Allianz Risk Barometer 2024 -
Rank 4: Changes in legislation and regulation

Since the pandemic, the balance between the market and the state has shifted in favor of the latter, initially out of sheer necessity, to cushion the economic standstill during the lockdowns. But since then, policymakers have increasingly taken an active stance in steering economic outcomes in the direction they want. Reasons for this can always be found: the energy crisis or green transformation, national security, economic self-sufficiency, or systemic competition with China.

“This development is a double-edged sword for companies. On the one hand, they benefit from the subsidy race between states to attract ‘strategic’ industries. On the other hand, this activism is accompanied by a large number of new restrictions on investment – protectionism has reached a new level,” explains Ludovic Subran, Chief Economist at Allianz.

This is by no means only directed against Chinese companies; recently, intra-European takeovers have also been stopped. Even within the European Union (EU), the rules are not standardized, and companies are confronted with a jungle of regulations and opaque decisions. Despite assurances to the contrary, it is unlikely that this jungle will clear up in the foreseeable future; after the many elections in 2024, the signs may point to even more protectionism.

As is so often the case, these regulations have an asymmetrical effect: while large companies tend to benefit from the subsidies, the investment restrictions are a heavy (cost) burden, especially for smaller and mid-size companies (SMEs), says Subran. When it comes to environmental, social, and governance (ESG) regulation, be it the EU’s CSRD (Corporate Sustainability Reporting Directive) or CBAM (Carbon Border Adjustment Mechanism) or Germany’s Supply Chain Act – the effort involved in obtaining the required data is enormous and almost impossible for many smaller companies. But it’s not just the regulatee who is overwhelmed. In the case of CBAM, for example, the infrastructure for data processing and verification is still lacking on the regulator’s side in some cases. It is not only companies that are drowning in regulation, says Subran.

But the decisive ‘regulatory battle’ is not due until 2024: what is policymakers’ attitude towards artificial intelligence (AI)? As a ‘general purpose technology’, AI is the best chance of escaping the looming low-growth regime through a sustained productivity boost. At the same time, the risks are enormous, including in geopolitical terms. There is therefore a lot at stake when it comes to regulating AI. Striking the right balance becomes a very delicate act of regulation.

Despite all the vows to reduce bureaucracy, companies will still be faced with new rules and regulations in 2024 that will not only require a high administrative burden but could also impose real restrictions on their business activities.

“Companies need a strategic response to this that goes beyond monitoring the legislative process. A high level of uncertainty calls for scenario planning, strengthening resilience and open communication with internal and external stakeholders,” Subran concludes.