Inês Maria Ribeiro da Costa (master’s student in European Union Law at the School of Law of University of Minho)
1. Introduction
On the 23rd and 24th of April EU leaders are meeting in an informal summit to discuss “current political developments and issues of strategic importance for the European Union”,[1] namely on the activation of a mutual assistance clause in the Treaty on European Union (TEU)[2] in case of an armed attack.[3]
In 2026, the Union’s geopolitical survival is at the top of the agenda, a priority for which European competitiveness is proving to be a necessity, rather than just a market concern. So much so that Ursula von der Leyen, President of the European Commission, has been promoting the idea of a “two-speed” Europe, arguing that Member States that favour enhanced integration[4] – in a group of at least nine – should be able to move forward in a coordinated effort to strengthen the Internal Market.[5]
In 2025, this competitiveness was at the heart of a significant strategic restructuring, focusing on post-pandemic recovery and responding to technological pressure from the United States of America (US) and China. To preserve and strengthen Europe’s position relative to global actors, it became essential to take decisive measures.[6]
In this regard, the “Competitiveness Compass” emerged as the Commission’s first major initiative, based on the Draghi Report. This new plan addresses the need to reposition Europe in response to the erosion of its innovative capacity, increasing global competitive pressure, and the vulnerabilities revealed by growing external economic and technological dependencies.[7]
Nevertheless, one year after its publication, we find ourselves facing a new geopolitical scenario and on the brink of a new energy crisis in the European Union (EU). With the recent escalation of tensions between the US and Iran and the resulting closure of the Strait of Hormuz, we are witnessing a steady rise in fuel and gas prices, whose impact is beginning to be felt acutely in the EU.
The conflict in the Middle East in 2026 has tested the premise that the Union needs to reduce its external dependencies to avoid coercion. It is becoming clear that strategic autonomy is no longer a theoretical concept but a matter of survival. The current crisis in the Middle East has forced the EU to accelerate its transition from a focus on efficiency to a focus on resilience. The question at hand is quite clear: is the Compass a sufficiently robust strategic instrument to prevent external coercion, or are we facing a silent fragmentation of the Single Market?
2. The legacy of February 2025: expectations vs. outcomes
Published in January 2025, the “New Compass for Competitiveness” is not merely a policy paper, but an effective strategic plan that establishes competitiveness as one of the Union’s “overarching principles for action”.[8] Based on Draghi’s report, this initiative has a twofold objective: “to accelerate economic reforms” and “to improve the way the EU works together”, with speed and unity being essential to its success.[9]
In the context of EU law, the importance of this “New Compass” lies in how its reform pillars interact with the traditional framework of the Internal Market and Competition. The third criterion for change in the Compass is “reducing excessive dependencies and increasing security”,[10] an objective that reflects the reconfiguration of the concept of the Internal Market within the economic sphere. The Compass also aims to take the lead in strategic technology sectors – “such as AI, quantum and semiconductor technologies, advanced materials, biotechnologies, robotics, space, and connected and autonomous mobility”[11] – in order to consolidate European technological sovereignty.
To this extent, competition and Internal Market rules have been realigned to serve as instruments of autonomy, notably through the simplification and flexibilisation of State aid rules (Articles 107–109 TFEU) and the use of exception mechanisms, such as the “Temporary Crisis and Transition Framework,” established in the wake of Russia’s aggression against Ukraine, which has led to the implementation of State aid measures to support the economy.[12]
In the meantime, the European Commission is actively working to simplify the regulatory framework in order to support businesses and increase competitiveness, with the Internal Market serving as the main catalyst for growth.[13] A central element of this simplification is the Omnibus Package, which, together with this strategy, seeks to remove existing barriers so that businesses can fully enjoy the benefits of economies of scale,[14] representing “an important step forward in creating a more favourable business environment to help EU companies grow, innovate, and create jobs”.[15]
Nevertheless, one year after its implementation, its execution has proved to be uneven. On February 26, 2026, the Omnibus simplification package was finally published in the Official Journal of the EU.[16] While the Commission presents this package as a necessary step towards “significantly reducing the effort associated with sustainability reporting” – as a way of maintaining the transition to a sustainable economy without compromising ESG standards[17] – these proposals have sparked debate and remain a critical challenge.
