger stock exchanges and post-trade financial infrastructure. These efforts complement ongoing work aimed at the harmonisation of insolvency frameworks, and the harmonisation of tax frameworks for cross-border investment.
Source: European Commission (2025[39]).
The EU’s state aid framework allows supporting national industrial policy in line with EU objectives, notably through the Important Projects of Common European Interest (IPCEI). These projects support investment in advanced technologies, R&D, innovation, first industrial deployment and key infrastructure, provided they have a European relevance and do not cover mass production or commercial activities. EU countries are in the driving seat as they propose projects to the Commission. The Commission ensures through competition analysis that any potential distortions of competition are minimised. More generally, industrial policy should not protect incumbents from competition, which would be negative for productivity (Millot and Rawdanowicz, 2024[34]).
4.4.1. Reducing the regulatory burden
When it is well-conceived, EU regulation can reduce compliance costs for businesses operating within the Single Market compared to the inefficiencies of fragmented national regulations. There also seems to be a positive international impact as EU product standards have in many fields become global standards, reducing compliance costs for businesses.
However, a growing regulatory burden is constraining business dynamism. In Germany, for instance, the total costs of bureaucracy incurred by the corporate sector is estimated at 0.7% of GDP per year. More than half of the costs of red tape in Germany are related to EU legislation (Falck et al., 2024[40]). In the EU, about 61% of firms surveyed by the European Investment Bank identified regulatory frameworks as a major barrier to long-term investment, and about 86% of firms employ staff to deal with regulatory compliance with an associated cost of 1.8% of turnover. Regulatory costs increase to 2.5% of turnover for SMEs (EIB, 2025[35]; EIB, 2024[41]). Recent years have seen new EU legislative acts for money laundering and sustainable reporting, due diligence rules, data protection, policing of online content, AI, and digital services. This suggests that the combined burden of all regulations has increased.
In response, the European Commission has proposed to simplify sustainable finance reporting and due diligence rules, and exempt smaller companies from the carbon border tax (European Commission, 2025[39]). To effectively reduce the combined burden of all regulations (and directives), the European Commission has announced a review of the entire body of EU legislation that has grown over the past decade to simplify and streamline documentation requirements and reporting obligations (European Commission, 2025[42]). The proposed Omnibus Simplification Package, announced in early 2025, aims at streamlining corporate sustainability reporting and the Carbon Border Adjustment Mechanism (CBAM), among other things, while maintaining the EU’s sustainability goals (European Commission, 2025[43]).
The European Commission announced it aims to reduce administrative burden for businesses by a quarter, and for SMEs by 35%, by 2029 (European Commission, 2025[42]). In 2021, the Commission already adopted the “one in, one out” approach offsetting new EU regulations by equivalently reducing the number of existing regulations (European Commission, 2021[44]). To flank the “one in, one out rule” and support burden reduction efforts, the Commission has announced a suite of new tools, including implementation dialogues with stakeholders and reality checks with practitioners in companies.
To better manage the flow of new rules and avoid unnecessary burdens in the first place, all regulatory proposals (and directives) should be accompanied by rigorous cost-benefit analysis as discussed above, including a list of reporting obligations. Currently, cost-benefit analysis of draft legislation is not rigorous as it typically does not provide a clear comparison of all policy options in terms of effectiveness and efficiency, making a solid comparison of options and justification of the preferred set of measures difficult (European Commission, 2024[45]). The total net economic cost of new regulation should be less than zero for the coming years to reduce the combined regulatory burden that has grown over the past decade. Given their key role in the EU legislative process, the Council of the EU and the European Parliament need to contribute to the burden reduction effort by assessing the impacts, including costs and benefits, of their substantive amendments.
The EU Corporate Sustainability Due Diligence Directive introduced due diligence obligations on large companies, requiring them to carry out human rights and environmental due diligence in their own operations and supply chains. Beyond the Directive, a range of other EU laws integrate due diligence expectations, often with OECD standards as the basis, while differing on some aspects. Such differences can increase compliance costs for businesses. Effective international coordination and exchange among policy makers is important to reduce compliance costs and duplication.
The growing body of regulation is also constraining the predominantly smaller European companies to fully exploit new technology (Figure 4.7). The General Data Protection Regulation (GDPR) governs how the personal data of EU residents may be processed and transferred. The Digital Services Act ensures, notably, policing of online content, and the AI Act sets out a clear set of risk-based rules for AI developers and deployers regarding specific uses of AI (European Parliament and European Council, 2024[46]). Part of this regulatory trend in digital technologies reflects a stronger emphasis on consumer protection than on innovation. While consumer protection is important, compliance costs for businesses are high. For instance, the GDPR is estimated to have reduced profitability for smaller high-tech firms by up to 12% in addition to its costs in terms of lower innovation, although it has facilitated services trade (Frey and Presidente, 2024[47]; Frey, Presidente and Andres, 2024[48]; EBRD, 2024[49]).
Moreover, the national implementation of the GDPR has led in some instances to diverging rules across EU countries, adding to compliance costs. For instance, national rules differ with regard to the processing of biometric data or data concerning health. An additional factor behind higher compliance costs is diverging interpretations of the GDPR by national data protection authorities (European Commission, 2022[50]). The European Commission acknowledged in 2024 the compliance costs for SMEs and called for intensified efforts to support SMEs’ compliance with GDPR, including through guidelines and compliance tools provided by data protection authorities (European Commission, 2024[51]).
Share of employment accounted for by companies with less than 250 employees
Note: Data for the United States refer to employees only in 2015, the latest year for which data is available.
Source: OECD Structural business statistics by size class and economic activity (ISIC Rev. 4) database; and OECD calculations.
The EU AI Act will be fully applicable in 2026. A structured set of AI guidelines is important for both advancing the technology and ensuring that risks for workers and consumers are appropriately addressed. An AI regulatory framework also helps develop a market by creating trust. However, it is important that the EU remains vigilant that the AI Act does not result in an overly restrictive framework, so that the AI related productivity gains in areas such as autonomous vehicles, education, and health are not unduly hampered. Other countries are following a more hands-off approach, where AI technologies are regulated after they are being introduced. In the United Kingdom, for instance, sectoral regulators issue AI-specific guidance to regulated entities in line with the government’s voluntary guidance (Department for Science, 2024[52]). Similarly, the EU’s well established sectoral standards organisations could help understand the economic effects of AI based on accurate, up-to-date information about its actual capabilities, laying the ground for regulation grounded in experience (Kilian, Ebel and Jäck, 2025[53]).
In this regard, the OECD recommends reviewing and adapting AI regulatory frameworks to encourage innovation and competition (OECD, 2024[54]). As AI is still a new technology, regulations must be crafted pragmatically to minimise unintended consequences while incentivising innovation. Hence, more agile regulatory frameworks are needed as new AI models have the potential to be deployed for countless purposes, many not initially foreseen in development. There was an impact assessment of the AI Act but not about reporting obligations and reporting requirements. The Commission has already committed itself to reviewing the AI Act in 2029. This is welcome as the upcoming review offers an opportunity to assess costs and benefits of reporting obligations and reporting requirements. A similar review should be conducted for the General Data Protection Regulation.
Digitising administrative procedures can create greater efficiency and effectiveness while raising public trust in the EU. Half of EU citizens perceive the EU bureaucracy as burdensome and about a third of EU citizens ask for more digital services and more user-friendly e-government services (European Commission, 2023[55]). Only seven EU countries provide e-government services above the OECD average, with Estonia and Demark at the top, while most others are digital laggards (OECD, 2025[56]).
The Commission’s Your Europe online portal provides access to national electronic procedures for businesses, including requesting business permits, registering employees for pension and social security, paying social security contributions, and declaring corporate tax. It is the Commission’s most visited online portal, with 32 million visitors in 2023. Time spent by businesses on administrative procedures from other countries has fallen from an average 2 ½ hours to four minutes when they use the portal.
The EU plans to further ease business registration in 2025 with an EU-wide company certificate, the reduction of certified translations, and fully implementing the once-only principle where citizens and businesses will need to provide their data only once to public administrations. That once-only principle is currently being rolled out with the establishment of the Once-Only Technical System. When the onboarding of some 80.000 national authorities across the EU will be completed, users of online procedures will be able to request that documents needed for the procedure are transferred directly from the authority that issued it to the authority requiring it. The Once-Only Technical System has been proven to reduce costs and time for businesses by half.
However, while about 60% of national administrative procedures that EU countries are required to make available online are fully available online, only about 20% are also accessible for cross-border users, including the transmission of documents from another country (European Commission, 2023[57]). Thus, there is a need to make more procedures available online, especially for cross-border users. Eventually, the EU should ensure that EU countries post all administrative processes online by default to encourage the uptake of e-government services and reduce compliance costs.
