Matthias Bauer / Feb 2026
Image: Shutterstock
Brussels and Member State capitals spend much of their time worrying about external threats – energy dependence, supply chains, foreign technology, geopolitical pressure. Yet Europe’s most significant vulnerability lies much closer to home. It is underestimated, largely self-inflicted, and deeply structural: institutional and regulatory lock-in. While public debate fixates on the outside world, Europe’s real constraint is of its own making – a dense thicket of layered laws, fragmented legal competences and slow-moving administrative choreography shaped by institutional and political inertia. In Europe, laws rarely die; they accumulate. The result is a system that quietly constrains business scale, stifles innovation and weighs on the continent’s competitiveness.
Europe’s Institutional Dependency: A Vulnerability from Within
Europe likes to boast about its Single Market. In practice, it resembles 27 legal systems politely pretending to be one. Legal fragmentation across taxation, labour rules, contract law and sector regulation has created a peculiarly European form of dependency. Unlike the United States or China – where firms can scale across vast domestic markets from day one under far more unified legal and administrative systems – European companies must tiptoe through 27 regulatory regimes in 24 official languages. Scaling across borders is rarely a matter of simply doing more of the same. It means rewriting contracts, reworking compliance, rethinking hiring and adjusting reporting all over again, country by country, inside what is supposed to be one market.
And, of course, hiring an ever-growing platoon of tax advisers and compliance experts whose main job is to explain why something that works perfectly well in one Member State suddenly becomes complicated, expensive and slightly risky the moment it crosses a border.
Consider taxation. VAT is often presented as a success story of European harmonisation, and reforms in recent years have reduced some frictions. Yet European firms still face an enormously confusing web of different rates, exemptions, reporting obligations and interpretations across Member States. For companies operating cross-border – particularly smaller firms – this legal complexity continues to raise compliance costs and can discourage expansion. One cannot help but wonder why Europe still lacks a genuinely common VAT base, or at the very least a much simpler structure with one standard rate per country. Instead, businesses must navigate a legal maze of rates, special regimes and national exceptions that turn what should be a neutral consumption tax into a recurring administrative headache.
And just as the system grows more complex, new legal layers keep being added. The recent wave of digital-specific tax rules shows how quickly fragmentation can deepen. In Italy, for instance, new provisions have formalised special place-of-supply rules for digital services, including streaming and online events. Proposals for network traffic charges and content levies point in the same direction. Such targeted regimes do not fix the system – they thicken the fog.
Every new carve-out brings fresh definitions, formulas and reporting requirements, adding another administrative detour and another reason to hire specialists to interpret what should have been simple in the first place. Tax codes swell, European bureaucracies expand, and compliance in Europe becomes a growth industry of its own. The sensible alternative is almost dull by comparison: simple, broad-based VAT rules that are clearly enforced and properly collected, instead of constantly inventing legal new side routes for selected sectors.
Corporate taxation tells a similar story. For decades, Member States have resisted efforts to create a common consolidated corporate tax base, leaving firms operating across Europe to contend with multiple definitions of taxable income, parallel reporting systems and overlapping compliance obligations. The result is substantial legal complexity – particularly for companies seeking to grow across borders. Yet a common tax base would not eliminate tax competition. Member States could still retain sovereignty over tax rates, preserving their ability to compete on fiscal policy while reducing compliance burdens and legal uncertainty for firms operating across the Single Market.
Compared with more integrated economic systems, the contrast is striking. In the United States and China, a single national tax base and broadly consistent reporting frameworks provide a stable foundation for firms expanding across regions. The American system is far from perfect – states retain significant tax powers and add their own layers of legal complexity. Yet it still operates within one overarching federal structure, one dominant accounting framework (US GAAP), a shared legal vocabulary and, in practice, a single working language: English.
In Europe, by contrast, companies must navigate not only different tax logics, but also 27 legal interpretations expressed across 24 official languages. For large multinationals this remains manageable. For smaller firms, however, it is a meaningful barrier to scaling across what is meant to be a single market.
Labour market laws add another layer. National employment law, collective bargaining systems and social security frameworks differ widely, often compounded by gold-plating of European directives. For European firms operating across borders, hiring is rarely a matter of simply replicating a successful model. It requires adjustments to local legal and institutional settings, which adds immense legal complexity and deters expansion.
Legal fragmentation persists even in sectors where one would expect a high degree of uniformity. This is particularly visible in technical and infrastructure-related fields. In areas such as metering and energy-related services – which depend on interoperability, data exchange and scale – national regulatory approaches and implementation practices still differ significantly. These differences do not prevent cross-border activity, but they slow rollout, raise adaptation costs and reduce the benefits of scale.
