Disclaimer: The following article was written by an external author. The opinions expressed in it do not necessarily reflect the opinions of the Foundation or its members.
The European Union stands at a critical crossroads. While the continent boasts 440 million consumers, world-class universities, and some of the globe’s most innovative companies. The EU has everything it needs to dominate the digital economy, for instance, six EU countries rank among the world’s top 15 most innovative countries, inequality is 10 percentage points lower than in the US or China, and European commitment to the rule of law and environmental protection is unmatched globally and yet, it’s falling dangerously behind in the digital race. So what’s holding the EU back?
A deep diagnosis of the causes is in the Draghi Report on EU Competitiveness, which identified, among others, two critical problems: fragmented actions and excessive regulatory burden. While Silicon Valley startups can launch with a single regulatory framework, European entrepreneurs must navigate 27 different legal systems. It’s like trying to build a highway where every few kilometres the road rules change completely. To pave the road in one go, the Draghi Report recommended the creation of the 28th Legal Regime — a unified set of laws that would apply across all Member States, shortening the length of national procedures for businesses qualified to operate under it (Draghi Report, p.51). Think of it as creating a “digital single market” with actual teeth.
The 28th Legal Regime isn’t simply regulatory housekeeping. It can make the difference for the EU becoming a digital powerhouse. A high vision institutional framework can be the turning point for companies seeking to relocate amidst the geopolitical turmoil of our time. And, moreover, bring back European startups and companies that moved overseas, forced by the costs of complying with EU regulations. As noted by the Draghi Report, one-third of European start-ups that became unicorns moved outside the EU in their incubation stage to avoid a gruelling duo: taxes and regulation.
Designing the 28th Legal Regime can probably be done efficiently and in record time. However, the biggest challenge may be in its implementation. How do you actually implement such a massive change across 27 sovereign nations? It is difficult to ignore that the 28th Legal Regime will fall within the realm of politics and institutional design. And that is where the crux of the matter lies.
Traditional Approaches May Not Work
To implement the 28th Legal Regime, the Draghi Report suggests creating “a permanent European coordinator in charge of assisting in obtaining the necessary permits. This coordinator would be responsible for monitoring progress in the permit granting process and facilitating regional cooperation to ensure political backing for cross-border infrastructure from all relevant Member States (Draghi Report, p. 51).”
On paper, this sounds reasonable. In reality, it’s a recipe for bureaucratic gridlock.
Consider the track record: Europe’s attempt to create a unified Civil Code in the early 2000s collapsed under political pressure and was watered down to a basic Sales Law. Why would the 28th Legal Regime fare any better?
Creating a supranational bureaucracy operating the 28th Legal Regime across the Union will bring new challenges and risks that can be bigger than the alleged solution.
The permanent European Union’s coordinator can potentially become a centralised bottleneck because the appointment of the managers that will be in charge of enforcement and oversight of the 28th Legal Regime would likely become a political matter where the EU member countries will probably seek to have influence and decision-making power, which becomes a social choice dilemma: who will be appointed? for what term?, how are positions rotated across the EU members?, and a myriad of political decisions that can potentially ensnare the economic goals of the new legal regime.
Additionally, there is going to be a budget battle. The new Permanent Coordinator or Implementer of the 28th Legal Regime will require the corresponding funding, which means that the EU Budget will have to create a new budgetary item with a charge to the EU taxpayers. Moreover, the new bureaucratic agency will become a supra-national entity with more power than the local law enforcement agencies, at least for certain economic sectors or companies, which can give rise to social and political tensions at the local level.
On the other hand, if each Member of the Union establishes an office in charge of the 28th Legal Regime, the differences in capacity, efficiency, and effectiveness will generate new intra-regional inequalities, affecting the social perception of the new regime.
There has to be a better way—and there is.
Special Economic Zones: The Market-Driven Alternative
What if instead of creating more bureaucracy and costs on the backs of the taxpayers, the EU leveraged market forces to implement the 28th Legal Regime?
Special Economic Zones (SEZs) offer exactly this opportunity. These are geographically defined areas where different and special legal frameworks apply, designed to attract investment and accelerate innovation. Think of them as “policy laboratories” where new rules can be tested and refined before broader implementation.
There is a lot that can be said about the failure of Special Economic Zones, as it can be said about companies or public policies. What cannot be contested is that if successful, Special Economic Zones have the power to transform entire nations. The iconic case of China, a country that transformed its economy and technology capacity thanks to its aggressive Special Economic Zone policy at the national and municipal levels. Today, Chinese Special Economic Zones, Shenzhen-Guangzhou, alongside Hong Kong, form the second most competitive Science and Technology Cluster in the world[1]. Following the model, India has authorised 5,537 Special Economic Zone units since the enactment of the SEZ Act in 2005 and according to an evaluation done by the renowned consultancy PwC, the units in operation have created 2.3 million jobs, have attracted over 4 billion dollars in foreign direct investment and have demonstrated higher productivity and social inclusion as Indian SEZ employ more women compared to what the rest of the Indian labour market does. There are multiple examples in the Middle East; it is just a matter of searching images on the internet of Dubai in the 1970s and what it is today, and yes, Dubai Internet City and Dubai International Financial Centre are Special Economic Zones, also named Free Zones, where a different legal framework applies compared to the rest of the Emirate.