4.4.2. Bolstering market integration of services
The Single Market offers EU businesses the scope for economies of scale of the type US and Chinese firms benefit from. However, the level of European integration, especially in services, remains insufficient. Intra-EU trade in services accounts for only about 16% of GDP compared with more than 42% for goods in 2023 with no sign of catching up, although presumably many services are less suited to trade than goods. This comes despite the much larger size of the EU services market (Figure 4.8, Panel A and B). Similarly, cross-border establishments accounted for only 10% of output (less net exports) in services in 2018. What is more, extra-EU trade in services has surpassed intra-EU trade in services since the departure of the United Kingdom from the Single Market in 2020 (Panel C). This reflects the relative importance of EU-UK trade in financial and IT services. There is a need to step up efforts towards further deepening the Single Market in services to boost productivity.
Progress in reducing internal market barriers in service sectors has been slow over the past decade. As a result, more regulated services sectors such as retail and professional services show lower market integration (Figure 4.9). Firms in legal services face the highest regulatory barriers, while retail sectors saw an increase in barriers (European Commission, 2021[58]; European Commission, 2022[59]). Overall, 60% of regulatory barriers present in 2002 were still present in 2022 (European Commission, 2022[60]). This reflects that many EU countries implemented the EU Services Directive in national law with limited ambition, and thus foregoing the full potential of streamlining national services regulation (OECD, 2025[61]). As a result, rules differ across countries, including legal form requirements and territorial restrictions on retail. Such fragmentation increases the administrative costs and procedural times for businesses, and denies businesses the scale benefits of the Single Market (European Parliamentary Research Service, 2019[62]; European Parliamentary Research Service, 2023[63]). To reduce internal market barriers, the EU should introduce common rules and Single Market clauses in EU legislation, and closely monitor transposition of EU legislation in EU countries.
Note: In Panels B and C, intra-EU and extra-EU trade integration refers to import and export volumes as a share of GDP. Data refer to the EU changing members' composition, EU27 from 2010 to 2012, EU28 from 2013 to 2019 and EU27 from 2020 to 2024.
Source: Eurostat; and OECD calculations.
Closer collaboration and sharing of evidence on regulatory costs (and benefits) between EU countries and the European Commission could ensure consistency and minimise burdens. However, only a minority of EU countries assess impacts of legislative proposals to inform their negotiating position. Moreover, since implementation of EU law is largely within the purview of EU countries, they are well placed to anticipate and flag to the Commission any potential challenges related to implementation, helping to keep proposals practical from the outset. Sharing evidence across EU countries can help identify best practice that reduces burdens and drive consistent approaches across the Single Market. This could also help avoid cases of gold plating, i.e., when countries introduce stricter regulations than required by EU rules, running against the objective of a Single Market. Yet, there are no specific information sharing mechanisms in place for transposition and only a handful of EU countries actively use each other’s or the Commission’s impact assessments to inform the transposition of EU directives (OECD, 2025[61]). The Commission should establish information sharing mechanisms for transposition to identify best practice and advocate for consistent application of such best practice across the Single Market.
Overall, there have been many initiatives to remove barriers to competition in the Single Market over the past years with limited impact. This may partly reflect a focus on soft prevention measures rather than enforcement by infringement action. The Single Market Enforcement Taskforce’s work on document requirements for the cross‑border recognition of qualifications is an example for the prevention approach (European Commission, 2024[64]). More recently, the Commission proposed the establishment of Single Market offices in EU countries (European Commission, 2023[65]).
Note: In Panel A, apparent consumption refers to production plus imports minus exports. The Product Market Regulation (PMR) indicator is a composite index that encompasses a set of indicators that measure the degree to which policies promote or inhibit competition in areas of the product market where competition is viable.
Source: European Commission (2022), "30 years of single market – taking stock and looking ahead"; and OECD Product Market Regulation database.
However, a question is whether new preventive initiatives will make a difference. Arguably, prevention is easier and less confrontational to prevent the creation of barriers as opposed to demanding EU countries to dismantle them. In general, however, EU countries seem to have low incentives to further reduce barriers, which may reflect lower infringement enforcement action by the Commission over the past decade (see below). Together with continued prevention, stepping up enforcement action via infringement procedures would contribute to putting the Single Market at the top of policy priorities.
The European Commission plans the establishment of a European Code of Business for smaller companies (European Commission, 2025[66]), following recommendations by Draghi (2024[3]) and Letta (2024[2]). Such a common corporate regime would harmonise rules for smaller businesses operating in the different EU countries under a so-called “28th regime”, and it would co-exist with national corporate business law. However, company size thresholds would penalise firm growth. Ideally, such a corporate structure could establish common EU-wide rules for all companies, irrespective of size, that are more attractive than national rules for business registration, insolvency, cross-border investment and cross-border trade of company shares, significantly reducing compliance costs.
The reporting framework for internal market barriers under the Services Directive is weak. Reporting obligations for EU countries only concern a limited number of barriers to business establishment. This includes restrictions on legal form or shareholders, minimum tariffs and number of employees. The limited scope of reporting requirements is reflected in a relatively low number of notifications, and national measures of other types, such as authorisation regimes, are often not notified so that the Commission and other EU countries or stakeholders cannot scrutinise those measures on compliance with Single Market law (Figure 4.10). Another factor that complicates public scrutiny is that there is no single notification entry point for EU countries as in the case of goods. All this leads to underreporting of internal market barriers.
Number of national regulation drafts notified to the Commission, 2024 reporting period
Note: 2024 reporting period goes from 1 October 2023 to 30 September 2024.
Source: EC Single Market Scoreboard.
A relatively straightforward way to raise reporting is to extend reporting requirements for barriers in goods markets to services. Importantly, business as well as other relevant local stakeholders should be alerted on time and have access to an easy online mechanism for comments on national legislation at an early stage. Currently, only few EU countries, like Denmark and Spain, consult stakeholders early in the policy process, before a broader policy direction has been set with legal draft legislation. Early consultations can help identify challenges and explore the right tools, including non-regulatory alternatives.
Moreover, few countries publish feedback on consultations, which could signal that comments are being given due consideration (OECD, 2021[67]). The lack of meaningful stakeholder consultation early on leads to more burdensome regulation. Announcements on laws and regulations should be also made in English to allow foreign companies to comment. Hence, reporting requirements for national services regulation should be tightened and a single online access point for stakeholder comments on national legislation should be established, as in the case of goods. Consultations on national services legislation should occur early, with the European Commission’s “Have Your Say” portal as a useful example.
The existing reporting framework for internal market barriers under the Services Directive does not provide details for a proper proportionality assessment (European Parliament, 2024[68]). This means that EU countries do not have robust guidance as to how to assess whether national rules are properly justified, proportionate and non-discriminatory. The Commission could provide a template for proportionality assessments that EU countries could apply to national draft laws or regulations, as it already does in the case of professional services. Hence, proportionality assessments should be made mandatory for notifications of national regulatory barriers to services and conducted by EU countries. Such assessments should also include economic impact assessments. The Commission could provide guidance to EU countries where necessary (OECD, 2022[69]). For instance, impact assessments including a cost-benefit analysis of national regulations would be useful and relatively inexpensive (see below).
4.4.3. Removing internal market barriers in retail
Within the Single Market, retailers are confronted with restrictions on establishment and day-to-day operations (Figure 4.11) (European Commission, 2018[70]). Restrictions to retail establishment amount to major entry barriers and include requirements regarding the shop’s size and location or the procedure to obtain a specific authorisation. Restrictions on day-to-day operations include restrictions on shop opening hours, sales promotions and distribution channels, sourcing of products, and retail specific taxes (European Commission, 2018[70]). Most of these restrictions are present in all EU countries, although some countries are more restrictive than others (Figure 4.12). Since 2018, only few countries have reduced regulatory restrictions, while their level has either remained unchanged or even increased in most other cases (European Commission, 2025[71]). This is despite the positive impacts of reforms on market dynamics, consumer choice and prices. Denmark and Finland, for instance, have introduced higher establishment thresholds and removed certain floor caps. Such reforms are likely to have a positive impact on consumer choice and prices (European Commission, 2018[70]).
The EU’s Service Directive prohibits some barriers on retail establishment such as economic needs tests and requires EU countries to evaluate the justification and proportionality of some others such as territorial restrictions, and the conditions for granting an establishment authorisation. However, EU countries often do not sufficiently assess the justification and proportionality of national restrictions to establishment and day-to-day operations of retailers. Thus, the European Commission should ensure that freedom of establishment as well as the relevant provisions of the Services Directive are well-implemented and enforced by EU countries.