In fact, the “simplification” rhetoric surrounding the Omnibus Package has been received with some scepticism. For many, this measure could undermine the regulatory standards established by the EU; consequently, the debate surrounding the package reveals a clear tension: the difficulty of balancing competitiveness with the preservation of fundamental social and environmental standards and values.
The key to making this ambition a reality lies in Enrico Letta’s proposal, the “Savings and Investment Union,” which still faces serious challenges. The potential fragmentation of national markets continues to prevent the EU from achieving the scale necessary to compete with the US “Inflation Reduction Act.” Without centralised European funding, “technological sovereignty” in sectors such as AI remains dependent on national budgets, which are often disparate.
Moreover, the urgency that Draghi demands often clashes with the Union’s complex governance structure. Internal political fragmentation prevents the “Compass” from being a fully effective plan. Although the “Compass” mentions strategic sectors such as biotechnology, the conflict in the Middle East has shown that leadership in AI, for example, is meaningless without energy security. Although initiatives such as “AI factories” are being implemented, their sustainability is at risk due to the high production costs caused by the crisis in the Strait of Hormuz.
The legacy of the Compass’s first year is, therefore, a “two-speed” Union, as mentioned earlier: one that is moving swiftly toward administrative deregulation (Omnibus) but remains stalled in the creation of a true common financial authority, leaving strategic autonomy dangerously exposed to external shocks such as the current conflict in the Middle East.
3. The conflict in the Middle East and the EU’s external dependencies
In 2026, the impact of the conflict in the Middle East validated the sense of urgency Draghi has been emphasising — the era of geopolitical stability is coming to an end — and this crisis is affecting the EU in terms of energy vulnerabilities, supply chains, and geopolitical coercion. Iran’s retaliation, following the US attacks on February 28, disrupted the supply of about 15 million barrels of oil per day, triggering, according to the International Energy Agency, “the largest supply disruption in the history of the oil market.”[18]
Thus, we observe that the EU is undergoing a period of structural reform in which the traditional model of integration — focused on the removal of barriers — has proven insufficient in the face of current political fragmentation. Given this unstable context in which we live, Letta proposes the institutionalisation of “the 5th Freedom to enhance research, innovation, and education in the Single Market.”[19] This proposal is not purely theoretical and does not seek merely to stimulate growth, but strives to operationalise a cutting-edge industrial ecosystem that enables the Union to establish globally relevant entities, as well as a common digital infrastructure and European data spaces, such as the European Health Data Space, to enable technological leadership.[20] To make this ambition a reality, Letta incorporates the concept of a “Savings and Investment Union,” capable of mobilising European private capital for internal strategic projects, preventing its transfer to third-party markets.[21]/[22]
In parallel, Mario Draghi, in the report “The future of European competitiveness,” adopts a sense of urgency by asserting that the EU faces an “existential challenge” due to the loss of its traditional sources of growth – cheap Russian energy and geopolitical stability[23] – arguing that European competitiveness currently requires a “war economy” approach in the industrial sphere, where security and energy are requirements for prosperity.
The urgent need to abandon fossil fuels, as outlined in the 2025 Roadmap, has become a matter of survival. As pointed out by Jorgensen – a representative of the European Commission – the effects of this conflict “will not be short-lived” and, even in the event of a ceasefire, there would still be consequences.[24] Therefore, the EU finds itself in a position where it is compelled to take emergency measures ranging from promoting telework and limiting speeds on highways to the urgent need to expand energy supply sources, with the debate on the potential of fusion energy gaining greater relevance for the first time – not merely in theory, but also in practice.[25]
In addition, the restrictions on shipping through the Strait of Hormuz put the Union’s “Resilience 2.0” to the test. The resulting disruption to trade exposed the fragility of import routes, requiring full coordination of industrial policies that Member States had, until now, been reluctant to fund. One thing has become clear: external dependence is no longer merely an economic risk but has become a direct obstacle to European production. And as such, as outlined in the “Compass,” exposure to external shocks makes the EU vulnerable to coercion, making strategic autonomy an essential requirement for our own democracy within the Union.