Taken together, these frictions form a structural constraint on Europe’s economic potential. The Single Market promises scale in theory; legal and institutional diversity limits it in practice. High fixed compliance costs tend to favour incumbents, discourage investment and create steep barriers for smaller firms seeking to scale.
Europe’s Most Profound Dependency: Institutional and Regulatory Lock-In
The EU27’s regulatory machinery is highly effective at producing new rules, yet far less adept at simplifying or aligning them once they are in place. Over time, complex legal frameworks develop their own administrative routines, legal interpretations and professional ecosystems – many of them clustered in Brussels, where managing and navigating complexity has become a professional habitat in its own right. This creates a powerful form of inertia: even when there is broad recognition that simplification would be beneficial, adjusting or consolidating existing legal regimes becomes politically and institutionally close to impossible.
This, in turn, is Europe’s particular kind of vulnerability. The dependencies most European firms face are not commercial or technological – they are institutional and imposed by law. Companies cannot work around them, substitute them, or innovate their way past them.
Europe finds itself in a protracted competitiveness crisis. More than ever before, European firms depend on the consistent interpretation of laws across borders, on effective administrative coordination, and on regulatory frameworks that can both adapt when economic conditions change and, when necessary, be rolled back or abandoned entirely.
Legal Integration Where It Matters Most
Many initiatives adopted in the name of resilience have legitimate objectives. But layering new horizontal rules on top of existing national frameworks without addressing underlying fragmentation will only add further legal complexity. The result is more coordination requirements and higher compliance burdens, while the core problem – very little legal harmonisation and administrative coherence across the Single Market – remains.
Putting this into perspective, Europe’s situation is not the result of a single failure but of an increasingly outdated system built on political compromise. Fragmented party landscapes, layered responsibilities and an institutional patchwork designed to protect national prerogatives have produced a model that advances integration only cautiously, and almost never steps back. National ministries defend their competences. The European Commission safeguards the integrity of the treaties and the interpretation of the legal order. Both roles were long seen as legitimate and necessary. Yet taken together, they have created a structure that is very good at adding new layers, and far less capable of removing old ones. Structural simplification is not openly resisted – it is simply crowded out by the logic of preservation.
There are attempts to move the debate forward. In the European Parliament and beyond, discussions about institutional reform and deeper legal integration have regained momentum. But “more Europe” can mean many very different things. There are many versions of federalism, and not all lead in the same direction. Europe does not need to become the United States of Europe. Nor should it drift towards a centralised, top-down model where economic coordination is imposed from the centre in the way it is in China. What Europe needs instead is something more focused and more practical: greater coherence in the rules that matter for the functioning of markets.
For businesses of all sizes and across all sectors, the most meaningful form of integration is not institutional symbolism but legal clarity in the rules that determine whether firms can operate across borders in practice. Companies seeking to expand beyond their home markets depend on frameworks for taxation, contract law, social security, cross-border services, labour mobility and regulatory implementation that are understandable and predictable. Greater legal harmonisation in these foundational areas does more for competitiveness than yet another layer of EU programmes, funds or strategies.
The long-term ambition should not be harmonisation for its own sake, but the establishment of genuinely common legal frameworks in the domains that shape cross-border economic activity, combined with consistent interpretation and enforcement across Member States. Only then can firms scale across the European market without repeatedly having to adapt to national legal environments that, in principle, are meant to form part of a single economic space.
In that sense, the original spirit of the European Economic Community (EEC) still offers a useful reference point. Its strength was not centralisation, but the creation of a rules-based economic space in which firms could operate across borders with confidence. A modernised version of that idea would focus less on protecting existing governance structures and more on enabling citizens and companies to act, invest and trade across Europe without constantly re-learning the system in each country.
What Europe may ultimately need is not simply institutional reform, but a clearer constitutional understanding of what integration is for. Not a constitution designed to preserve the prerogatives of national administrations, nor one built around ever more complex governance layers, but a framework centred on people, common markets and economic opportunity. One that defines a limited number of common rules that truly apply across the Union – and leaves space for diversity elsewhere.
The real question is not whether Europe needs more or less integration, but whether it is prepared to pursue deeper legal integration where it actually matters. A functioning Single Market depends on laws that are simpler, more harmonised and applied in the same way across borders. It requires a clear willingness to revisit – and, where necessary, remove – legacy frameworks that no longer serve their original purpose.
Europe’s challenge is not that it is too connected to the world. It is that it remains insufficiently connected to itself. Until institutional and regulatory fragmentation is treated as a core competitiveness issue, EU Member States will continue to turn their own internal complexities into a protracted economic weakness.