Note: Panel A, the OECD PMR indicator is a composite index consisting of indicators that measure the degree to which policies promote or inhibit competition in product markets where competition is viable. Panel B, the Commission’s RRI shows the level of regulatory restrictions in the retail sector. The churn rate indicates the sum of birth rate and death rate of companies in the retail sector.
Source: OECD Product Market Regulation database; European Commission, Retail Restrictiveness Indicator; and Eurostat Business Demography database.
Note: The EC Retail Restrictiveness Indicator (RRI) shows the level of regulatory restriction in the retail sector across the EU.
Source: European Commission, Retail Restrictiveness Indicator (RRI); and OECD calculations.
Territorial supply constraints are a major non-regulatory barrier for retailers set up by large brand manufacturers, which often oblige retailers to buy stock from their national distributors (EuroCommerce, 2024[72]). This has a negative impact on competition and prices as retailers cannot seek the best price and offers EU-wide (European Commission, 2020[73]). The Commission updated the Vertical Block Exemption Regulation in 2022 to provide more clarity when territorial supply constraints resulting from agreements between companies constitute a barrier to the Single Market (European Commission, 2022[74]).
In addition, the Commission is constantly monitoring such anti-competitive practices. A recent example is the Mondelēz case, one of the largest global producers of chocolate and biscuits, which was fined by the Commission in 2024 for having prevented retailers from freely sourcing their products in EU countries with lower prices. The Commission also announced in March 2025 that it was carrying out new investigations in the drinks and personal care sector. Measures such as the whistle-blower tool, allowing individuals to alert the Commission about anti-competitive behaviour anonymously, can help alert about anti-competitive behaviour but they are not sufficient (European Commission, 2024[75]). Continued enforcement of competition rules will be important to tackle the misuse of territorial supply constraints.
However, territorial supply constraints occur also beyond the scenarios captured by competition law, i.e., when the company has a dominant market position or in case of an anti-competitive agreement. To identify such scenarios, the Commission launched a fact-finding exercise in September 2024 to map the occurrence of such restrictions in the different EU countries. As part of this exercise, the Commission also organised a stakeholder dialogue. The Commission should use the findings of this exercise and propose concrete measures in the upcoming Single Market Strategy.
4.4.4. Lowering barriers to professional services
Professional services providers continue facing a wide array of barriers when they want to establish themselves in another EU country. The recognition of professional qualifications is subject to heavy documentary requirements in many EU countries and requirements differ significantly across EU countries (European Commission, 2025[76]). This reflects that EU countries are competent to regulate professions, within the limits of non-discrimination and proportionality. Many professional service providers are also subject to a relatively high number of prior checks on their qualifications, which are lengthy procedures often lasting several months. As a result, recognition procedures remain costly and lengthy, and the mutual recognition of qualifications is also not yet fully achieved (European Commission, 2020[77]). Such restrictions negatively affect intra-EU labour mobility as regulated professions represent about 22% of the EU labour force (Figure 4.13). The Commission observed little progress in removing restrictions on professional service providers since 2017, with the level of restrictive regulations still being high for certain categories, notably lawyers, architects and engineers (European Commission, 2021[78]).
Note: Panel A, The EU restrictiveness indicator (EURI) measures the level of regulatory restrictiveness on a scale from 0 (least restrictive) to 6 (most restrictive) for the cross-border provision of services and the right of establishment for seven groups of professional services with a high share in EU firms’ intermediate consumption (the value of the goods and services consumed as inputs by a process of production) or cross-border mobility. Panel B, the OECD Product Market Regulation (PMR) indicator is a composite index that encompasses a set of indicators that measure the degree to which policies promote or inhibit competition in areas of the product market where competition is viable.
Source: EC Single Market Scoreboard; OECD Product Market Regulation database; and EC Regulated Professions database.
Countries can introduce restrictions on professional services providers based on public interest ground such as public security and public health. These restrictions need to be proportionate, i.e., they must be suitable and necessary to achieve the desired end. A positive development has been the 2018 Proportionality Test Directive, which requires EU countries to assess the proportionality of draft regulations for professions (European Commission, 2023[65]). The Commission provides EU countries with a standardised framework to assess the proportionality of such regulations. Furthermore, EU countries are encouraged to involve independent bodies, such as competition authorities, to ensure the objectivity and independence of proportionality tests. In certain countries this is already in place, with positive results. For example, the Italian competition authority and the Council of State in Luxembourg are requested to express opinions on the proportionality of new legislations regulating professions (European Commission, 2022[79]).
However, the Commission concluded in 2024 that a significant proportion of the prior checks of qualifications of professional services providers who intend to provide temporary services in another EU country raise doubts as to their justification and proportionality. Although EU countries committed to removing many of them, they proceed at different speeds (Figure 4.14) (European Commission, 2024[64]). Given the slow and uneven progress, the European Commission launched infringement procedures in December 2024 against 22 EU countries covering more than 250 professions. This is welcome and the Commission should follow up on the enforcement action to ensure that all unproportionate restrictions are removed.
Source: EC Single Market Enforcement Taskforce (SMET) Report 2022-2023; and EC Single Market Scoreboard.
4.4.5. Further liberalising network sectors
Market liberalisation of the rail sector is in progress. National incumbents still accounted for 86% of all commercial passenger rail transport in 2020 (European Commission, 2023[80]). Market liberalisation in freight is more advanced, with about half of all volumes carried by competitors (non-incumbents) in 2020. The high market share of national incumbents in passenger rail transport reflects that domestic services were only liberalised in 2020, ten years after the liberalisation of cross-border services. Still, many EU countries directly awarded as much as 100% of train kilometres for national incumbents under public service contracts in 2020, without a competitive tender (Figure 4.15, Panel A and B).
The lack of competition has led to generous public service compensations per passenger kilometre for national incumbents (Panel C). This comes despite the EU’s Fourth Railway Package, which requires that all public service contracts must be allocated via competitive tendering since 2024. However, data on competitive tendering for 2024 is not available yet, although the low share of competitively tendered domestic rail services in 2020 suggests that progress has been slow. The Commission should continue monitoring the liberalisation of the rail market and ensure that public service contracts are allocated via competitive tendering.
Source: European Commission, Rail Market Monitoring (RMMS).
The main barriers to further passenger rail market integration are of a technical nature. National signalling systems are still in place while the switch to the common European signalling system has been behind schedule (European Commission, 2023[81]). A faster transition to the European system would allow trains to run on all the lines. This, together with harmonised qualification and language requirements for drivers, would significantly reduce technical barriers for cross-border trains.
For cross-border connections, there is discrimination against foreign competitors when it comes to access to path slots, notably in about 13 EU countries where the infrastructure operator and the railway operator are not fully separated (European Commission, 2023[80]). Such integration within a holding company creates the wrong incentives for competition. To ease access to cross-border path slots, the Commission proposed to switch from national path slot allocations to a more integrated scheme across countries. The EU should implement such a cross‑border system of path slot allocations and ensure non-discrimination against competitors in access to path slots, both within EU countries and across borders.
Other barriers to entry include high track charges, high costs of rolling stock and ticketing. The EU aims to reduce costs of rolling stock by standardisation, setting EU-wide basic requirements for most common vehicle types that can be used in different EU countries. This is complemented by a unique EU-wide authorization process for rolling stock. However, the lack of secondary market for rolling stock may discourage market entry. The absence of an appropriate single digital booking and ticketing regulation is also a significant barrier to entry. The Commission is currently preparing an initiative that aims to enable ticketing solutions for passengers across different operators and borders.
Broadband prices tend to be lower and broadband services of higher quality in the EU compared to the United States (OECD, 2024[82]). This reflects a sound EU pro-competition framework, which in turn incentivises investment (OECD, 2021[83]). However, the Single Market for telecommunication remains in some respects fragmented. For instance, there are 27 different spectrum policies with sometimes lengthy spectrum assignment processes, inconsistent approach on spectrum assignment conditions and diverging licensing costs across countries (European Commission, 2023[84]). The lack of a consistent approach on licensing conditions, including spectrum caps or reservations, results in fragmentation and legal uncertainty. This may impair operators’ ability to expand their footprint across borders in the EU.
To harmonise regulation across EU countries, the European Electronic Communication Code of 2018 mandated common spectrum licensing conditions, such as licence duration, among many other regulatory measures (European Commission, 2018[85]). The Code is intended to be reviewed in 2025. With regards to spectrum management, well-designed and transparent licensing regimes encourage investment and foster innovation in mobile networks (OECD, 2022[86]). Hence, the EU should further enhance coordination of spectrum assignment policies, including harmonising license conditions such as the duration of licences and licensing costs.