Nevertheless, this transformation process faces an internal challenge: crisis management. The European Commission has already issued a warning to European countries, stressing that Member States must avoid turning this “energy crisis into a budgetary crisis”.[26] The Commission argues that “the subsidies and price caps proposed by the 27 [Member States] must be limited in time and scope, in order to prevent a recurrence of the 2022 energy crisis”,[27] and cautioning that the response to external pressure must not result in the destabilisation of public finances – a risk that, if materialised, would fragment the European solidarity that the “Compass” itself seeks to preserve.
4. Critical analysis: where do we stand a year later?
The doctrinal debate over the “New Compass for Competitiveness” oscillates between Enrico Letta’s vision – which enshrines a “5th freedom to enhance research, innovation and education in the Single Market”,[28] parallel to the four traditional freedoms – and that of Mario Draghi, who describes strategic autonomy as being most akin to a structural principle of the Internal Market. One year after its implementation, the fundamental question is whether this instrument is robust enough to prevent external coercion or whether we are witnessing a silent fragmentation of the Single Market.
The answer lies in the dual nature of this instrument. If strategic autonomy is perceived as merely a softening of competition rules, the risk of fragmentation increases and becomes a real possibility. The implementation of the “Temporary Crisis and Transition Framework” has enabled a renationalisation at the national level, where Member States with greater resources – Germany and France – may end up investing disproportionately, distorting the “level playing field.”[29] Rather than giving the Union any strength, this dynamic merely fragments its core, creating a “two-speed” market where internal solidarity is sacrificed in the name of an industrial policy that only the wealthiest Member States can afford. As the European Parliament (EP) states, competitiveness cannot be pursued at the expense of social justice or the weakening of poorer Member States.[30]/[31] European integration will collapse if the Union becomes strategically strong externally but fragments internally.
However, the “Compass” can truly be a robust instrument. To achieve this, it must cease to be perceived as a “fundamental freedom” and instead be established as an institutional freedom of action for the EU. The robustness of this instrument stems from active coordination among the 27 Member States. As suggested by Letta’s proposal for a State aid contribution mechanism, the EU will only be able to avoid fragmentation if it is capable of transitioning from a logic of national permissiveness to one of collective financing. The success of the future of European integration depends on a reform that combines both an external strategy and an internal approach based on solidarity. In other words, this means that the EU cannot continue to be merely an open market that passively follows the rules of globalisation, which implies ensuring that the “new freedom” prevents capital from fleeing abroad.[32]/[33]
In this context, recent debates regarding a “two-speed” economic integration plan are particularly relevant. For the Union to overcome the paralysis caused by silent fragmentation, the “Compass” must serve as a regulatory framework for Member States willing to move toward greater cooperation. This vanguard could provide the necessary flexibility for deeper economic integration for those states ready to commit, ensuring that the EU maintains its capacity to act even when unanimity proves difficult to achieve. Ultimately, the future of integration depends on whether we view this “two-speed” model as a rules-based instrument for progress.[34]
5. Conclusion
The EU is at a constitutional and economic turning point. The rise of strategic autonomy and the proposal for a “New Compass for Competitiveness” represent a significant reconfiguration of the European integration project, not merely an adjustment to industrial policies.
Strategic autonomy should not be viewed as a limitation of the Internal Market, but rather as a necessary evolution toward an international order characterised by geopolitical competition. Strategic autonomy can, in fact, be conceived as a new “5th freedom”, parallel to the four fundamental freedoms, however, it cannot take on a classical nature. It must be established as a structuring principle that prevents the fragmentation of the Union, enabling the transition from an EU based strictly on market rules to a Union of coordinated and collective political action. In this new structure, competitiveness must serve to protect prosperity across all Member States, ensuring fair competition and social cohesion. The future of European integration will thus depend on the EU’s ability to be strategically strong on an external front, while remaining legally united and fair within its internal space.
