Voices from the Young Leaders Network: “Cutting Red Tape: Why Bureaucracy persists and what Start-ups need from Europe” I By Simon Costa

“If Europe cannot become more productive, we will be forced to choose. We will not be able to become, at once, a leader in new technologies, a beacon of climate responsibility and an independent player on the world stage. We will not be able to finance our social model. We will have to scale back some, if not all, of our ambitions.”

Mario Draghi – “The future of European competitiveness”

Reducing regulatory burden is a priority

Europe has fallen behind the economic dynamism of the United States since the turn of the century. Real disposable income has grown almost twice as much in the US as in the EU since 2000, EU labour productivity fell from 95% of the US level in 1995 below 80% of the US level today and the difference is especially glaring in technology: Europe has approximately 130 unicorns, compared with more than 600 in the United States.

Next to a relative decrease in living standards, the more pressing concern with this are the stark choices arising from investment needs given the challenges of the 21st century.

Technological progress and its commercialization are both the cause and the way forward given this challenge for Europe. If the productivity gains from big tech would be excluded, Europe and the US would have grown broadly at par in this century. What precisely hinders the development of large tech companies in Europe and the dissipation of digital technology is spelled out in detail in the “Draghi Report” on European competitiveness:

• European research institutions lack in world-class output: just three EU institutions are among the global top 50, according to the 2022 Nature Index, as cited in the Draghi report.
• The top-notch research that is produced, does not translate into world class companies (commercialisation).
• The fragmented single market makes it hard for scale-ups to reach critical mass, so the natural route for VC funded businesses is to scale in the US.
• Bottle necks in digital and other infrastructure as well as lack of larger risk capital pools can soon lead to Europe falling further behind in these critical areas.
• The regulatory burden is especially high and relatively more burdensome on SMBs and start-ups.

From these challenges, the regulatory burden and the fragmented single market are directly in the responsibility of European governments. This should naturally be the low hanging fruit: unlike research, digital infrastructure, or commercialization, reducing bureaucracy depends solely on policy itself. Making regulation more efficient is furthermore policy-neutral in principle, that is policy direction is not changed. Because of this it is a popular demand across the political spectrum. 

The impact of increased regulatory burden

For start-ups, bureaucracy can be a decisive barrier to growth. Young firms face disproportionate costs given limited resources, which touches several aspects:

• It will drain focus and time from the early core team, which is arguably the most important resource of a start-up.
• Direct costs divert funds from core operations.
• Time-to-action, which is crucial in digital markets, is delayed waiting for approvals.
• Incumbents of larger scale do have the resources to spend little in relation to their earnings on compliance, or even have leverage to impact compliance in their favor.

Multiple studies confirm this drag and the increasing burden on companies and citizens. One example is the Annual Report of the German Normenkontrollrat, which estimates that compliance costs in Germany alone rose by EUR 9.3 billion between 2022 and 2023. These burdens translate directly into reduced agility and, ultimately, fewer scale-ups.

The demands of start-up founders for reducing regulatory burden are unsurprisingly in line with these observations:

• Simpler processes, fewer reporting duties and faster responses by the authorities
• A standardized 28th regime or “EU-Inc.” allowing innovative companies to operate across the European Union under one regime
• Homogenization of immigration and labor laws across borders to attract global talent more easily
• Simplification of equity incentives for employees
• Streamlined and digital access to public procurement tenders

The drag of regulatory burden has been well researched. Likewise, public commitments by politicians to reduce bureaucracy can be traced back decades, yet it persists.

Why is growing bureaucracy a stubborn problem to solve?

Studies in public administration (such as OECD research on regulatory governance) consistently show that bureaucracy tends to expand unless active countermeasures, such as systematic burden assessments, sunset clauses, or simplification programs are institutionalized. While Denmark, the Netherlands and other well-ranked countries in terms of administrative efficiency have systematic ex ante and ex post evaluations for newly proposed laws in place, this is often lacking.

While some mechanisms to ensure that laws are enforceable and user-friendly both on the German and EU level exist, there are no binding controls. Approaches such as the Standard Cost Model can be applied to measure the administrative burden of a proposed law. While this is an ex-ante tool to assess increased regulatory burden by proposed legislation, mandatory safeguards to ensure efficient administrative implementation are needed. Without these, legislation will accumulate over time. To achieve a long-term efficient administrative system, cost-benefit analyses and ex-post evaluations must be made mandatory and applied rigorously.

Successful digital administration and active measures to de-bureaucratize: Estonia and Denmark as best practice examples

Given these many obstacles Estonia and Denmark are considered examples where political will, digital tools, and measurable targets translated into examples for the wider EU.