4.4.6. Strengthening Single Market law and competition enforcement
Enforcement of Single Market law has weakened over the past decade. Between 2010 and 2023, the number of infringement cases opened by the Commission dropped by 47%, while the number of cases it referred to the European Court of Justice fell by 53%. In 2023, the Commission referred on average three cases per EU country to the Court of Justice, down from an average of 11 cases per EU country in 2000. The fall in infringement cases was not associated with a proportionate drop in complaints from citizens and businesses about low compliance with EU rules (Kelemen and Pavone, 2023[87]; European Commission, 2024[88]). To encourage stronger compliance with EU rules, enforcement should be strengthened. This entails stronger use of infringements procedures, and, in damaging instances, may entail a suspension of related national law at the onset of the infringement procedure. This should be followed by an in-depth investigation as under EU Competition Law where Member States have the right of appeal. An alternative would be a fast-track procedure to the Court of Justice.
The competition authority faces new challenges to competition that require reprioritisation of budget and staff. The Digital Markets Act and the Foreign Subsidy Regulation - two new instruments that came into force in 2023, saw a redeployment of staff from other competition instruments such as merger control and antitrust. This reduced resources for competition enforcement. At the same time, the EU continues to examine a relatively high number of mergers, which is welcome as they might otherwise not be examined by national competition authorities (OECD, 2024[89]). Over the past decade, merger control has focused on the very few notified merger transactions that threaten the proper functioning of the internal market, with 9 prohibitions out of a total 3 760 merger decisions adopted since 2015. This means that the Commission approved about 97% of all notified transactions, including 4.3% of merger cases approved with ex-post remedies. Competitive markets are essential to promote productivity and innovation, especially in view of rising industry concentration over the past decade (Calligaris et al., 2024[90]; Calligaris et al., 2025[91]). Thus, given limited resources, the competition authority should re-assess its priorities and, if needed, its resources should be bolstered. Prioritisation will also be important to address new competition challenges arising in digital markets and to respond to national industrial policy (Nicoletti, Vitale and Abate, 2023[92]).
The Proportionality Test Directive encourages EU countries to involve independent competition authorities in the proportionality assessment of national professional services regulations. For instance, the Italian competition authority is required to provide an opinion on the proportionality of the draft legislation (European Commission, 2022[79]). More generally, national competition authorities could play a more relevant role in assessing the anticompetitive stance of restrictions targeted under the Services Directive. Hence, the Commission should strengthen the role of competition authorities in the Services Directive, similarly as under the Proportionality Test Directive.
4.5.1. Deepening capital markets
Capital markets remain relatively underdeveloped, limiting access to funding for innovative companies for which bank lending is less suitable (Figure 4.16, Panel A). Underdeveloped capital markets reflect a lack of deeper pools of long-term capital provided by retail and institutional investors such as pension funds, hampering effective financial intermediation. This is despite the high saving rate of European households, with savings mostly kept in bank deposits with low returns (Panel B and C). The failure of high savings to flow into productive investment may be due to insufficient risk-taking by a largely bank-based financial system. Thus, shifting savings from bank deposits to long-term investment, including retail investment and pension assets, would help channel more capital to innovative firms and secure better returns. Another important element is improved financial literacy, as addressed by the Commission’s Strategy for a Savings and Investments Union.
In addition to efforts at the EU level, multi-country initiatives can enhance market integration in areas where EU legislation has limited reach—such as taxation, which remains largely under national jurisdiction. EU countries can coordinate their actions to help advance the creation of a Savings and Investments Union, complementing EU-level initiatives (see below).
While in most EU countries, private pensions and owner-occupied residential property benefit from lower marginal effective tax rates, taxation on other forms of savings follows different approaches (OECD, 2018[93]). Many EU countries still favour bank deposits with generous tax advantages compared to corporate bonds, shares or investment funds. For instance, Austria, Finland and Luxembourg provide tax relief on deposits in a tax-favoured savings account, up to a specified limit. In France, Livret A bank savings accounts are exempt from tax up to a deposit limit of EUR 22 950 in 2025. Similar tax exemptions for bank accounts at the holding stage apply in Austria, Belgium, Hungary, Luxembourg, Spain and Sweden. In other countries, like Sweden, retail participation in capital markets is encouraged via savings and investments accounts with favourable tax treatment.
While banks indirectly benefit from those tax advantages, they often do not offer other financial products of competitors, which may prevent broader retail participation in capital markets. This also constitutes a major entry barrier, entrenching banks’ incumbent position. In 2023, the Commission highlighted that more competition is needed in the distribution of retail investment products (European Commission, 2023[94]). In 2025, it announced a blueprint for tax-favoured savings and investments accounts as an alternative to bank savings to strengthen retail investment in capital markets (European Commission, 2025[95]). This initiative aims to build financial wealth and investment capital but may also increase competition in financial service offerings. To support entry in financial markets, the EU should encourage banks to offer financial products other than their own, for instance by introducing a blueprint for investment accounts. It will also be important to advocate for tax reforms by EU countries with a view to aligning the tax treatment of bank savings products with retail investment products.
There has been some progress on financial integration recently. EU countries agreed on simplifying withholding tax procedures, which will make cross-border transactions more tax efficient, although there is a long transition period until 2030 and EU countries with smaller capital markets can opt out. The European single access point will provide information on all EU listed firms for retail investors and the European consolidated tape will provide access to information on actual trading conditions, which is currently dispersed at different trading venues. At the same time, the Listing Act lowers prospectus requirements for listings. However, the Eurogroup acknowledged in 2024 that there has been little progress in reducing fragmentation of national regulatory and insolvency frameworks, while risk capital for scale ups remains limited (Eurogroup, 2024[96]).
Mobilising of household savings will be key. The pensions system, and particularly private funded pensions systems, can contribute to providing sufficient long-term capital to support productive investment (Figure 4.17). However, private funded pension systems remain underdeveloped in most EU countries, with the notable exception of some northern European countries. Denmark, the Netherlands, and Sweden, for instance, have introduced such private funded pension systems. They are organised as occupational pension plans where employers provide employees with pension plans as negotiated in collective bargaining agreements. Another option is auto-enrolment in occupational pension schemes as in Italy, Lithuania and Poland (European Commission, 2021[97]).
In this regard, in March 2025, the Commission announced forthcoming measures to encourage EU countries to promote auto-enrolment in occupational pension schemes based on best practice, and enhance the EU framework for occupational and personal pensions (European Commission, 2025[95]). In the longer term, pension reforms that support a stronger uptake of occupational pensions would help expand the retail and institutional investor base. As EU countries are responsible for pension systems, the EU could advocate for technical standards and reforms via the Eurogroup and the European Semester based on identified best practice.
Source: European Capital Markets Institute (ECMI); OECD National Accounts database; Eurostat Financial Balance Sheets database; OECD Financial Statistics database; and OECD calculations.
Household financial assets per capita, by type of asset, thousands PPP-adjusted, 2023
Source: Eurostat Financial Balance Sheets database; OECD Financial Statistics database; OECD National Accounts database; and OECD calculations.
Retail participation in capital markets is relatively low. EU households still hold a third of their assets in low-return bank deposits, compared to only 12% in the United States where households invest more in equity and investment funds with higher returns (Figure 4.16, Panel C above). Only Denmark, the Netherlands and Sweden – countries with large private funded pension systems, have a higher share of household assets hold in equity and investment funds. To broaden the retail investment base, the EU could collect best practices and advocate for reforms via the Eurogroup and the European Semester. Such an exercise could draw on the successful experiences in countries that offer tax incentives for retail investment, including tax deductions for private pension savings, such as in Denmark and Sweden (Box 4.2).
In this regard, the Commission proposed to introduce an EU-wide blueprint for investments accounts based on existing best practice, accompanied by a recommendation addressed to EU countries on the tax treatment of such investment accounts (European Commission, 2025[95]). Another factor behind low retail participation is low investor confidence following financial market boom and bust cycles in the 2000s. Hence, financial stability and consumer protection will be key to raise investor confidence. This entails reinforcing supervision (see below).
Almost all OECD Member States offer tax incentives for private pension savings (OECD, 2018[98]). Denmark and Sweden are successful examples where tax incentives for private pension savings and employer matching contributions have led to a strong uptake of private pension saving products.
The Danish and Swedish private funded pension systems date back to the 1990s. They are mostly organised as occupational pension plans that are negotiated as part of collective bargaining agreements. Importantly, employers provide contributions, which are, like other parts of salaries, fully tax deductible as expenses.
