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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer was chair of the House of Lords economic affairs committee in the last parliament
For two decades, the EU has prided itself on being a regulatory superpower. It was a clever idea: in a world of geopolitical fragmentation, the bloc could project influence through rules rather than armies or subsidies. By setting the standards others must meet to access its vast single market, Europe could export its values, protect consumers and give its companies a first-mover advantage. Regulation was Europe’s soft power — a tool for global leverage and internal cohesion.
This vision dovetailed neatly with the EU’s pursuit of strategic autonomy — the idea that it should be self-reliant in shaping its own economic destiny and less dependent on the US, China or others for growth, energy or technology. Regulation was seen as the means to that end.
But what once looked like strategic wisdom now seems self-defeating. The EU’s ambitions for the green transition and digital transformation have led to a relentless accumulation of rules. Each crisis — the global financial crash, Covid-19, climate risk — has spawned new layers of oversight.
Criticism of this approach was ignored in EU circles until last year’s Draghi report, which concluded that inconsistent and restrictive regulation had become one of Europe’s biggest obstacles to competitiveness. A year on, despite politicians proclaiming the need for urgent action, few of its recommendations have been implemented. Those that have form a “simplification” agenda — notably the so-called “omnibus package”, which aims to streamline overlapping sustainability laws.
Still being negotiated in Brussels, the proposal would tweak thresholds and defer deadlines, yet leave the underlying machinery intact. Fewer companies may need to report, but the architecture of mandatory ESG disclosure and due diligence remains. The regulatory edifice stands; only the wallpaper changes.
This reflects a deeper, structural problem. The EU’s legitimacy rests on its ability to make rules. The single market was built through regulatory harmonisation. So the governing mindset has long been that more rules mean progress; more oversight means safety. The system rewards risk aversion and consensus, not experimentation or innovation.
Even when the EU acknowledges that regulation has gone too far, it cannot easily pull back. True deregulation — reducing the scope of regulation — is still treated as heresy. Hence the euphemism of “simplification”, a word that ignores the damaging impact that bad, simple regulation has on growth and competitiveness.
Meanwhile, in the US, deregulation is an explicit policy goal. In banking, capital and liquidity requirements have been eased. More strikingly, the Trump administration has begun limiting the reach of ESG-driven finance. In a recent executive order, Donald Trump told US regulators that a financial institution must not be allowed to debank American companies simply because it “disagrees with or disfavors” their activities “for political reasons” — for which read ESG policies. He instructed regulators to junk the entire concept of “reputation risk”, which EU supervisors now demand banks under their purview must monitor.
The irony is sharp: while the EU aspired to be a regulatory superpower, the US is now acting as a deregulatory one — using deregulation to strengthen its competitiveness and make it still more attractive for foreign capital.
This highlights the urgent need for the EU to develop a genuine capacity to deregulate — to shrink, not just tidy, the regulatory state. It must find a regulatory reverse gear, a way to dismantle regulation. That requires a reset of its collective risk appetite. If it fails to do this, the growth and competitiveness it so badly needs will remain beyond its grasp. Given the security and political challenges Europe faces, that is in no one’s interests.
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