As Commission prepares to unveil its so-called 28th regime proposal, the stakes for Europe’s fragmented single market have never been higher. Years of failed attempts to create a unified cross-border framework are colliding with mounting geopolitical pressure and the stark warnings in the Letta and Draghi reports. “A lot is at stake here—it is not simply a technical detail,” says expert Judith Arnal in an interview.
As the startup community prepares for a proposal that would allow for one set of rules on the single market instead of 27 different ones, the regulatory path forward remains fiercely contested. Leaked Commission documents and strong Parliamentary preference for a directive have alarmed the startup community, who fear different national implementations will simply reproduce the fragmentation the regime is designed to eliminate.
In this interview with EU Perspectives, Judith Arnal—Associate Senior Research Fellow at Centre for European Policy Studies (CEPS), Senior Research Fellow at the Elcano Royal Institute, and co-author of the CEPS report ’Establishing the 28th regime in Europe’—explains why the choice between regulation and directive is far more than a technical detail.
The European Parliament recently voted to endorse recommendations for the 28th regime, and President von der Leyen announced ’EU-Inc.’ at Davos. You co-authored the major CEPS study on this. After years of stalled attempts, why is this moment different?
I think there are both external and internal reasons that can explain this. Externally, we are under a lot of geopolitical and trade pressure. We need to make our internal market work to compensate for more complicated trade relationships with traditionally allied and like-minded countries like the Unites States.
Internally, we also see how momentum is growing, especially thanks to the reports by both Enrico Letta and Mario Draghi. I think both these external and internal pressures are making it clear that we cannot afford anymore not to rely on a fully integrated internal market.
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The startup community is concerned about leaked Commission documents suggesting a regulatory approach, while the Parliament has expressed preference for a directive. What’s actually at stake with the choice of regulation versus directive for the 28th regime?
A lot is at stake here—it is not simply a technical detail. If we go for a directive, then we will see 27 different transpositions with gold plating, derogations, options, and national discretion. This would probably defeat the main purpose of the 28th regime, which is to provide companies with a really harmonized regime in different elements like company law, insolvency law, tax law, and labor law. A directive would simply defeat the purpose of the whole exercise.
Some MEPs like René Repasi (S&D, DEU) call the directive a ‘pragmatic compromise’ since unanimous Council support for a regulation may be politically impossible. But if the political resistance is that strong, can a directive—with 27 different national implementations—still solve the fragmentation problem it is designed to fix?
We need to make a clear distinction here. The voting rule in the Council does not depend on whether we are talking about a regulation or a directive, but about the legal basis for that proposal of the 28th regime. If we’re talking about Article 114, which is the internal market legal basis, or Article 50, which is the legal basis for company law, we are talking about qualified majority in the Council. However, if we went for Article 352 of the Treaty on the Functioning of the European Union, which is basically the safeguard clause or legal basis to go into other areas that are not covered by other articles, we would need unanimity.
A directive would result in 27 different transpositions with gold plating, derogations, options, and national discretion. – Judith Arnal, Associate Senior Research Fellow at Centre for European Policy Studies
So I don’t think that going for a directive instead of a regulation is what would allow us to depart from the need for unanimity. It’s not the type of instrument, but the legal basis on which the proposal would be put forward.
Going for a directive is a political compromise that would simply lead us back to previous exercises—previous failed attempts that we have seen to have a 28th regime. The Commission would be ticking a box, the legislators would be ticking a box, but this would simply not work for companies. They would still need to navigate 27 different legal frameworks. They would need to see how that directive has been transposed, what derogations, what gold plating in each member state. That would simply defeat the whole exercise and the whole idea.
Even if the Commission proposes a regulation, we have seen with the Societas Europaea—which took 30 years to create—that it’s barely used because of complexity and being targeted toward larger businesses. How do you avoid these pitfalls and not fall into the same path as past efforts?
One of the failures with Societas Europaea was that it was targeting a very specific type of company—basically big companies. That’s why it was barely used. We should not try to target specific types of companies but try to build company, tax, insolvency, and labor common ground for all types of companies. That would be a step in the right direction.
Another point is that there were some elements that were hybridized, meaning that a Societas Europaea would still need to have a look at the 27 different national insolvency, tax, and labor regimes. The extent to which the Societas Europaea provided a harmonized framework to operate cross-border in the internal market was very limited. Those two elements were the ones that really made this regime—I don’t know if I would call it a failure—but not as successful as one would have expected.
Is piloting through small groups of member states a viable path logistically right now, taking into context the political preferences of this present moment?
I am not a big fan of piloting. I think it can be used in some very specific cases, but we need to know what we are piloting and why. If we want to pilot a single accounting framework or a one-stop shop, this needs to be in a very limited timeframe and basically to try to prove to other member states the usefulness of this.
But this piloting cannot become common practice to build mini clubs, because again, this would simply defeat the purpose, which is to have an internal market of 27 member states, or at least 25 or 26. If we go into small groups of five, six, or seven member states and this becomes permanent, and these piloting exercises are not made with the purpose of showing to other member states the advantages and just moving all together—at least with a very high number of member states—then I think it’s not a good idea.
You worked with ENISA, Spain’s startup promotion agency. From that experience, what is the one thing people misunderstand about what European startups actually need to reach the scale they want?
Many times we want to create mini programs for startups or subsidies, tax incentives—very targeted and specific public programs for startups. But if a startup has a good idea and it becomes successful, then it will want to scale-up very soon and it will want to start operating cross-border.
What we do not understand is that we really need the single market. Sometimes we just want to introduce labels and give specific tailored programs to startups so that they become scale-ups, but what they really need is a single market. That is why many of them go to the United States. Sometimes it is because they have more venture capital—that is true—but that is also very much related to having a single market. We do not understand how harmful fragmentation is for our startups to thrive.
The Commission says their proposal will arrive within the first quarter of this year. What does this proposal have to include to be appealing for European businesses?
It needs to have a clear value proposition for businesses. We really need to think about what businesses need to obtain to really think that this is a valuable proposal. If we are only doing this for the sake of integrating—if we put political objectives before a business’s interests—I think we will probably end up with a political agreement. Politicians will tick the box, but then it will be added again in future analysis to the failure column.
There is a clear trade-off in any case between political interests and business interests. Politicians will probably want to say, “We have made an agreement on the 28th regime, good, done, well done.” If they come too quickly to an agreement—unless there is a lot of political support for this—this will mean that they have left many things behind, and this will reduce business interest.
The Commission should try to build a coalition of political and business interests behind their 28th regime idea. They really need to find member states willing to support it and also strong business groups and business associations of scale-ups and startups supporting the 28th regime. They need to build cross-border momentum across the political and business spectra to support their idea. Otherwise, if it’s simply a tick-the-box political exercise, businesses will not opt into it.