As in most OECD countries, pension savings contributions are tax exempt. In contrast, returns on investment are taxed. Returns on investment are however not subject to progressive income tax rates but rather to lower fixed tax rates of 15.3% and 15% in Denmark and Sweden, respectively. In comparison, other capitals gains are taxed at 27% in Denmark (up to 8 170 EUR a year and above that at 42%), and 30% in Sweden. To avoid early withdrawals, Sweden provides tax relief on contributions conditional on people not retiring before a certain age. In Denmark, a fixed tax rate of 60% applies to withdrawals before retirement age, although many occupational plans do not offer this opportunity of early withdrawal.
Source: OECD (2018[98]).
Low retail participation also reflects the small size and high costs of European investment funds (European Securities and Markets Authority, 2023[99]). The growth of investment funds is to some extent hampered by the fragmented regulatory landscape across the EU, including marketing registration requirements. This results from different national markets with national rules, but also national preferences and institutions. Fragmentation also reflects that the EU law regulating investment funds is a Directive, where countries have considerable room to introduce rules besides EU minimum standards. As a result, setting up an EU-wide fund has become economically unviable. The EU requires countries to remove such local requirements on cross-border funds (European Commission, 2019[100]). Despite this, EU countries maintained and even strengthen their requirements (Investment Company Institute, 2023[101]). Hence, the EU should ensure marketing registration requirements for cross-border investment funds are harmonised, for instance through regulations. Doing so would support the growth of investment funds and reduce costs for retail investors.
Preferential tax treatment of national bank savings products still poses a formidable challenge to the development of EU-wide savings and investment products. For instance, the EU introduced in 2022 the Pan-European Pension Product (PEPP) to pool private pension savings across EU countries. However, its uptake has been disappointing due to tax disadvantages compared to national bank saving products such as life insurance and private pension products, among other barriers (European Insurance and Occupational Pensions Authority, 2024[102]). The European Commission announced a review of the PEPP Regulation to increase its attractiveness and uptake (European Commission, 2025[95]). The differential tax treatment of long-term retail investment hinders cross-border portability. One way forward would be for a group of countries to test harmonised taxation rules for long-term investment products. For instance, Spain and six other EU countries (Estonia, France, Germany, Luxembourg, the Netherlands, and Portugal) have launched the European Competitiveness Laboratory in March 2025 to work on harmonisation of aspects related to long-term savings products, among other things. The initiative is open to all other EU countries. Cost-benefit analysis of investment tax frameworks by the European Commission would be useful and relatively inexpensive.
Regulatory changes are slow. Over the past decade, a common rulebook for capital markets has been developed. However, the regulatory process is lengthy, taking two to three years for a regulatory change as it involves the entire EU legislative process. Markets perceive this as too slow and bureaucratic, especially in case of changing framework conditions such as market circumstances, emerging risks, and technological innovations (European Securities and Markets Authority, 2024[103]). One way forward could be a more responsive regulatory approach. In the United Kingdom, for instance, the Financial Conduct Authority has the powers to develop and adjust technical rules and reporting requirements in light of changing market circumstances, resulting in more agile market regulation without compromising consumer protection. More generally, stronger cooperation between ESMA and the Commission will be important to deal with these technical rules in an efficient way.
The past decade has seen an upsurge in new EU legislative acts. The resulting common European rulebook for trading and consumer protection was needed to address pre-financial crisis vulnerabilities and adapt to innovations in capital markets. However, it has also increased the regulatory burden. In response, the European Commission has decided to simplify sustainable finance reporting and due diligence rules as discussed above (European Commission, 2025[39]). To effectively reduce compliance costs, the EU and ESMA should continue reviewing the entire body of capital market legislation that has grown over the past decade, with a view to simplify and streamline technical requirements and reporting obligations.
Despite recent harmonisation efforts of EU capital market regulation, supervisory practices differ, and national authorities interpret EU laws differently. Fragmentation along national lines is not conducive for the Single Market. Convergence in supervisory practice and rules would help reducing regulatory fragmentation and improving cross‑border investment. Such convergence in national practice would constitute an incremental approach to capital market integration. For instance, there is room to improve supervisory consistency between different national supervisors. To improve consistency of rules, more timely cooperation and joint supervisory work is needed among national authorities and ESMA, notably for larger, cross-border firms. This could take the form of mandatory supervisory colleges (Eurogroup, 2024[96]; European Securities and Markets Authority, 2024[103]). Hence, the EU could make supervisory colleges mandatory to enhance supervisory convergence. A question, however, is whether incremental changes will be sufficient to achieve a fully unified Single Market for capital.
Making sure that capital markets fulfil the function of a truly unified Single Market for capital, and provide better financial intermediation, might require a bigger push for more harmonised supervision. A single European framework for supervision of capital markets follows from the bigger ambition to truly unify the Single Market for capital. Moreover, recent geopolitical tensions that have resulted in increased capital inflows to the EU pose a challenge for supervision, but also a big opportunity in terms of Single Market and deeper capital markets. Going forward, continued geopolitical tensions might make it more attractive for companies and investors to seek safe havens in places where there is predictability, such as the EU.
However, making European capital markets more attractive requires a bigger push for simplification and efficiency. In the banking sector, for instance, the EU went for a unified approach to supervision and established a single European supervisor for larger banks following the financial crisis. This led to tangible benefits such as simplified supervision and rules. In capital markets, a more European framework could provide similar benefits of simplification, especially in cases where there are European-wide risks or where markets provide pan-European services (European Securities and Markets Authority, 2024[103]). A first step would be EU supervision of larger, systematic market actors and infrastructures with European dimension. This includes large pan-European stock exchanges, large pan-European asset managers, and large post-trade infrastructure. Hence, to unify supervision and spur deeper capital market integration, the supervision of such providers of EU-wide financial market services could be moved to ESMA.
4.5.2. Completing the Banking Union
Since 2010, the EU banking sector has undergone significant integration with the establishment of the ECB’s Single Supervisory Mechanism (SSM), the application of a single EU rulebook, and the Single Resolution Mechanism (SRM). EU banks can operate across the EU through subsidiaries and branches, benefiting from a harmonized regulatory framework. Despite this progress, there are few large, cross-border banks in the EU. Barriers to cross-border banking include a lack of common deposit insurance, and ring-fencing measures applied to each legal entity of the banking group by EU countries. These barriers reduce the scope of economies of scale. As a result, EU banks often do not match the scale of their bigger US counterparts (ECB, 2018[104]). To maintain the banking sector's strength, further market integration should be accompanied by a continued strong focus on financial stability and supervision.
A positive development has been the setting up of the bank resolution framework. However, it has been rarely used as EU countries prefer to handle bank failures at the national level via insolvency proceedings (Buckingham et al., 2019[105]). The hesitancy to use the resolution framework reflects higher and stricter bail-in capital requirements from creditors and investors compared to national insolvency proceedings. The Commission has proposed a package of reforms to the EU’s resolution framework to improve the application of the resolution tools for smaller and mid-sized banks, and to better protect depositors and reduce risks to public finances.
A resolution framework with a stronger financial backstop of the Single Resolution Fund (SRF) could provide a bigger budget for orderly bank resolutions and support cross-border bank expansion. However, the amended European Stability Mechanism (ESM) Treaty, which would make the ESM a backstop to the SRF, is currently pending ratification in one country (Italy). To support cross-border banks, the EU should ensure that the resolution framework is complemented by a stronger financial backstop of the SRF. This entails ratifying the new European Stability Mechanism (ESM) Treaty and implementing it.
Another barrier is a lack of an EU-wide deposit insurance scheme. This means that national sovereign safety nets remain the ultimate backstop for banks in times of crisis. However, national safety nets cement the sovereign-bank nexus that amplified the euro area crisis more than a decade ago. Hence, EU countries should agree on a common deposit insurance system. A way forward would be a step-by-step approach, agreeing on common injection of liquidity in a first step, and tackling loss absorption later on (ECB, 2024[106]). Importantly, a deposit insurance scheme needs to be complemented with strong market discipline to mitigate adverse incentives and a robust burden‑sharing framework between countries (see below).
Deepening the banking union requires reducing regulatory barriers that continue to hinder cross-border consolidation and competition. The overall supervisory framework for international banking groups is European, with the ECB’s SSM supervising international banking groups. However, national competent authorities can impose local capital and liquidity buffers on national units of banking groups and limit intragroup cross-border transactions. Such ring-fencing measures limit cross-border flows of capital and liquidity within a single banking group. A common deposit insurance scheme would render such ring-fencing measures unnecessary.
But waiving local capital and liquidity buffers would also require a robust and clearly defined burden-sharing framework between countries in times of crisis to ensure financial stability if a banking group encounters distress. This includes, for instance, the conclusion of intragroup support agreements, and making further steps to improve the credibility of single-entry point resolution strategies. Without such a harmonised crisis management framework, a premature easing of capital and liquidity requirements could potentially introduce financial stability risks.
