Europe’s economic base is eroding

The EU is the largest single market in the world and a community of values. Family businesses in Germany want a successful Europe. But they are very worried because Europe’s economic dynamism has fallen behind other regions of the world. At the same time, excessive regulation from Brussels is increasingly restricting the freedom of family businesses to operate. European laws are prescribing in ever greater detail how companies must act. Their compliance with these laws is then to be controlled by the state. It is an impossible job for both sides. Instead of dealing with markets and customers, companies have to do more and more administrative work and fulfil an increasing number of reporting obligations. In recent months, for example, the CSR Directive, a new directive on pay transparency and reporting obligations as part of the Carbon Border Adjustment Mechanism were added. In addition, the lack of practicability of many laws creates blatant legal risks and leads to high administrative costs. Legal certainty is one of the cornerstones of the rule of law.

We have reached a critical juncture. The future of Europe as a business location is at stake. We appeal to the EU to change direction and place greater trust in market-based solutions. Politicians are supposed to set targets, but they overburden the authorities, citizens and companies if they think they know the best way to achieve them.

Practical examples illustrate just how critical the situation is:

• A well-known family-owned company in the air filtration sector with around 22,000 employees pointed to one problematic aspect of the CSR Directive: Up to 1,149 data points for 79 companies must be quantitatively and qualitatively assessed and, if necessary, recorded. One-off costs totalling €4 million to €5 million are expected. But this is hardly all. The work will generate personnel costs that are many times higher, costs for auditing and consulting services and costs to set up an IT infrastructure. nt. This is money that will be spent exclusively on additional reporting and that will be unavailable to finance the company´s transformation, research and additional sustainability.
• Another medium-sized company is experiencing this problem first hand: As part of the new Carbon Border Adjustment Mechanism, companies are subject to new regular reporting obligations in various phases. To compile these reports, companies must request information on direct – and, in many cases, indirect – pollutant emissions from their suppliers in third countries and then aggregate this data. The EU provides a calculation template for this purpose, and this template requires the provision of dozens of in-depth details per supplier and production site. The EU guidelines comprise 266 A4 pages for suppliers and 104 pages for their customers.

The EU Commission’s initial initiatives and proposals to reduce reporting obligations are the right signal. Their focus is too granular. Their realisation is partly uncertain. It will also take further starting points to produce an urgently needed trend reversal towards de-bureaucratisation. That’s what matters now:

• All new projects must be put on hold in their regulatory-intensive part. In particular, new burdens resulting from the Corporate Sustainability Due Diligence Directive should be avoided. There must be no increased liability, and the inspection of suppliers from the EU should be eliminated. Large family businesses report that they have to hire a double-digit number of new employees in the area of compliance to fulfil the requirements. This leads to a sharp increase in administrative costs. We need to rethink things here.
• The EU Commission’s “one-in, one-out” rule must be implemented consistently. The bureaucratic costs, which are drastically increasing in practice, must first be determined on the basis of a binding European method and reduced on this common basis.
• Requirements must be practicable for companies to implement without leading to a disproportionate administrative burden. Otherwise, they should be withdrawn. The requirements for sustainability reporting are frequently unclear and lead to structural legal uncertainty. A large amount of information is not available at all. The reporting requirements of the CSR Directive must be streamlined and updated.
• Any impact assessment must include specific practical checks involving family businesses. This is also the case for the measurement of the compliance effort. Impact assessments for individual laws must also take into account the development of the regulatory environment as a whole.
• “Silo” thinking in the Commission is the core cause of excessive and inconsistent regulation. There is no overall control authority. The appointment of a SME ambassador planned by the EU Commission can be a good step if the position is given the appropriate authority and works with the interests of family businesses of all sizes in mind. Shared content must be given political consideration.

In this way, business conditions in Europe can be improved without abandoning political goals. This is urgently needed to finally halt the erosion of Europe’s economic base. We need a change of course in policy that is based on increasing competitiveness. This is the only way that Europe can remain successful.

On behalf of the Board of Trustees of the Foundation for Family Businesses and Politics. The Board of Trustees consists of more than 50 stakeholders of renowned German family enterprises.

Brussels, November 2023