Estonia: digitalisation as a remedy for long-wound processes

Following independence in 1991, Estonia lacked both resources and institutional legacy systems. Policymakers deliberately chose a modern digital-first model and trusted the still nascent internet. The result is what is known as the e-Estonia system:

• Company registration can be completed entirely online, usually in less than 20 minutes
• The “once-only” principle obliges authorities to reuse existing data, removing duplicate requests across agencies, which is a major pain point in reported by businesses across the EU

By eliminating repeated procedures and introducing legal e-signatures, Estonia has systematically reduced the administrative load on both citizens and businesses.

Denmark: Measurable burden reduction

In contrast to this new design of a digital first system, Denmark’s reforms can be characterized as systematic pruning of existing regulation. In 2001, the government launched an ambitious programme to cut administrative costs for businesses by 25% within a decade. To achieve this, Denmark applied the Standard Cost Model (SCM): All ministries were required to map business reporting obligations, measure the time and resources required, and then redesign rules to achieve the reduction target. A single authority oversees legislative impact and quality control.

While the ex-post assessment of these measures shows mixed perception by the business community, Denmark ranks among the best places to do business in the OECD and shows among the lowest costs of administration as share of GDP.

Scale, Federalism, and Path Dependency

Estonia and Denmark prove that administrative simplification and digitalization can cut costs significantly and time for citizens and businesses. Yet it would be misleading to assume their solutions can be transplanted into larger, more complex countries such as Germany or into the European Union as a whole.

One key difference lies in scale and institutional design. Estonia, with just 1.3 million citizens, built many of its systems after regaining independence in 1991. This “greenfield situation” allowed the state to focus on digital administration, creating universal e-IDs and the “once-only” principle, where citizens provide data once and the government reuses it across agencies. Denmark, with 6.0 million inhabitants, benefits from a lean institutional setup without federalism that makes central reforms easier to implement.

Germany, by contrast, is a federal state with 16 states (Bundesländer), each possessing substantial legislative and administrative authority. Reforms agreed in Berlin must still be executed at state and municipal levels. This challenge is magnified at the EU level, where directives require consensus among 27 member states and subsequent implementation in national law, creating another layer of complexity.

Denmark’s reforms reveal that leaner bureaucracy is achievable through systematic ex-ante and ex-post review of legislation along the Standard Cost Model (SCM). The playbook for “cutting red tape” is known, while the issues lie in scaling these across larger member states and the EU as a whole.

What can be done now, what should come next?

At EU scale, reducing regulatory burden in a sustainable way requires a coherent quantitative framework to analyse cost and benefits of new laws. While the European Commission does apply the Standard Cost Model to calculate regulatory burdens, no mandatory guard rails are in place and the European Parliament and Council do not have any such methodology in place. Furthermore ex-post evaluation for European legislation at a member-state level is a prerequisite to formulating a clear and measurable goal of reduced regulatory burden. Given today’s political and administrative constraints, quicker realisations will come from targeted, high-impact fixes, while a broader program for more efficient legislation is built. What these fixes should be is spelled out by start-ups themselves. One such proposal is the initiative “EU Inc.” or 28th regime, that answers directly to the call for a better integrated single market.

This proposal aims at the fragmentation of the 27 member states and suggests a new legal entity for innovative companies regarding a homogenization of the laws regarding incorporation, hiring and taxation in each EU country. This would solve the problem that different regulations for each member state must be followed, driving up regulatory cost for scale-ups in the EU – a core roadblock for commercialized innovation as outlined by the Draghi report.

While the initiative has been endorsed by Ursula von der Leyen in 2024, its success hinges on a decisive point: its implementation as a directive or as a regulation. A directive would mean that each member state transposes it through its own legislative process, in line with its national traditions and judicial practice. In the view of the initiative’s proponents, implementation as a regulation would defeat its purpose, since the entity would become an additional patchwork of 27 rules on top of the existing framework.

A supposed preference by the Commission for a directive might be motivated by pragmatic considerations. A regulation establishing a legal entity that effectively supersedes the German GmbH, French SARL, or Italian SRL would touch on core national competencies and could therefore be blocked or watered down in the European Council. For the proposal to lead to a meaningful outcome, a smart compromise that respects member-state sensitivities while finding a solution on a European scale has yet to be found.

Europe must act

The urgency of the problem is well established, and proposals to alleviate the regulatory burden have been made at both the fundamental, long-term level and the level of specific short-term solutions to cut red tape. Bureaucracy is the one competitiveness barrier that administrations can address on their own. If the Union cannot find the resolve to implement fixes now, more complex challenges will prove even less feasible.

With economic reforms taking center stage in public debate, Europe has a chance to demonstrate capacity for reform. A visible commitment to reducing administrative burden would signal that Europe can act. The well-founded, pragmatic suggestions of European entrepreneurs should be heard, showing that Europe is ready to provide space for innovation to drive the continent forward.