In this regard, the Eurogroup statement of June 2022 provides a clear outline for advancing on the Banking Union, with strengthening the crisis management and deposit insurance framework as the next step. Another possibility is for banks to rely more extensively on branches. In this regard, the ECB’s suggests facilitating the use of branches embedded in the European Regulation on the Societas Europaea and the Cross-border Merger Directive (ECB, 2021[107]). Other barriers include overly restrictive transparency and due diligence requirements that hamper securitisation.
The European Commission projects labour supply to fall starting from the late 2020s despite expected increases in participation rates of older workers due to pension reforms (European Commission, 2024[108]; European Commission, 2024[109]). Declines in the EU’s working age population are likely to exacerbate labour shortages (European Commission, 2023[110]). The productivity impact of population ageing is not clearcut as labour shortages, and the resulting wage increases, may lead to a stronger uptake of labour-replacing new technology (André, Gal and Schief, 2024[111]). Nonetheless, making better use of existing skills and attracting global talent will be key for productivity and economic growth. This entails both measures to attract talent from outside the EU and to enhance cross-border mobility within the EU.
The EU has developed rules to harmonise EU countries’ entry and residence conditions for certain categories of non-EU nationals, including highly qualified workers, seasonal workers, and intra-corporate transferees. EU rules also regulate admission and rights of non-EU students and researchers, family reunification, and procedures for obtaining long-term residence permits.
Currently, labour force growth depends largely on immigration (Figure 4.18). The inflow of more than four million displaced persons from Ukraine, under temporary protection until March 2026, has contributed to some extent to reducing labour shortages in low-wage sectors in several countries, notably Czechia, Denmark, Germany, the Netherlands, Poland, and the United Kingdom (UNHCR, 2025[112]). But more needs to be done to attract talent to ease labour shortages. High-skilled non-EU job seekers can apply for the EU Blue Card scheme, which applies to all EU countries except Denmark and Ireland and offers an easier route to EU long-term residence status, as the periods spent in different EU countries may be cumulated. Even so, the uptake of the Blue Card is low with 89 thousand in 2023, and could be enhanced as it continues to exist alongside more attractive national schemes, which tend to offer lower salary thresholds and quicker processing times.
In 2021, a Directive revised the EU Blue Card scheme, which had to be transposed by November 2023, making the scheme more attractive by reducing the minimum job offer duration, relaxing restrictions on changing employers and expanding eligibility to highly skilled applicants with relevant professional experience but not a diploma. These adjustments are welcome and could even be taken further. For example, lower salary threshold requirements could help alleviate the existing skills shortages in less-skilled occupations, such as healthcare, construction and agriculture, which display high and increasing vacancies in many OECD countries (Causa et al., 2025[113]).
However, delays in transposition in some EU countries together with substantial cross-country differences in the minimum salary requirements and the eligibility of applicants with professional experience but no relevant educational qualifications risk ongoing fragmentation, lengthy procedures and hence preference for national schemes. To address these issues, the EU countries could align their EU Blue Card-related salary thresholds and other conditions to the extent possible with those of their national schemes (OECD, 2021[114]). Uptake could be also strengthened by easier access to the EU Blue Card for workers already covered by similar national schemes.
Apart from high-skill migration, which is supported by the EU Blue Card, labour migration from abroad can support employers to address shortages at all skills levels. For instance, the Single Permit Directive was recently revised to make access to the procedures to obtain a single permit easier and faster. This recast, together with the Blue Card Directive recast, aim at making the EU more attractive for workers from abroad. A broader approach focusing on areas with labour shortages would help and requires more detailed analysis of actual needs of the labour market.
Foreign-born/native-born contribution to labour force growth, 2020-2024 (annual average), percentage points
Note: Foreign (native) born contribution indicates the absolute change in the number of foreign (native) individuals in the labour force, divided by the absolute change in the total number of individuals in the labour force. The sum of the foreign and native components equals the total labour force growth. Data refer to the labour force aged 15 and over for all countries except the United States and the United Kingdom for which data refer to the age group 16 and over.
Sources: Eurostat Labor Force Statistics (EU); Australian Bureau of Statistics Labor Force Statistics (AUS); Statistics Canada Labor Force Statistics (CAN); Office for National Statistics Labor Force Survey (GBR); and US Bureau of Labor Statistics Current Population Survey (USA); and OECD calculations.
To facilitate intra-EU labour mobility for EU citizens, the Directive on mutual recognition of professional qualifications allows for automatic recognition of some qualifications obtained in another EU country. Automatic recognition is to be applied for seven professions, including doctors and nurses. In addition, the directive allows for automatic recognition based on professional experience in the craft, commerce or industry sectors. In addition, EU professional cards became available in 2016 for five professions (nurses, pharmacists, physiotherapists, mountain guides and real estate agents) to help professionals get their qualifications validated more quickly.
However, service sector providers still face a wide array of barriers when they want to establish themselves in another EU country or deliver services on a temporary cross-border basis. Recognition procedures remain costly and lengthy, and the mutual recognition of qualifications remains limited, leading to market restrictions and limiting cross-border mobility. This reflects that EU countries are competent to regulate professions, within the limits of non-discrimination and proportionality, including the qualifications required to access specific professions (see above).
Another barrier to within-EU labour mobility are difficulties to transfer pension rights across borders. The EU has established the Electronic Exchange of Social Security Information system to accelerate the transfer of pension rights across EU countries. Improving cross-border labour mobility will require faster exchange of information on pension rights through this system. Another way to strengthen labour mobility is to extend the portability period for unemployment benefits from three to six months, where a legislative proposal to this effect is currently being negotiated between the European Council and the European Parliament, and better monitoring of working conditions of posted workers as discussed in the last Survey (OECD, 2023[31]).
The number of cross-border workers and postings returned to pre-pandemic levels and continued to grow in 2023. The estimated number of cross-border workers (with Portable Document A1) stood at 3.6 million, which is 19% higher than in 2022. Similarly to previous years, Austria, France and Germany were the main destination countries for workers coming predominantly from France, Germany, Italy and Poland (European Commission, 2025[115]). However, posting of workers remains a lengthy and burdensome process. Since 2023, the Single Market Enforcement Taskforce works on reducing administrative burden by EU countries, such as prior declarations. In 2024, the Commission proposed to establish a multi-lingual online declaration system for declarations of posting of workers, which is currently being negotiated by the European Council and the European Parliament (European Commission, 2024[116]). This is welcome, as the online declaration portal will considerably reduce the time firms spend on declarations and increase the transparency of postings. At the same time, by facilitating effective and targeted inspections, it will contribute to the protection of rights of posted workers.
Some EU countries, including Germany, Austria and Denmark, to name a few, have reimposed internal border controls in 2024 in the context of fighting irregular migration and have considered prolonging them. Frontex, the EU’s border agency, recorded a 40% drop year-on-year in irregular border crossings in 2024, despite a switch in migration routes from the Balkans route to entries via the eastern Mediterranean and the Canaries (Frontex, 2024[117]). The fall in irregular border crossings may reflect stronger border controls, and levels of irregular border crossing are arguably still high despite the recent fall. However, there are trade-offs between border controls and the Single Market. Making border controls more permanent than in the spirit of Schengen will have repercussions on labour mobility. Border checks affect cross-border commuters (1% of the EU labour force), although some countries have a significantly higher share such as Austria, Belgium and Luxembourg (European Commission, 2024[118]). EU countries can in case of a threat to their internal security or public policy, in reasoned cases and proportionally, suspend Schengen for six months at a time. The EU should ensure that internal border controls are temporary and proportional.
4.7.1. Creating the right framework conditions for innovative companies
Europe is losing ground in innovation vis-à-vis the United States and China. The European Research Council has been successful in fostering basic research, although there is a need to continue fostering excellent basic research given growing competition from other countries. While the EU’s science base is strong, a major weakness lies in the translation of science into breakthrough innovation (Figure 4.19, Panel A). Private R&D spending is relatively low and taking place in a handful of incumbent companies that have not changed over the past decades. This has led to an over-specialisation in the medium-tech segment where competition is growing fiercer, notably in the automotive sector (Panel B and Panel C). As a result, the EU lags the United States and, increasingly, China in innovation in frontier technologies (Panel D) (Fuest et al., 2024[7]; European Commission, 2024[119]). In contrast, support for breakthrough innovation is limited and the fragmented Single Market hampers the scaling up of high-tech start-ups that can challenge incumbents. Entry and exit barriers, stringent labour market regulations, and different national investment tax and insolvency frameworks increase operating and hiring costs for businesses and investors.
