Theme
Spain has proposed creating a new experimental tool for the economic governance of the EU in order to promote rapid progress towards a more efficient single market.
Summary
The Letta and Draghi reports urge the EU’s member states to deepen and improve the single market to restore competitiveness. Taking up this baton, Spain has launched a proposal to create a new economic governance tool for the EU called the European Competitiveness Laboratory. This comprises temporary and limited trials of integration formulas in a few volunteer member states that, once evaluated, could lead to their extension to the other members. The idea puts forward as priorities the Capital Markets Union (CMU) and regulatory simplification. This analysis summarises the main mechanisms available in the EU for the legislative pathway, inserts the specific Spanish proposal for a European Competitiveness Laboratory into this framework and concludes by considering its strengths and weaknesses.
Analysis
The Letta report and the Draghi report have highlighted not only the need but also the urgency of solving the shortcomings and limitations of the European single market as a means of restoring the competitiveness that Europe has lost in comparison to the US. This is a priority that must also be balanced with equally important objectives (such as decarbonisation at a time of climate crisis and economic security in a highly hostile geopolitical context), which in many cases entails difficult trade-offs.
One of the competitiveness improvement areas where progress is most overdue is that of the CMU, which is key for financing and developing enterprise. The most obvious way of doing so would be by means of regulatory harmonisation, which is the instrument the then EEC gave its 12 members in the 1980s and 90s when promulgating the Single Market programme that did so much to help overcome the stagnation of preceding years. However, this requires an integrationist outlook on the part of the 27 current members and much greater political will than exists in the EU at this time.
An alternative way of achieving it is through coordination and regulatory harmonisation among a group of member states willing to make more rapid progress; regardless of whether it may be later extended to the remainder. This is the apparent direction implicit in Spain’s recent proposal to the Eurogroup held on 7 October 2024 to create a European Competitiveness Laboratory, an experimental framework for partial integration between the most ambitious member states in the areas of legislative simplification, extension of the single market and development of new European tools.
This analysis sets out the need for making progress on the CMU, the three distinct alternative ways of achieving it (through harmonisation in accordance with the ordinary procedure, through enhanced cooperation or using the so-called ‘28th Regime’) and how Spain’s recent proposal for a European Competitiveness Laboratory could be inserted into this framework.
1. The need to make headway on the Capital Markets Union
The initiative to create a CMU is now 10 years old, dating back to the Jean-Claude Juncker Commission of 2014, although in fact it goes back to the Treaty of Rome in 1957, as part of the goal of the free movement of capital, one of the four fundamental freedoms on which the integration process is based, together with those of goods, services and people. Although progress has been made since then, the EU’s capital markets continue to be fragmented and enterprises’ finance-raising conditions vary significantly from one member state to another. Private investors tend to invest within their own country, whereas institutional investors prefer to invest outside Europe, where yields tend to be higher. This alarming situation is one of the main conclusions of the Letta report. The differences with the US are startling: capital markets in the EU scarcely provide 25% of corporate financing, as opposed to 75% in the US; investment in venture capital in the EU accounted for 0.1% of GDP in 2023, compared with 0.6% of GDP in the US; private equity investment in the EU accounts for 0.3% of GDP, versus 2.5% of GDP in the US; European investment funds are on average 15% of the size of their US counterparts, as well as having higher costs; and European citizens invest barely 30% of their savings in shares and investment funds, as opposed to 50% in the case of the US.
This is why the Commission agreed a new action plan for the CMU on 24 September 2020. The plan established 16 legislative and non-legislative measures for integrating national capital markets into a genuine single market. Among the most notable advances are: (a) the Commission’s legislative package in December 2022 with three proposals on clearing, insolvency and listing; (b) the political agreement between the European Parliament and the Council (which have to decide jointly) on the so-called Listing Act, which forms part of the aforementioned package; and (c) a list of indicators for monitoring the progress made in achieving the capital markets union’s targets (the most recent being in 2024).
Meanwhile, the European Securities and Markets Authority (ESMA), set up in 2011, has been accumulating powers and now supervises the credit rating agencies, records of commercial information, data providers, administrators of essential benchmark indices as well as third-party countries’ central clearing counterparties, and will soon oversee additional aspects. This is still far from being centralised oversight of the capital markets, however. It is also worth celebrating developments such as the passing of the regulation on prospectuses and the creation of the European Single Access Point (ESAP) for bringing together information related to financial services and sustainability.
Other aspects of the CMU have barely made any progress, however; these include the consolidation of savings products or pan-European investments (owing to a range of obstacles, both social –different savings habits– and fiscal and regulatory), the reactivation of the European securitisations market, the divergence of legislative treatments of insolvency and the preferential fiscal treatment given to debt over capital.
