France Digitale's views on a European Competitiveness deal
Europe
In the context of a Competitiveness Deal discussed by heads of the European Union Member States, Enrico Letta’s report is a good basis, although some reforms could be deepened. For France Digitale, three points should make it to the Competitiveness Deal.
After years of passive attention and belief in the rule-based order of multilateralism, Europe is finally waking up. The European Union, it seems, has finally grappled with the perte de vitesse of its economy, despite the strength of its research clusters, primed universities and innovative entrepreneurs.
As a sign of the times to come ahead, and 50 days before the European elections, competitiveness is on everyone’s lips in Brussels and in Member States. Former President of the Italian Council Enrico Letta just published a 147 pages report on the future of the Single Market and EU Member States are gathering to discuss, during a two-day Summit, the idea of a Competitiveness Deal to strengthen the EU’s economy.
Building on these recent publications, and in line with France Digitale’s Manifesto for the European elections, the actors that we represent – startups, scale-ups and venture capitalists – welcome this renewed interest towards innovation, and call for it to be the centrepiece of this new competitiveness deal.
The innovation ecosystem believes that the Competitiveness Deal should notably be comprised of a (i) tangible support for companies to scale in the Single Market, for a (ii) European public investment that matches the EU’s ambitions and (iii) a push for better access to private capital for young and innovative companies.
- A Scaling in Europe Package
“Allowing EU companies to scale up within the Single Market is not just an economic imperative but also a strategic one.” Enrico Letta
European companies suffer crucially from a size deficit compared to their American and Chinese counterparts. To be more competitive on a larger stage, Europe must allow its companies to grow in Europe, at different stages of the innovative value chains, with a Scaling in Europe Package.
This package should include Enrico Letta’s proposal of a European Business Code, allowing for a 28th regime to operate within the Single Market, to unlock the potential of the Single Market and its 450 million inhabitants. The willingness to harmonise rules within the EU (on market law, insolvency, intellectual property, employment) is welcome by France Digitale, as it is on par with our mission to create European champions. As proposed in our Manifesto, we believe the European business code could also further harmonise stock options regimes for employees, and provide accelerated visa procedures to attract foreign talents.
However, this 28th regime should not be exclusive to SMEs. Once they have outgrown their status, fully grown scale-ups should not face an administrative wall while they are still on a path to growth and rentability. An innovative Societas Europaea status, easily accessible to startups, could be offered to those who are scaling throughout the continent, offering better access to talents, funding, innovative procurement and fast track administrative procedures.
Talks have also been ongoing, in Brussels and in Member States, on the need for skills and talents, which are as crucial as funding when it comes to scaling in Europe. Despite the EU’s limited competences in the field, we salute Enrico Letta’s proposal for a European Degree, the mention of the EU Talent Pool and the call for a full implementation of a coordinated social security in Europe. However, there is a lack of proposals on how to foster skills in Europe for the strategic technologies that we want to develop. Taking inspiration from the Net Zero Industry Act, we believe the EU could boost the creation of academies for specific technologies, with public-private partnerships involving universities, SMEs, startups and larger groups.
- A Strategic Technologies Investment Plan that matches European ambitions
“Faced with strong global competition, the EU must step up its efforts to develop a competitive industrial strategy capable of counteracting instruments recently adopted by other global powers, such as the US Inflation Reduction Act.” Enrico Letta
The European Union, faced with the energy crisis and strong global competition, has temporarily allowed for a more liberalised use of state aid. The French ecosystem greatly benefited from this relaxation, as France accounts for 24% of state aid permitted in 2022 (second, after Germany’s 53%). As Enrico Letta’s report highlights, these efforts are necessary to face the US’ IRA – but will remain weak if not pooled at a European level. We welcome the report’s intention to set European common objectives to state aid mechanisms, allowing Member States to support its economy if it answers to European concerns, with common conditionality and a mechanism to contribute to a common pot at the EU level, as well as calls to make the application processes less burdensome for SMEs. Further harmonisation of the state aid procedures could allow for European scale-ups to apply more easily throughout the continent, and diversify their finances.
The debate for state aid, however, should be enhanced by a European plan for investments on strategic technologies, complementary to the national plans already proposed. While Letta’s report mentions the importance of the next European budget (2028-2035), Member States’ reluctance to invest further on strategic technologies (as showcased in STEP, the strategic technologies for Europe platform) does not call for a common European investment plan, such as the once-envisaged European Sovereignty Fund. The next European budget should also have a deeper look at research and innovation programs, such as Horizon Europe, which are not targeted towards commercialisation enough, and leave researchers with money but no information nor incentive to launch their innovation on the market.
France Digitale has been leading the call for innovative public procurement, with a joint call co-signed by 15 startup associations for a Buy European Tech Act published in July 2022. We thus welcome the report’s demand to reduce over-reliance on the cheapest bid. European public procurement rules date from 2014 and are now outdated, in an age of green and competitiveness ambitions for innovation. We strongly support the idea to go from a Directive to a Regulation when it comes to public procurement, to limit national fragmentation and ease startups’ access to applications in different national markets.
The report’s call for a minimum quota of innovation procurement for Member States is also of interest, as it will boost the use of innovative solutions across Europe and diversify startups’ revenues. Yet, there is no call for resilience criteria, although already planned within the Net Zero Industry Act. To push its innovative solution in the entire value chains of strategic technologies, and to assure Europe’s economic security, resilience criteria should be an integral part of a new public procurement regulation.
- A Saving and Investments Union to ensure adequate funding for innovation
“While the EU has boldly set forth an array of ambitious goals, a critical challenge remains unresolved: the funding of these aspirations.” (Letta report)
The innovative ecosystem appreciates that the report on the Single Market acknowledges the need to boost private capital’s activities in Europe, especially in line with the recent calls for a deepening of the Capital Markets Union (CMU). Enrico Letta’s observation is correct: the CMU has not delivered, and liquidity is still missing in European markets, which does not allow for successful exits on the continent and large investments in innovation. This is an issue for the financial market, but more importantly for the European twin transition, which needs 620 billion euros of investments annually to be successful, according to Letta’s report. Today, an innovative company which provides solutions for the resilience of the EU green or digital transition has more appeal to enlist on American stock exchanges rather than European ones, a move which correlates with more investments, recruitments and R&D done overseas.
As such, a single entry point to European capital markets for small and mid-cap companies is promising, as well as a specific EU Deep Tech Stock Exchange, with a “different (less risk adverse) EU prudential regime with supervision”. The Deep Tech lists of technologies that benefit from this measure should however be expanded to the tech ecosystem (cleantech, platforms, saas…) as they are key actors of European strategic autonomy. Furthermore, similar private initiatives have failed in the past and the EU needs to make sure this new stock exchange is attractive to investors.
For the first time in recent years, the Council Conclusion will mention the need to improve the conditions for institutional, retail and cross-border investment. The investors (pension funds and insurers) are key to unlocking the potential of EU startups, as they are largely under-participating in venture capital compared with the US. As such, today it is US pension retirees that are mostly benefiting from the success of EU promising tech startups.
We therefore welcome the concrete solutions of Enrico Letta’s report to increase institutional investors’ participation to fund innovation (A Saving and Investments Union), notably by creating an auto-enrolment EU Long-Term Savings Product for pension funds and better allocation of insurers’ assets into tailored risk investments. These measures will help institutional investors into betting on innovation, but we need to create more connections between these two ecosystems. We call on the European Union to build on the example of the Tibi initiative in France and the German Watchstumsfond to promote investments into VCs and further deepen sustainable investment streams between the two ecosystems that will benefit non-listed companies.