Capital markets can provide the finance for companies to commercialise their innovative ideas and rapidly scale up their investment. However, European stock markets remain unattractive for companies to raise capital. Initial public offering volumes have fallen over the past decade (European Securities and Markets Authority, 2024[103]). To encourage stock exchange listings, the EU has relaxed disclosure requirements and research investment rules under the Listings Act. Nonetheless, shallow and fragmented capital markets fail to provide the necessary liquidity and scale, resulting in a higher equity risk premium compared to the United States (OECD, 2024[120]; Fratto et al., 2024[121]). The costs of not having deeper and more integrated capital markets are particularly high for innovative firms. These firms rely on equity finance because debt-based bank finance is less suitable for their high risk, high reward innovation activities. A stronger participation of retail and institutional investors, such as pension funds, could deepen capital markets and lower the equity risk premium, making it cheaper to raise equity through initial public offerings.
Note: In Panel D, on the x-axis, “relatedness density” measures how easily a country can build comparative advantage in a particular technology, depending on how closely related it is to other technologies the country is already strong in. Higher values show a higher relatedness density for a given technology. On the y-axes, technologies are ranked according to how advanced they are, ranging from green transport (less technologically advanced) to Internet of Things (more technologically advanced). The size of the bubble captures the degree of specialisation that each country reports in a given technology field, as measured by the revealed comparative advantage (RCA).
Source: OECD (2023), OECD Science, Technology and Innovation Outlook 2023: Enabling Transitions in Times of Disruption, OECD Publishing, Paris, https://doi.org/10.1787/0b55736e-en; 2024 EU Industrial R&D Investment Scoreboard; Di Girolamo et al. (2023), The global position of the EU in complex technologies, European Commission, Directorate-General for Research and Innovation, Publications Office of the European Union, Luxembourg, https://data.europa.eu/doi/10.2777/454786; and OECD calculations.
Venture capital investment is relatively low, further limiting financing options for innovative young firms for which bank financing is less suitable (Figure 4.20). A concern is limited private risk capital to finance the transition from startup phase to the growth phase of companies. This reflects shallow capital markets that reduce listing options for venture-backed start-ups, and thus exit options for their investors (Arnold, Claveres and Frie, 2024[122]). As a result, the EU has only 11% as many large venture-backed companies as the United States (Fratto et al., 2024[121]). A concern for policy is that the scarcity of risk capital pushes EU companies to seek funding and stock market listings abroad. The EU, together with ESMA and the financial sector should foster the development of an EU-wide market segment for high-tech start-ups with sufficient size and liquidity to attract private investors. Common supervision and trading rules for such pan-European trading venues could facilitate their development (see above).
Public involvement in the venture capital market is strong. The European Investment Fund (EIF) plays a major role in the venture capital market with its European Investment Fund (EIF), accounting for 15% of total venture capital raised in the EU over the past decade (Fratto et al., 2024[121]). In addition, EU budgetary support of about 0.02% of EU GDP a year is provided for high-tech start-ups via the EU’s InvestEU programme and the European Innovation Council. The proliferation of EU financial instruments is not optimal as it complicates the funding landscape for start-ups (Demertzis, Pinkus and Ruer, 2024[123]). The Commission should simplify its portfolio of investment instruments and introduce common application requirements to ease access for start-ups. Importantly, an independent cost-benefit analysis needs to establish whether public investment programmes deliver value added in terms of innovation.
Venture capital investments, as % of GDP
Note: Data refer to European Union member countries that are also members of the OECD (22 countries).
Source: OECD Venture capital investments (market statistics) database; and OECD calculations.
Corporate frameworks remain largely national, raising operating costs for companies that want to scale up activities across the EU. Such barriers to EU-wide business operation limit the contestability of markets and reduce the supply of scale ups for investors. In response, the Commission proposed the establishment of a European Code of Business Law for smaller companies as discussed above. With the Societas Europaea (SE), such a European corporate structure already exists. However, its uptake has been limited to large publicly listed industrial firms. This reflects the high minimum capital requirement of EUR 120 000 to be incorporated and the lengthy formation process as firms still need to follow national regulations (Biermeyer, 2021[124]).
To attract companies into the scheme, such a 28th corporate regime would need to lower the minimum capital required to be incorporated and ensure EU-wide common regulation, starting, for example, with business registration and insolvency rules. Importantly, company size thresholds should be avoided in order not to penalise firm growth. Hence, the Commission should establish a European corporate framework with common requirements for business registration and bankruptcy.
There are roughly 400 different national insolvency proceedings across the EU. From an investor’s perspective, collecting information about EU countries’ insolvency proceedings is costly and assessing liquidation values of cross-border investments difficult (European Commission, 2022[125]). The high number of insolvency proceedings also impairs the levelling of the playing field among businesses in EU. Hence, as a first step, the EU should ensure that EU countries reduce the number of insolvency procedures with the objective to have only one insolvency procedure per country. Thereafter, the different national insolvency proceedings could be unified (see below).
National insolvency proceedings also continue to differ in terms of efficiency. This reflects differences in definitions of insolvency, recovery times and rates, and ranking of claims. For instance, the time to recover assets during insolvency proceedings ranged from half a year to 7 years across the EU in 2019. Lengthy insolvency procedures keep unproductive firms alive, hampering efficient allocation of capital to more productive firms (Adalet McGowan, Andrews and Millot, 2017[126]). In addition, the recovery rate for creditors was on average 40% of the amount outstanding at the time of the default, although this rate varied between 7% in Poland and 95% in Denmark in 2019 (European Banking Authority, 2020[127]). Such cross-country differences impair cross-border investment.
In 2022, the Commission proposed to harmonise insolvency proceedings (European Parliamentary ResearchService, 2023[128]). This includes recovery rates and the ranking of claims for a more predictable distribution of recovered value among creditors. However, a common definition of insolvency is still missing. The Commission and EU countries should adapt and implement a harmonised framework for insolvency, preferably through regulations to avoid divergent implementation across countries. This entails a common ranking of claims and a common definition of insolvency, which could include pre-insolvency procedures. Specifically, creditors should be allowed to initiate restructuring to distinguish temporary distress from insolvency and enable the timely restructuring of temporarily distressed firms. In addition, priority should be given to new financing over unsecured creditors in the event of restructuring to facilitate capital injections and internal reorganisation (André and Demmou, 2022[129]). Monitoring of progress towards full harmonisation will be important. In this regard, the Commission should ensure that national authorities share data on the number and duration of insolvency procedures, where claims are being paid, and the ranking of claims.
4.7.2. Improving effectiveness of innovation policy
EU-level public R&D spending is relatively low as a share of GDP and not consistently directed at addressing the innovation deficit (Figure 4.21, Panel A). Limited EU-level funding means that the focus should be on raising the effectiveness of EU public R&D support in supporting innovation. This requires rigorous cost-benefit analysis and other forms of impact evaluations of individual EU programmes based on clear output indicators, such as scientific breakthroughs leading to innovative start-ups.
The Commission has a long tradition in programme evaluations, although key performance indicators for programmes under Horizon Europe, the EU’s framework R&D programme, were only introduced in 2020 (European Commission, 2023[130]). Before that, evidence on the direct benefits of the individual programmes were not always available, and underperforming programmes were never closed, leaving less budgetary space for well-performing programmes. Hence, the EU should subject all R&D programmes to evaluations based on clear key performance indicators and follow up by closing under-performing programmes and shift funding to well-performing programmes. If this is ensured, existing EU budgetary resources should be re-directed towards support for R&D and innovation coordinated at the EU level as recommended in the last Survey and committed to by the Commission (OECD, 2023[31]).
The relative role of EU funding for business R&D is similar, with about 10% of total support for business R&D in the EU attributable to the Commission (OECD, 2025[131])(Figure 4.21, Panel B). The role of EU-level R&D support also varies across countries and is higher in central and eastern European countries. EU-level funding can complement national funding to avoid duplicate efforts, scale up and foster R&D and innovation. Hence, the interaction with national programs should be acknowledged and accounted for in evaluations of R&D programmes, where possible.
EU budget resources devoted to breakthrough innovation are limited. The European Innovation Council (EIC), the EU’s funding instrument for deep-tech breakthrough innovation that was established as recently as 2021, accounts for only about 10% of the Horizon Europe budget (European Commission, 2024[132]). The EIC features both an open, bottom-up element, where researchers and companies submit their proposals, accounting for over half its funding, and a challenge-based element, where funding is provided in pre-defined key areas such as quantum technologies, clean tech and biotech. Following international best practice, the EIC has programme managers that help both define early-stage challenge topics and develop the portfolio of activity taken forward by these projects. Topics for EIC challenges are informed by both policy priorities and emerging opportunities with consultation involving the EU countries.
