Amid a sweeping wave of US deregulation to kick off Donald Trump’s second presidency, the EU is mounting its response.
On 29th January, European Commission President Ursula von der Leyen launched the process for dismantling the Green Deal that defined her first term. Dubbed the ‘Competitiveness Compass,’ this red-tape cutting gambit to boost the bloc’s industrial power in a “new era of harsh geostrategic competition” equally reflects internal political forces.
Indeed, the past year’s rightward swing in the European Parliament has seen von der Leyen’s EPP party increasingly court the ascendant hard-right, with critics characterising the Compass as a green betrayal designed to appease these MEP groups. That perception has only been reinforced by Patriots for Europe leader Jordan Bardella’s 28th January letter urging leading EPP figures to help him kill the Green Deal.
Yet, ideological purity is a luxury Brussels can no longer afford. To compete with the U.S. and China, the EU must strike a pragmatic balance, tightening regulation where public health and fiscal stability demand it, such as tobacco control, while aggressively fostering innovation and competitiveness in strategic industries like AI and defense.
Getting the Compass off the ground
The EU’s emerging competitiveness agenda comes after years of sluggish growth and innovation, with the bloc’s existential economic weaknesses laid bare in two landmark reports from former Italian prime ministers Enrico Letta and Mario Draghi last year.
In her address at January’s World Economic Forum in Davos, von der Leyen conspicuously failed to mention these industrial struggles, with other striking omissions including Trump’s return and the far-right’s rising influence in EU politics. Instead, the EU chief framed the bloc as a “global and reliable” economic force, outlining US-inspired measures to unify fragmented capital markets, mobilise billions in private savings for investment and streamline regulation to grow world-leading companies that keep pace with global competitors.
As part of this Competitiveness Compass initiative, the EU executive plans to reallocate regional funding—traditionally reserved for infrastructure and education—toward EU-wide strategic investments. A new TechEU fund, led by the European Investment Bank, would notably provide financing for AI, clean tech, semiconductors, energy storage and other innovative industries, complemented by regulatory reforms aimed at cutting competitiveness-killing energy prices that have eroded the bloc’s industrial base – especially painfully in long-time powerhouse Germany.
Brussels’s glaring regulatory paradox
Yet, von der Leyen’s Davos speech equally signaled that the EU “will be pragmatic, but we will always stand by our principles…and uphold our values” – a “European way” regulatory approach that Trump lambasted in his own Davos remarks, bemoaning the growth-stifling effect of Brussels’s infamously slow-moving bureaucracy. While Brussels has been fairly criticised for its ideologically-driven, innovation-hindering regulatory battles, particularly in the digital tech and green spheres, it has paradoxically failed to impose strong oversight where it matters most.
Nowhere is this contradiction clearer than in tobacco control, where the hypocrisy of von der Leyen’s new red tape cutting mantra is laid bare by the Commission’s selection of an excessively complex, bureaucratic and fragmented track and trace system, whose complications play directly into the tobacco industry’s hands. Indeed, the EU executive’s transparency failures – prominently highlighted by former European Ombudsman Emily O’Reilly’s maladministration rulings – have given Big Tobacco excessive influence over this critical policy for tackling Europe’s rising, record-high illicit tobacco trade.
This illicit trade plague is not only undermining the EU’s tobacco-free goals and putting citizens at direct health risk, but also draining an estimated – but likely much higher – €10 billion in annual cigarette excise tax revenue at a time when EU and member-state innovation budgets are already stretched thin.
Big Tobacco and partners’ infiltration calls for bolstered regulation
According to leading tobacco control experts and NGOs, Big Tobacco’s interference has delayed crucial revisions to the Tobacco Products Directive (TPD) and the Tobacco Taxation Directive (TTD) – the former of which initially included a provision to implement a WHO FCTC-compliant track and trace system, removed at the eleventh hour due to tobacco lobbyist interference.
A recent White Paper produced by MEPs and advocacy groups like the EU-wide Smoke-Free Partnership (SFP) exposes how Big Tobacco has mobilised its private sector partners to mould EU track and trace to meet its commercial interests rather than Europe’s public health and fiscal resilience objectives. Concerningly, the White Paper highlights the deep Big Tobacco ties of two Swiss providers at the core of the system – Dentsu Tracking and Inexto – both of which have inherited the Codentify technology developed by PMI via their respective acquisitions.
Furthermore, Dentsu was selected by the Commission in opaque conditions, with its contract – mired by a conflict-of-interest scandal exposed by MEPs – notably extended for an additional five-year term in late 2023, once again without a public tender. Meanwhile, Inexto is in charge of traceability for Big Tobacco in the EU despite prevented from participating in public tenders. Like Dentsu, Inexto continues to experience removals from tender processes in countries outside of Europe due to its ongoing, openly-admitted tobacco industry links, yet remains inexplicably involved in the EU traceability system.
This reality underscores the Commission’s ineffective criteria for ensuring a tobacco-industry independent track and trace solution in full compliance with the WHO FCTC and its Illicit Trade Protocol. Consequently, Big Tobacco has gotten its wish of a weak system coinciding with a consistently-rising illicit trade in Europe since its implementation in 2019.
Can EU Compass guide way forward?
Considering the significant tax collection benefits of fully independent traceability systems, which have generated revenue hikes of over 50% in certain countries, the EU is forfeiting billions in potential revenue every year that could fuel its new industrial innovation and defence schemes under the Competitiveness Compass umbrella.
China’s DeepSeek AI breakthrough proves that Europe still has a chance to close the innovation gap—if it moves fast. At the Compass’s core, the EU executive is rightly prioritising an AI startup and scaleup strategy and a Clean Industrial Deal to integrate its innovation and sustainability goals. With war at its doorstep, Brussels is equally urging defense firms to scale up and coordinate production – a task that industry players warn has been hindered by cumbersome rules and limited funding.
Regulatory simplification will be vital for the bloc’s most strategic and competitiveness-boosting industries, a push that the Franco-German engine is encouragingly uniting behind despite recent bilateral tensions. Yet, Brussels must resist its tendency to overregulate just as it starts cutting red tape elsewhere. The European Space Act, set for 2025, risks doing just that, with early drafts prompting key aerospace players like Germany to warn against holding rocket-makers back with a fresh layer of extraterrestrial red tape.
The EU stands at a crossroads. Clinging to outdated regulations will cement its decline, while reckless, Trump-style deregulation risks long-term instability. Instead, Brussels must act pragmatically—bolstering oversight where it strengthens public health and fiscal resilience, while cutting bureaucracy to ramp up innovation and competitiveness critical to Europe’s long-term economic survival in an increasingly hostile climate.