Making progress on the CMU currently appears to be a daunting challenge. The possibilities for making headway may be grouped under three headings: (a) measures for harmonising the 27 member states using the ordinary legislative procedure; (b) resorting to the enhanced cooperation mechanism; and (3) the introduction of a parallel European regime, otherwise known as the ‘28th regime’.
2. Harmonisation using the ordinary legislative procedure
Article 114 of the Treaty on the Functioning of the European Union (TFEU) states that, at the proposal of the Commission, the European Parliament and the Council shall, in accordance with the legislative procedure, adopt measures for the ‘approximation of the provisions laid down by law, regulation or administrative action in Member States’ that have as their object the functioning of the internal market (although this is not applicable to fiscal provisions, the free movement of people or the rights and interests of employees).
On the basis of this article there have been some attempts at legislative harmonisation, particularly within the context of European contract law, in the search for a version of private law that is somewhat more European and less national. It has resulted in a series of communiqués, a Plan of Action, and a group of experts, but also in a Commission proposal for a common regulation on European sales, the Common European Sales Law (CESL), applicable to cross-border sales. It was launched in 2011 on the basis of article 114 of the TFEU, but gave rise to various legal disputes, because it was conceived as a set of norms parallel to national law that neither harmonised national norms nor replaced them. After various problems, the proposal was definitively withdrawn in 2019, in what has deemed to be a victory for the supremacy of national private law.
Thus the imposition of harmonising rules has proved to be anything but straightforward, particularly in the context of scant demand for supranational integration and bearing in mind that this supposedly ordinary route first requires the Commission to engage in long periods of prior consultation with national governments, experts and stakeholders, then complex inter-institutional negotiations and finally a parliamentary majority and a qualified majority in the Council representing 55% of the member states, accounting for 65% of the population. Quite apart from the slowness, it does not currently seem that this twofold majority can be attained easily, and even less so the alternative route set out in article 115 of the TFEU, resorting to a special procedure requiring the unanimity of members in exchange for reducing the participation of the European Parliament to mere consultation.
3. The enhanced cooperation mechanism
This leads to a second possible method of legislative coordination, namely what is referred to as enhanced cooperation. This is a differentiated integration mechanism (commonly known as ‘multi-speed Europe’), which was introduced in the Treaty of Amsterdam and later amended by the Treaties of Nice and Lisbon. As will become evident below, it has not had much practical legal effect, but it is a real possibility that enables a group of member states (at least nine) to advance towards deeper integration or cooperation in certain areas, even if other member states are not willing to take part. It is established by article 20 of the TEU and articles 326-334 of the TFEU and is a way of getting around the requirement for qualified majorities of the 27 member states or unanimity in key areas.
Enhanced cooperation is thus a regulatory coordination mechanism of last resort between a group of member states with differential integrating ambition, involving the creation of European legislation that generally replaces national legislation, but only for the countries that have signed up to it.
As already mentioned, its use has been limited. It has been applied to areas of civil law, such as the law applying to divorce and judicial separation with cross-border implications (Regulation 1259/2010/EU, adopted in 2010 by 17 countries) and the matrimonial property regimes of international couples (Regulations 2016/1103/EU and 2016/1104/EU, applicable since January 2019); in intellectual property, with the creation of a unitary European patent (1257/2012/EU and 1260/2012/EU) agreed in 2011 by 25 countries; and in criminal law, with the creation of the European Prosecutor’s Office (2017/1939/EU) to investigate crimes impinging on the EU budget in 23 countries. The creation of a Unified Patent Court was also begun under enhanced cooperation, but it ended up as an international agreement (owing to incompatibility with European law).
The attempts to use enhanced cooperation in fiscal areas (such as the proposals for a tax on financial transactions or a common corporation tax) have not so far translated into legal rules.
The problem with enhanced cooperation is in any case its potential complexity, which can lead to a degree of fragmentation whereby the cure is worse than the disease. Its governance needs to be extremely well run, because otherwise it incurs the risk of promoting cherry-picking and leading to a single market full of opt-outs.
4. The ‘28th Regime’
A third possibility, not formally defined in the treaties, is resorting to the EU’s so-called ‘28th Regime’, in other words the creation of a judicial framework that provides an optional and additional set of regulations for companies and consumers, which operates alongside the member states’ prevailing national laws. Rather than replacing national regulations it thus complements them, offering a legal option that is in principle applicable throughout the EU.
The possibility of an optional regime that is parallel to national regulations is highly useful, because it prevents national courts from rejecting the jurisdiction as ‘foreign’ when they come to address a case. The downside is that, by virtue of being a ‘secondary regime’ the scope of application must be strictly limited to avoid situations of legal uncertainty.
The proposal for an instrument of this kind had already appeared in a 2005 opinion of the European Economic and Social Committee on the possibility of creating a European insurance contract (and indicating other possible areas for applying this solution, from which employment contracts were explicitly excluded). In any case there had already been the precedent of UCITS (collective investment schemes in transferable securities), regulated in 1985 and which ended up creating a standardised European model: nowadays the UCITS framework accounts for 75% of retail investors’ collective investments in the EU and is gaining ground outside Europe.
