The EU’s policy pivot: a changing toolkit with major economic impacts

The EU is reshaping its Green Deal and unveiling a new policy toolkit that promises to have significant economic impacts over time.

In brief

• The EU is introducing a new economic policy toolkit with far-reaching impacts for both domestic and international businesses.
• The policy toolkit is expected to tackle innovation gaps, industrial needs and resource dependencies for a competitive, sustainable future.
• US companies operating in Europe should consider these policy shifts and how they might influence sustainability reporting, competitiveness and decarbonization.

Elsa Venturini, Associate Director, EY Belgium, and Ambrose Murray, Executive Director, EY Belgium, contributed to this article.

Focus on EU public policy should not waver. The objectives of the Green Deal remain, but the toolkit the EU is using to achieve those objectives is being restructured in economically significant ways.

Any US company doing business in Europe has had a weight of policy developments to respond to driven by the EU’s Green Deal: a comprehensive policy package aimed at achieving an array of economy-wide sustainability goals. Given near-term compliance windows, extra-territorial effects and complexity, conversations with US clients have tended to be dominated by the Corporate Sustainability Reporting Directive (CSRD), the EU Taxonomy and the Corporate Sustainability Due Diligence Directive (CSDDD). Companies have spent time and resources building momentum to comply with these signature environmental, social and governance (ESG) regulations. However, the first Omnibus process of the European Commission (the Commission), through its combination of delay, substantive uncertainty and speculation, has caused a slowdown in associated readiness activity.

Omnibus should not, however, reduce focus on the EU market. The EU’s big policy pivot is going to be big business, and US companies should not look away. The EU is beginning to engage in industrial policy for decarbonization and defense on an unprecedented scale. To enable the investments and coordination required to make industrial policy effective, the EU is, in parallel, implementing significant institutional, legal and single-market adjustments. It will be critical for US groups doing business in Europe to follow this agenda to capitalize on its significant implications, industry by industry. 

Diagnosing the problem: Draghi and Letta

The Draghi report (2024) is closely referenced in this storm of EU policymaking. The report takes a comprehensive look at the EU economy and diagnoses several strategic challenges. Much of the diagnosis set out by Draghi was prefigured in the Letta report, which, among other analysis, extensively documents the issues presented by regulatory fragmentation and the lack of “harmonization” in the EU’s capital markets.

Three strategic challenges are critical to explaining the urgency of the EU’s policy response (the extent of which is set out in the EU’s Competitiveness Compass launched in January 2025):

The big pivot: industrial strategy

Industrial strategy and incentive-based regulations have not been entirely absent from the EU’s policy toolkit to date, and the focus on disclosure and labeling initiatives has not been singular:

• The EU has operated an emissions trading scheme for over a decade and inaugurated its Carbon Border Adjustment Mechanism, two policies that partially set an EU carbon price.
• The EU has also had in place a range of financing instruments, such as the Multiannual Financial Framework (MFF, basically the EU’s budget), Horizon Europe and Invest EU. However, some of these are timing out, running out of resources or are not being conducted with sufficient scale in key focus areas.

The Clean Industrial Deal provides much of the ambitious framework for the EU’s industrial decarbonization agenda, setting out six priority areas:

• Affordable energy (as Europe has struggled with high energy costs)
• Boosting demand for clean products (through the proposed Industrial Decarbonization Accelerator Act)
• Financing the clean transition (through de-risking and invigorating the EU’s capital markets)
• Circularity and access to materials (through the proposed Circular Economy Act)
• Acting globally (often through strategic partnership with strategic minerals suppliers)
• Skills and quality jobs (promoting a just transition for European workers)

This suite of policies acknowledges that though the transition is underway, it is vulnerable to low-cost competition and non-market behavior from competing nations. As such, Europe aims to adjust the economics of the transition through policy intervention.

The extent of this potential tool kit is vast and includes changes to the EU’s state aid framework, proposed tax incentives, accelerated permitting, export restrictions, public procurement to create lead markets and de-risking investments.

Industrial action plans and other policy initiatives are in-progress or in development regarding a range of industries and products, including defense, automotive, iron and steel, energy transmission, batteries, and many others. We will address many of these in future articles in this series.

The big pivot: one big market

There are several elements to the project of “completing the single market” in the EU, including removing barriers, creating an EU capital market and enabling the institutions of the EU to coordinate the effort.

The EU Single Market Strategy has as its initial focus the removal of the “Terrible 10,” namely those complexities, duplications and blockages to an effective single market, especially in relation to services. Significantly, this package also proposes a Single Market Barriers Prevention Act to enable the Commission (as the EU’s executive branch) to prevent Member States from erecting barriers to the single market, similar in effect to the Commission’s proposal to prevent gold plating of new directives, such as CSDDD. The EU is also building up the resourcing and institutional capacity of the Commission to enable it to coordinate this comprehensive policy development and implementation effort.

Alongside these significant technical interventions is the EU’s plan to “get EU money moving” in service of innovation and decarbonization. The Savings and Investment Union is the umbrella initiative under which these policies are proposed. A critical feature of that initiative is the effective creation of a truly single market for financial services, the sources of funding it will provide being the ultimate enabler of the EU’s investment objectives.

Challenges

The EU faces significant strategic challenges, but much sentiment is bullish about the combined impact of the EU’s big policy pivot (particularly in the context of increased policy instability in other major markets). Much has to be agreed, and much future success depends on funding being made available at sufficient scale. Industrial policy often has impacts on a timeline that requires politically inconvenient patience. Nonetheless, the EU has reasserted its commitment to the Green Deal and seeks to bring the full weight of its political economy to bear to achieve its objectives. Policy specifics will matter by industry, but the ambition and scale of the policy interventions are clear.

Future articles in this series will address developments on a thematic and sector basis.