Europe’s Circular Economy: Closing the loop on strategic dependencies
-
Europe’s Circular Economy Act is an opportunity to strengthen industrial resilience by reducing strategic dependencies and improving the competitiveness of circular markets.
-
Digital SMEs are key enablers of the circular transition, providing the technologies and digital solutions that help businesses improve resource efficiency and adopt more circular business models.
-
A successful Circular Economy Act requires coherent implementation, combining regulatory certainty, a functioning Single Market for secondary raw materials and proportionate obligations for SMEs.
Circular economy has long been a cornerstone of Europe’s industrial and sustainability ambitions. Yet despite an increasingly comprehensive policy framework, its principles remain far from standard practice across European industry.
In a previous article [1], we explored Europe’s dependence on fragile critical raw materials supply chains. This article examines how the forthcoming Circular Economy Act (CEA) could help strengthen Europe’s resilience while creating opportunities for digital SMEs to support the transition.
Moving to a circular economy
The circular economy is moving from an environmental concept to an industrial and economic strategy. Europe is heavily dependent on critical raw materials sourced from politically sensitive countries, while high energy costs and the outsourcing of manufacturing and processing create further vulnerabilities. China’s 2025 export restrictions on critical raw materials used in the defence, energy and automotive sectors provide a clear example of Europe’s continued supply chain vulnerability [2]. The circular model, if it works, can reduce reliance on primary material imports and exposure to price swings while retaining processing activity in Europe.
Against this background, the forthcoming Circular Economy Act (CEA), now due to be adopted before the end of 2026, is increasingly being framed as a tool for both sustainability and industrial resilience. By increasing the reuse, recovery and circulation of materials within Europe, the EU aims to reduce dependency on imported raw materials while strengthening its industrial base [3].
DIGITAL SME recently published its initial response to the European Commission’s Call for Evidence on the Circular Economy Act, outlining priorities to ensure the transition strengthens Europe’s circular economy and the competitiveness of its digital SMEs. Through digital solutions that improve resource efficiency, product traceability, data sharing and secondary raw material management, digital SMEs can enable businesses to adopt more circular business models. The CEA should therefore create conditions for these solutions to scale [4].
Fragmentation is holding back progress
Fragmentation between Member States, sectors and policy instruments continues to hinder the development of a functioning circular market in Europe. End-of-waste criteria determine when a recovered material ceases to be classified as waste and becomes a secondary resource. A material that qualifies as a secondary resource in one country may still be classified as waste elsewhere in the EU, creating uncertainty for cross-border secondary material markets.
Greater harmonisation or mutual recognition of end-of-waste criteria across the EU would help reduce these inconsistencies and support the development of a genuine Single Market for secondary raw materials.
Regulatory fragmentation also affects investment. Businesses are more likely to adopt circular products, services and digital solutions when requirements are coherent and provide long-term certainty.
Creating the conditions for a functioning circular market
Businesses continue to face market and regulatory barriers that limit investment in circular business models. The CEA’s success will therefore depend on creating the conditions for circular markets to function effectively.
One of the key challenges is the limited competitiveness of secondary raw materials compared with virgin materials. Recycled materials, for example, often remain more expensive than virgin alternatives, while high energy prices further increase recycling costs.
Addressing these challenges will require appropriate market incentives and a coherent, predictable regulatory framework that supports investment, innovation and circular business models.
Getting implementation right
Effective implementation and consistent enforcement are essential to ensure a level playing field, but the transition must also remain workable for Europe’s SMEs. New obligations should then be proportionate and designed to avoid unnecessary administrative burdens. A phased implementation, accompanied by appropriate support measures, will be key to ensuring that digital SMEs can contribute to Europe’s circular transition while remaining competitive.
[1] Europe’s critical raw materials moment: Closing the gap in Europe’s twin transition
[2] Commission must tackle China’s export restrictions on rare earth elements
[3] Circular Economy