In practice, the clearest example of a ‘28th Regime’ (the number obviously depends on the number of member states at any given time, currently 27) is the Statute for a European Company (SE), established by Regulation 2157/2001/EC, which creates the judicial concept of the European Company, a corporate entity that does not belong to any specific country but which has to be accepted by all countries. This legal concept facilitates the merger of companies from various member states and cross-border corporate mobility, eliminating the need to adapt to multiple national regulations. A similar case is arguably the Regulation on European Economic Interest Grouping (2137/85/EEC).
Another example of the ‘28th Regime’ in the EU is theAuthorisation of Biocidal Products (Regulation 528/2012/EU), which enables such products to have not only the possibility of national authorisation followed by a request for mutual recognition, but also of European authorisation, which is to say at the level of the Union and with no need for additional national authorisation.
The unitary European patent is a hybrid between enhanced cooperation and the ‘28th Regime’: it involves a complementary regime in addition to national patents, but is only applicable to the countries that have signed up to it (currently all 27 except Croatia and Spain). It was proposed by 12 member states in December 2010 and led two years later to two EU Regulations that created the unitary patent. These were challenged by Spain and Italy owing to the languages that they recognised, which, apart from English, included only German and French. All the challenges lodged by the two dissenting states were rejected by the Court of Justice of the EU. Italy eventually joined in September 2015, but Spain is still a non-participant. The unitary effect of European patents came into effect in 2023, when the Agreement on a Unified Patent Court also came into force.
The Letta and Draghi reports do not overlook this possibility: the Letta report proposes the creation of a ‘28th Regime’ in the form of a European Commercial Code while the Draghi report advocates it for electricity interconnections classed as Important Projects of Common European Interest (IPCEIs) and for innovative SMEs and mid-caps.
5. Spain’s proposal for a European Competitiveness Laboratory
At the Eurogroup meeting held on 8 October 2024, Spain proposed the creation of a tool called the European Competitiveness Laboratory, a limited regulatory regime to enable some member states to try out new projects in a controlled way and to gauge their quantitative impact. Each project would be initiated at the request of at least three countries, by means of a joint declaration at the margins of a Council meeting. The Commission would carry out a preliminary assessment and, if this were positive, the participating member states would hammer out its operating ground rules. Member states initially choosing not to participate in the project could join up subsequently at any time. All the Laboratory projects would have a time limit, and once this elapsed the Commission would evaluate the results and would be able to recommend their extension to the 27 member states (by means of an ordinary legislative proposal), their cancellation or possible alternatives.
The projects liable to participate in the Laboratory would be subject to the directives and general goals set out by the Council, in particular fostering European competitiveness, at the same time as promoting the integrity of the single market and the financial stability of the Union. This is why the Spanish government believes that the European Competitiveness Laboratory would be most useful in areas where the Treaties do not bestow exclusive powers on the Union and where there has been less harmonisation by virtue of EU legislation.
This is the case of initiatives related to the CMU, which is suggested as the Laboratory’s initial area of development, in aspects such as the creation of a retail European investment product or encouraging securitisation, as well as regulatory simplification. More specifically, as a pilot project, the creation of a new European rating system for SMEs is suggested, which would make a major contribution to improving their access to markets and foster corporate growth. This is a seemingly minor example but is a good illustration of the idea that the Laboratory would promulgate practical and not necessarily divisive initiatives among the 27 member states.
Conclusions
The Spanish proposal for a European Competitiveness Laboratory, based on what is known about it so far, has various highly positive aspects.
First, it seizes the initiative in taking measures to improve European competitiveness, in line with the proposals in the Letta and Draghi reports. The loss of competitiveness is an urgent matter that demands to be taken seriously, and it is good that a major member state such as Spain is doing so.
Secondly, it realistically acknowledges the difficulty of adopting a legislative harmonisation model that satisfies all member states, encouraging the establishment of cooperation frameworks for those member states that are more convinced of the advantages of integration. The fact is that the copycat effect or the fear of being left out often works as an incentive for integration when attempts to establish regulations satisfying all 27 (or a qualified majority of them in the absence of sufficient incentives) prove ineffective.
Thirdly, it offers a clear demarcation of areas in which this partial integration may work, linked to the CMU, a key component of European competitiveness and indispensable for corporate growth and productivity.
Fourthly, the proposal avoids weakening the prudential requirements (unlike some proposals to relax the capital requirements for the securitisation of banks and insurance companies), a course of action that at most would exacerbate the already-existing concentration, as well as incurring risks for financial stability.