In sum, the “New Compass” is not, in and of itself, a robust enough tool to prevent external coercion. If the Union limits itself to passively following the logic of national flexibility, the result will be silent fragmentation, in which the EU becomes, in fact, strategically strong externally but politically ineffective internally. The robustness of the instrument thus depends on a fundamental parameter: autonomy can only serve as a safeguard if it is accompanied by solidarity mechanisms that ensure competitiveness does not lead to the weakening of smaller Member States. The future of integration and the European project depend not only on the ability to withstand external shocks, but also on the resilience and determination not to succumb to the weight of its own internal inconsistencies.
[1] Cyprus Presidency of the Council, Informal Meeting of Heads of State or Government (23-24 April 2026), https://cyprus-presidency.consilium.europa.eu/en/events/informal-meeting-of-heads-of-state-or-government/.
[2] See Article 42(7) TEU, which states the following: “If a Member State is the victim of armed aggression on its territory, the other Member States shall have towards it an obligation of aid and assistance by all the means in their power, in accordance with Article 51 of the United Nations Charter (…).”
[3] Jorge Liboreiro, “EU leaders meet in Cyprus to talk Ukraine, Hormuz, energy and mutual defence”, Euronews, 23 of April of 2026, EU leaders meet in Cyprus to talk Ukraine, Hormuz, energy and mutual defence | Euronews.
[4] See Articles 20 TEU and 326-334 of Treaty on Functioning of the European Union (TFEU).
[5] Maria Simon Arboleas et al., “EU leaders to decide on two-speed Europe economy plan in Cyprus,” Euractiv, April 17, 2026, https://www.euractiv.com/news/eu-leaders-to-decide-on-two-speed-europe-economy-plan-in-cyprus/.
[6] Mario Draghi, The future of European competitiveness: a competitiveness strategy for Europe, Part A (Luxembourg: Publications Office of the European Union, 2024), 5.
[7] Draghi, The future of European competitiveness, 11.
[8] European Commission, A Competitiveness Compass for the EU, Staff Working Document (Luxembourg: Publications Office of the European Union, January 2025), 1.
[9] PwC Portugal, “Bússola da Competitividade da UE: Um Roteiro para a Renovação Económica” [EU Competitiveness Compass: A Roadmap for Economic Renewal], April 10, 2025, https://www.pwc.pt/pt/temas-actuais/bussola-competitividade-ue-renovacao-economica.html.
[10] Eurocid, “Bússola para a Competitividade” [Compass for Competitiveness], Ministry of Foreign Affairs, https://eurocid.mne.gov.pt/bussola-para-competitividade.
[11] Council of the EU and the European Council, “Competitiveness Compass”, https://www.consilium.europa.eu/en/policies/competitiveness-compass/.
[12] European Commission, “Temporary Crisis and Transition Framework for State Aid measures to support the economy following the aggression against Ukraine by Russia,” Official Journal of the European Union C 101/3, March 17, 2023, 1.
[13] European Commission, “Bringing down barriers to the single market to create opportunities for all”, Directorate-General for Communication, May 21, 2025, https://commission.europa.eu/news-and-media/news/bringing-down-barriers-single-market-create-opportunities-all-2025-05-21_en.
[14] European Commission, “Bringing down barriers to the single market to create opportunities for all”.
[15] European Commission, “Comissão simplifica regras em matéria de sustentabilidade e de investimento na UE” [Commission simplifies rules on sustainability and investment in the EU], Representation in Portugal, February 27, 2025, https://portugal.representation.ec.europa.eu/news/comissao-simplifica-regras-em-materia-de-sustentabilidade-e-de-investimento-na-ue-disponibilizando-2025-02-27_pt.
[16] PwC Portugal, “Diretiva ‘Omnibus’: Alterações para Reforçar a Transparência e Combater o ‘Greenwashing’” [‘Omnibus’ Directive: Changes to strengthen transparency and combat ‘greenwashing’], March 3, 2026, https://www.pwc.pt/pt/temas-actuais/omnibus-alteracoes-sustentabilidade.html.