Coming back to the European Union and the 28th Legal Regime, the point is that, unlike a government-run agency, Special Economic Zones, as implementers of the 28th Legal Regime, would operate under a business logic, which means that they succeed by attracting companies, and the way to do it is by offering genuinely competitive advantages. The business logic behind the operation of a Special Economic Zone generates a virtuous cycle where the Zone will be in charge of implementing the 28th Legal Regime, and the Zone Operator will compete with other Zones to offer the best business and infrastructure conditions. Companies will choose the zone with the most efficient services and infrastructure conditions. Governments will compete to attract the most successful Zone operators to their territory, for instance, by offering incentives, connectivity, tax holidays, incentives, or aligning pro-innovative policies in a smart way, and Innovation would spread organically as successful models are copied.
When SEZ management and governance innovations prove superior, they naturally pressure traditional systems to improve, and perhaps the “special” 28th Legal Regime becomes effectively the EU regime for doing business matters.
From Pilot to Scale: The Path Forward
EU Special Economic Zones specifically designed to implement the 28th Legal Regime can be ideal spaces to accelerate frontier technologies—artificial intelligence, blockchain, edge computing, quantum computing, and others. The EU Competitiveness Agenda can accelerate the implementation of other policies that are being developed, for example, the Startup and Scale Up strategy, the simplification of digital regulations that exempt or relief companies from computational power thresholds, data storage limitations, single- stop licensing and obtaining permits, harmonised tax treatment, access to specialized courts familiar with digital business models, and more.
Instead of rolling out all the above policies throughout the 27 Members, Special Economic Zones permit launching pilot policies and are ideal spaces to focus incentives for the Projects of Common European Interest (Draghi Report, Vol 2, p.34). These are controlled environments suitable for testing and refining the new legal regime and regulatory simplifications. Proven successful policies will expand organically outside the zones through competition, imitation and, certainly, with lower political friction. This approach would minimise the political risks while maximising the learning opportunities. If the regime has some loopholes, the damage is swiftly contained and fixed, whereas if it succeeds, the legal & regulatory framework can spread rapidly.
The Governance Innovation Factor
Besides, Special Economic Zones are suitable to implement special rules more efficiently, that is, they innovate governance itself. When freed from legacy constraints, they can experiment with: regulatory sandboxes for testing new technologies, outcome-based regulation instead of process-rules, real-time policy adaptation based on market feedback, cross-border coordination, etc. Governance innovation could be the European Union´s most valuable export, positioning the continent as a leader in institutional design.
It Is Time for Bold Action
The 28th Legal Regime represents the EU Parliament’s recognition that business as usual isn’t sufficient. Global technological leadership demands institutional innovation to match.
Special Economic Zones offer a market-tested, politically feasible path to implement the 28th Legal Regime while fostering the innovation path that the EU requires, underpinning its digital leadership and sovereignty vis-à-vis global dominant players.
A centralised and bureaucratic approach to implement the 28th Legal Regime comes with a caveat: it has more probabilities of getting stuck in a political diatribe, shifting the focus away from what really matters: the EU’s competitiveness in frontier technologies that will determine the living conditions of the next decades.
With the 28th Legal Regime set for completion by early 2026, now is the time to consider institutional alternatives that can unlock the EU’s innovation potential. Special Economic Zones aren’t just an implementation mechanism—they are the opportunity to leapfrog the competition and reclaim technological leadership of the EU.
The question isn’t whether Europe can afford to try this approach. The question is whether it can afford not to.
The future of European competitiveness depends on bold institutional innovation. Special Economic Zones offer a proven path forward—if European leaders have the courage to embrace market-driven solutions over bureaucratic expansion.
[1] Top 100 S&T clusters in Global Innovation Index 2024, WIPO.
References
- Draghi Report
- Gebel T. (2022). Cités Privées Libres: Pour que les Gouvernements se battent pour vous. Aquila Urbis. Kindle French Edition. pp 1-342.
- Moberg Lotta(2015). The Political Economy of Special Economic Zones. Journal of Institutional Economics. Volume 11. Issue 01. March. pp 167 – 190.
- Moberg Lotta, Tarko Vlad (2021). Special Economic Zones and liberalization avalanches. Journal of Entrepreneurship and Public Policy
- PwC. (2021). Evaluating impact of SEZs in India through sectoral analysis and case studies. Final. Report. July.
- Zaldívar F. and Molina E. (2018). Special Economic Zones and their impact on Regional Economic Development. Latin American Economic Review, Vol 49, No. 193.
- Zeng Z.D. (n.d.) Special Economic Zones: Lessons from the Global Experience. Private Enterprise Development in Low Income Countries (PEDL) Synthesis Series No.1
- Zeng Z.D. (2021). The Dos and Don’ts of Special Economic Zones. World Bank. http://creativecommons.org/licenses/by/3.0/igo.
- Zeng Z.D. (2021). The Past, Present, and Future of Special Economic Zones and Their Impact. Journal of International Economic Law. 00:1-17, dos:10.1093/jiel/jgab014
The author is a Special Economic Zones consultant.