Fifthly, the idea of initially experimenting with the creation of a European SME rating system is highly advantageous, not only because of the need to provide SMEs, which have hitherto been excluded from capital markets, with crucial help (investors feel disinclined to lend to SMEs lacking either a rating or a credit history) but also because it applies to a sector that is disadvantaged and therefore more likely to attract European consensus (it is easier to adopt European measures applicable to SMEs than large corporations).
There is also a sixth positive aspect, in the specific terms of Spain’s European policy, which is the evidence it shows of a Spain that is proactively producing ideas, that encourages those member states that want to try new solutions to do so, obtaining outcomes that may prove highly useful, just as previous joint decision-making tools did.
The Spanish proposal also suffers from certain drawbacks, however.
First, there is a degree of legal vagueness, given that it does not seem to involve enhanced cooperation but rather something preliminary and temporary. The Spanish proposal seems to be focused essentially on saving time and streamlining the long process of decision-taking, on the basis that trialling projects in a limited and experimental way will subsequently make it easier to roll them out to all members. In any case, the suggestion that at the end of the experiment the Commission should evaluate whether to extend the initiative to all 27 with a new legislative proposal, or conversely to reject it, does not clarify what to do in the event of the experiment being successful but some countries, able to muster a minority veto, not wanting to accept the extension proposal. This is because, while it is true that whatever is tested in the Laboratory may open the eyes of the other states, there may well be some national governments that simply do not wish to submit certain areas to EU control. Perhaps later, with all the data, the prior testing with a minimum of three states may end up leading as a last resort to enhanced cooperation, with a minimum of nine states, but with all the downsides that this solution entails.
The vagueness may also extend to the practical legal aspects of the experiments: in some cases they will need to overlie the outline of general measures applicable to all states, but only be used by those that wish to sign up (using the ‘28th Regime’ model), while in other more complex cases they will need to be configured as legal frameworks applicable only to certain countries (as in the case of the unitary patent model).
Secondly, it is possible that the time limitation of the regulatory framework acts against the copycat effect, because the incentives to take part prior to the Commission’s evaluation of results are reduced. In this case, the doubts surrounding integration would simply arise after, rather than before, the experiment (albeit with more data).
Thirdly, there is a certain lack of clarity about how this solution could be applied to other aspects such as the creation of a European retail investment product or fostering securitisation. With regard to retail investment, it is not clear whether a decision will be taken to accept the proposal in the Letta report involving a European savings product for the provision of private pensions, in the guise of an improved version of the doomed Pan-European Personal Pension (PEPP), or to favour other instruments. In the case of securitisation, beyond the Letta report’s proposals, progress seems unlikely in the absence of significant measures in the area of banking union, or unless there is the possibility of legislative harmonisation in the area of mortgage law, bearing in mind that, in the absence of a ‘European mortgage’, the possibility of securitising real estate assets –among the most important for the purposes of securitisation– must remain fraught with difficulty. In general, without uniform legislation in the area of insolvency and more uniformity in the fiscal domain, it is unlikely that investors will be able to make well-founded judgements about the chances of recovering their money if things turn out badly. In any event, the fact that the proposal includes regulatory simplification as one of its goals is welcome news.
Fourthly, the proposal may be criticised for evincing scant awareness of the European Parliament, which does not appear to be referred to in the wording. An innovative way of legislating based solely on the Commission-Council axis has an excessively intergovernmental flavour and may be interpreted as a throwback to the past. A different argument would be that the European Parliament is unable to be a co-legislator in this context because only a few states take part and in powers that are shared (and, moreover, basically national), but perhaps it would be sufficient to mention the need to consult the Parliament (and, in this context, the Economic and Social Committee) as well as the involvement of national parliaments. It is true that it can seem excessively slow to have to wait 19 months for legislative reform in the EU to be approved, which is the average length of the decision-making process according to the calculations contained in the Draghi report, but impatience must not succumb to the temptation of overlooking democratic input and accountability. The main reason for this is that, quite clearly, the proposal does not suggest regulating by decree, but rather experimenting in order to convince: a means of legislative acceleration that cannot dispense with the involvement of Parliament.
Lastly, the proposal seems to overlook certain precedents, because something similar already exists in the EU, namely ‘pilot projects’ and ‘preparatory actions’ (where the Commission leads the initiatives, and the Parliament has to lend them impetus and approve their funding). What Spain is proposing is somewhat different, because here the leading role is played by member states, but perhaps it would be worth emphasising that experimentation is not alien to the EU.
In conclusion, the Spanish proposal to create a European Competitiveness Laboratory is an excellent demonstration of European leadership in response to the alarms raised by the Letta and Draghi reports. Although some legal and practical aspects remain unclear, encouraging experimentation by groups of countries that may subsequently lay the groundwork for advances in legislative harmonisation (and thus underpin the single market) and in regulatory simplification (and thus make it more efficient and competitive) is worthy of serious consideration and debate.
