Vienna and Rome spearhead red tape bonfire to boost EU competitiveness

Good morning. German Chancellor Friedrich Merz has vowed to stay in office despite historic losses for his Christian Democratic Union at the hands of both far-right and far-left parties in regional elections yesterday.

Today, I reveal a new initiative to slash national laws gumming up the EU's single market, and our economy correspondent reports on new research suggesting EU government overspending is being swept under the carpet.

Smashing gold plates

At least 17 EU governments are set to endorse an Austro-Italian initiative to slash red tape for business and end a culture of national authorities "gold-plating" Brussels rules which undermines the single market.

Context: The yawning gulf in economic competitiveness between the EU and rivals such as the US and China is an existential threat to the continent. Much of the blame is placed on regulatory hurdles in the bloc's theoretical but inefficient single market -- particularly "gold-plating" whereby governments add additional rules when applying EU regulations nationally.

The "Alliance for the Reduction of Bureaucratic Burden" initiative, to be launched in Brussels today, is an effort to improve the single market's functioning at a national level. Participating member state ministers are expected to sign a declaration to "reinforce the interests of European citizens and businesses as our guiding compass in shaping legislation".

Members are set to commit to principles including rapid and simple application of EU rules, impact assessments of existing regulations, and a "once-only" approach to requesting information from businesses.

"What we found slightly ridiculous was that Europe had all these people trying to get rid of unnecessary bureaucracy -- and yet we didn't even know each other," said Austria's state secretary for simplification Sepp Schellhorn. "The idea is very simple: steal the good ideas from each other, leave the bad ones at home, and make sure that when Brussels cuts red tape, we don't lovingly put it back on in 27 different ways."

Internal regulatory barriers inside the EU single market, such as additional national compliance permits necessary for a company based in one member state to sell products in another, are equivalent to a 45-60 per cent tariff on goods, according to ECB estimates.

All EU leaders have repeatedly pledged to improve the single market. Ministers from 17 governments have agreed to join the "alliance" initiative, according to a list seen by the FT last night.

Over the past two years the European Commission has implemented a series of "omnibus" laws to slash EU regulation, but officials complain that governments are reluctant to adjust national rules.

"Simplification cannot be a one-way street. All levels have to have skin in the game," Commission president Ursula von der Leyen said last week. "We are doing our best at the European level to cut red tape. But now I think it is time for member states to step up. If we are serious about simplification, we also need a pact against gold-plating."

Chart du jour: Reverse gear

Volkswagen has dropped out of the Eurozone's most important blue-chip stock index for the first time in 15 years.

Blind eye

EU countries have been allowed to avoid or delay tougher fiscal enforcement through Brussels' increasingly lenient application of the bloc's new fiscal rules, according to findings of the bloc's independent fiscal watchdog seen by Paola Tamma.

Context: The European Fiscal Board's assessment, to be published today, establishes how closely the EU executive implements rules meant to ensure Eurozone countries keep annual deficits within 3 per cent of GDP and debt-to-GDP ratios below 60 per cent.

The EFB said the implementation of the rules, known as the Stability and Growth Pact, increasingly relied on "discretion and forbearance" by Brussels, despite governments deviating from spending paths agreed after the rules were overhauled in 2024.

This leniency benefited countries straying from the correct fiscal outcome, as they avoided consequences, including so-called "excessive deficit procedures" (EDP) that can eventually lead to fines.

Specifically, the EFB said Spain avoided scrutiny of a possible EDP after activating a national clause allowing extra defence spending. Its spending exceeded its recommended path by 0.4 per cent of GDP in 2025, above the 0.3 per cent threshold. But defence spending increased by only 0.1 per cent of GDP, meaning most of the deviation reflected other expenditure and should have resulted in sanctions.

Hungary and Slovenia were also spared tougher enforcement. Hungary benefited from a broad interpretation of defence flexibility that prevented its existing EDP from being escalated; Slovenia benefited from Commission discretion to delay opening a new EDP despite concluding that Ljubljana had breached the deficit criterion.

The EFB said the trend risked weakening the EU fiscal framework, and called for a more "systematic and even-handed" application of the rules to restore their "teeth and credibility".