[17] PwC Portugal, “Diretiva ‘Omnibus’.”
[18] Alice Carnevali, “Could fusion energy save Europe from the energy crisis?”,Euronews, April 6, 2026, https://www.euronews.com/next/2026/04/06/could-fusion-energy-save-europe-from-the-energy-crisis.
[19] Enrico Letta, Much more than a market: speed, security, solidarity, Report, Document posted on behalf of
European Commission, April 2024, 17, https://european-research-area.ec.europa.eu/documents/letta-report-much-more-market-april-2024.
[20] Andrea Bolitho, “’Istart from a big, red alarm’ – Enrico Letta urges radical EU single market shake-up”, Euronews, June 11, 2024, https://www.euronews.com/business/2024/06/11/single-market-shake-up-a-fifth-freedom-for-the-eus-internal-trading-arrangements.
[21] Letta, Much more than a market, 28.
[22] “Relatório Letta: Um novo impulso para o Mercado Único e a Indústria Europeia” [Letta Report: A new impulse for the Single Market and European Industry], Zabala Innovation, https://www.zabala.pt/opiniao/relatorio-letta/.
[23] Draghi, The future of European competitiveness, 5.
[24] SIC Notícias, “Comissão Europeia diz que crise energética não será curta e sugere medidas” [European Commission says energy crisis will not be short-lived and suggests measures], April 1, 2026, https://sicnoticias.pt/mundo/europa/2026-04-01-video-comissao-europeia-diz-que-crise-energetica-nao-sera-curta-e-sugere-medidas-e18fd102.
[25] CNN Portugal, “Europa arrisca-se a ficar no centro da crise energética e Portugal tem sido muito lento a tomar medidas” [Europe risks finding itself at the centre of the energy crisis and Portugal has been very slow to take measures], March 27, 2026, https://cnnportugal.iol.pt/combustivel/estreito-de-ormuz/europa-arrisca-se-a-ficar-no-centro-da-crise-energetica-e-portugal-tem-sido-muito-lento-a-tomar-medidas/20260327/69c54aded34e28842c8235ba.
[26] Jornal de Negócios, “UE alerta capitais europeias para que não tornem crise energética numa crise orçamental” [EU warns European capitals not to turn energy crisis into a budgetary crisis], 2026, https://www.jornaldenegocios.pt/economia/europa/uniao-europeia/detalhe/ue-alerta-capitais-europeias-para-que-nao-tornem-crise-energetica-numa-crise-orcamental.
[27] Jornal de Negócios, “UE alerta capitais europeias”.
[28] Letta, Much more than a market, 19.
[29] Maria Garcia and John Smith, “The Letta and Draghi Reports in Europe’s Geopolitical Moment,” JCMS: Ideas on Europe, July 19, 2025, https://jcms.ideasoneurope.eu/2025/07/19/the-letta-and-draghi-reports-in-europes-geopolitical-moment/.
[30] European Parliament, Report on the institutional aspects of the Report on the future of European Competitiveness (Draghi Report) (2025/2013(INI)), Committee on Constitutional Affairs, Rapporteur: Brando Benifei, A10-0196/2025, 17 October 2025, 3 and 14, https://www.europarl.europa.eu/doceo/document/A-10-2025-0196_EN.pdf.
[31] European Economic and Social Committee (EESC), EESC opinion: Assessment of the Letta and Draghi reports on the functioning and competitiveness of the EU’s Single Market, February 26, 2025, 12, http://data.europa.eu/eli/C/2025/2004/oj.
[32] Letta, Much more than a market.
[33] Draghi, The future of European competitiveness.
[34] Maria Simon Arboleas et al., “EU leaders to decide”.
Picture credit: by Renan Rezende on pexels.com.
Author: UNIO-EU Law Journal (Source: https://officialblogofunio.com/2026/04/24/the-competitiveness-compass-under-scrutiny-strategic-autonomy-and-the-new-geopolitical-shock/)