However, the EIC’s limited budget is reflected in a limited number of 10 programme managers (compared to 100 at the US Defense Advanced Research Projects Agency in early 2025). In addition, the programming process is lengthy. This reflects the limited budget, but also that a new call within a Challenge cannot be signed off without the approval of every EU country in the European Council. This approach stands in contrast to best international practice of support for breakthrough innovation in the United States, or support for early stage research by the European Research Council (Fuest et al., 2024[7]). Hence, opportunities to give the EIC more autonomy should be explored. For instance, the EIC and its programme managers could receive a broader mandate in which they can initiate and execute calls once a topic for a challenge is agreed on, and therefore speed up processes.
Source: European Commission, 2024, based on Eurostat and OECD; Bureau of Economic Analysis of the United States (BEA); OECD R&D Tax Incentives database, https://oe.cd/rdtax; OECD Research and Development Statistics, https://oe.cd/rds; and OECD calculations.
The EU has the ambition to better align public R&D funding with investment in new strategic technologies such as AI (European Commission, 2025[39]). However, such a focus disregards the strengths of the European innovation system, which lie in advanced manufacturing, biotechnology, and clean technology (European Commission, 2024[132]). Another impediment to investment in strategic technologies is limited EU-level funds for R&D (see above). Public R&D spending is fragmented along national lines and not consistently directed towards EU priorities. Public procurement accounts for 14% of EU GDP and could provide an important impetus for new technology but it remains entirely national (European Court of Auditors, 2023[133]). All these factors reduce the scope for a better alignment of public R&D support with EU strategic objectives.
Several countries have established organisations to support high risk, high reward technological breakthroughs in precisely defined strategic areas. An example is the US Defense Advanced Research Projects Agency (DARPA), which supports breakthrough innovation in defence with a relatively large budget of USD 4.3 billion, or 28% of the EU’s annual R&D budget (Defense Advanced Research Projects Agency, 2024[134]). In comparison, the EIC has a relatively small annual budget of USD 1.7 billion (EUR 1.5 billion). In addition, there are several other US agencies dedicated to breakthrough innovation, including the Intelligence Advanced Research Projects Activity (IARPA) focusing on AI, and the Advanced Research Projects Agency-Energy (ARPA-E).
DARPA has funded technologies such as the internet and the global positioning system (GPS), to name a few. It has a high degree of autonomy and organisational flexibility to recruit experts from science, technology, and the venture capital industry. Importantly, its programme managers have significant leeway and budgets to pursue radical innovations and open calls. Calls are based on excellence and novelty, often benefitting new players. Accountability is strong as programmes are constantly evaluated based on clear quantifiable goals and trackable metrics, allowing to terminate unsuccessful projects early on (Azoulay et al., 2019[135]). However, while the EIC has many of these elements in place, such a system cannot be easily adapted to conditions in the EU with its national procurement markets that fail to serve as first buyer of new technologies as in the United States. Private investment for deep tech could partly compensate for public procurement, and the EIC aims to de-risk and crowd in private investment. Deeper and more integrated capital markets, including venture capital, would support this (see above).
4.7.3. Ensuring industrial policy does not harm the Single Market
Industrial policy is mostly national, which poses a challenge to the level playing field in the EU. To better align national spending with EU objectives, the Commission announced a new Clean Industrial Deal in February 2025. The Clean Industrial Deal will provide incentives for the decarbonisation of industry. Simpler state aid and public procurement rules will apply to strategic sectors including clean tech and energy-intensive manufacturing (European Commission, 2025[36]).
However, these new state aid rules for strategic sectors could result in a less stringent state aid framework which would not prevent fiscally stronger EU countries from providing excessive support. This reflects that some EU countries with high energy prices may want to maintain energy-intensive industries, whereas they could be only competitive in regions with low energy prices and high potential for renewables such as southern Spain or northern Sweden (Zachmann et al., 2024[136]). Such a national approach, together with relaxed state aid rules, may have implications for the Single Market and costs for the EU economy in the form of lower productivity. The reason is that unilateral industrial policy risks binding resources in uncompetitive firms, harming competition and hindering industry’s adjustment to structural change. Hence, the EU’s decarbonisation goal could be in conflict with its productivity goal. Instead, better integrated energy markets will be key to lower energy prices and support EU productivity. The Commission is working towards better integrated energy markets, which is welcome (Chapter 3).
A related issue is the lack of EU funds for industrial policy. Instead, the EU has state aid rules at its disposal to steer national spending towards EU objectives, notably under Important Projects of Common European Interest (IPCEI). IPCEI involve at least four EU countries and support investment in strategic EU objectives such as economic security and resilience, innovation in clean technology or new clean energy infrastructure.
There might be a trade-off between economic efficiency and resilience. The Commission ensures through state aid assessment that IPCEI address market failures, any potential distortions to the Single Market are limited and outweighed by the positive effects in terms of contribution to the objective of common European interest. In return, IPCEI can benefit from state aid of up to 100% of the funding gap, i.e., the difference between the positive and negative cash flows over the lifetime of the investment, discounted to their current value.
The Joint European Forum for IPCEI identifies potential new IPCEI based on cost-benefit analysis and provides guidelines for evaluation of IPCEI by EU countries. However, IPCEI are not subject to rigorous evaluations based on common key performance indicators, including an assessment of the costs and benefits of different policy options, as discussed in the last Survey (OECD, 2023[31]). Industrial policy needs to be carefully applied to those areas where markets fail, particularly in new technology, to crowd-in private investment. In this regard, it is welcome that the EU ensures that such policy interventions do not harm competition and the Single Market. Importantly, the EU should also ensure that the costs of policy intervention are limited, and its returns are high. To ensure the efficient use of public resources, a strong emphasis should be placed on evaluation and the regular reassessment of IPCEI (Box 4.3) (Millot and Rawdanowicz, 2024[34]). Hence, the EU should subject IPCEI to rigorous evaluations based on common measurable key performance criteria, and halt support if performance criteria are not met.
Effective industrial policies aim to enhance domestic business performance by addressing market failures, fostering innovation, and supporting sustainable, inclusive growth through well-designed and implemented strategies:
Clear objectives and strategic coordination: Policies should set clear objectives based on well-defined market failures, with coordinated government action.
Evidence-based design and evaluation: Decisions should rely on rigorous assessments, with regular reviews to adjust ineffective measures.
Balancing horizontal and targeted approaches: Broad business policies (e.g., R&D tax credits, competition policy) may be complemented by targeted support for strategic sectors and technologies.
Encouraging competition and innovation: Policies should promote competition and innovation, avoiding protectionism.
Using demand-side instruments such as public procurement, regulatory standards, and consumer incentives.
Ensuring transparency and accountability: Competitive selection, clear benchmarks, and sunset clauses help prevent inefficiencies and policy capture.
International cooperation: Policies should align with international trade rules and encourage international cooperation.
Source: Millot and Rawdanowicz (2024[34]), Criscuolo et al. (2022[137]), OECD (2025[138]).
More generally, prioritisation is missing with about 50 sectors deemed as strategic under the EU’s Net-Zero Industry Act, the predecessor of the Clean Industrial Deal (European Commission, 2023[37]). The EU’s new Clean Industrial Deal from February 2025 does not provide a list of strategic sectors, although it identified clean-tech as strategic and announced it would extend industrial policy support to additional sectors, notably energy-intensive industries (European Commission, 2025[36]). To identify potential IPCEI with the highest value added to achieve EU objectives, EU countries and the Commission work together in the Joint European Forum for IPCEI (JEF-IPCEI) since October 2023. Targets are also set on an aggregate level, such as meeting 40% of domestically produced key components of clean tech products on the EU market, but not at a technology or sector level. Missing prioritisation in the Clean Industrial Deal and measurable targets make it impossible to identify IPCEI with the highest value added to achieve EU objectives. Thus, the EU should publish a list of strategic sectors and introduce clear measurable sectoral output targets to improve accountability.
With financing provided by EU countries, previous IPCEI often involved larger EU countries with sufficient fiscal resources to support them (Government of Sweden, 2021[139]). This created the risk that the level playing field within the Single Market will be undermined as large countries attract investment. The EU has addressed this issue by encouraging countries to use Recovery and Resilience Facility funds to support IPCEI, although this solution is only temporary. To avoid harming the Single Market, the EU could top up IPCEI support for projects aligned with EU objectives with highest returns, such as early-stage technology development and cross-border energy infrastructure. This will require first and foremost the capacity to conduct rigorous cost-benefit analysis to identify projects where EU support can provide clear value added with limited costs of intervention (see above). If this is ensured, funding for EU industrial policy could be freed up from lower EU spending on agricultural and cohesion policy (Chapter 2).
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