EUtopian Regulation

David Cameron has made the reduction of red tape a cornerstone for EU reform. As we know, there will be no treaty reforms before 2017, the best we can expect is promises albeit firm ones. Brussels may well agree to deregulation as incoming Commission Presidents have done so often enough before: but can we believe such promises?  Whatever is bound can be unbound or, more likely, just overtaken by events. This paper moves on from what is likely to happen and considers the best that could happen.  What is the common ground between necessary commercial regulation and maximising UK competitiveness?  One obvious option is that London and Brussels should stop competing with one another to impose more regulation: one set of unnecessary regulations is bad enough but two are suicidal.

After reviewing what EU and UK politicians are telling us, the paper sets out alternative ways of dividing regulatory responsibility. Should we hand over responsibility to a single global regulator?  Or an EU one?  Or should nation states compete, each reducing regulation to increase competitiveness?  Or some other arrangement?

Finally, what seems to be the least bad solution for the EU – what would be EUtopian regulation?

Can we believe the politicians?

At the beginning Chapter 43 Charles Dickens’s David Copperfield, Copperfield has become a parliamentary journalist for a morning newspaper and writes “Night after night, I record predictions that never come to pass, professions that are never fulfilled, explanations that are only meant to mystify. I wallow in words. Britannia, that unfortunate female, is always before me, like a trussed fowl: skewered through and through with office-pens, and bound hand and foot with red tape.”

Plus ça change…

1. Precisely the regulations to be removed?
2. The mechanism to achieve that?
3. Who, in the future, would regulate what?

Danny Alexander spoke in France on “making the EU fit for the challenges ahead” in January 2015.  All he said about regulation was 

“And it [very practical things that the EU can do] can free businesses from unnecessary regulations.  A 25% reduction in EU administrative burdens on businesses could lead to an increase of 1.4% in EU GDP.”

Hardly specific. 

In both Brussels and London, “deregulation” translates in practice to rewording regulations.  For example, the 2015 UK Deregulation Act has a long list of regulatory amendments including: “Section 11 of the Employment Act 1989 (exemption of Sikhs from requirements as to wearing of safety helmets on construction sites) is amended in accordance with subsections (2) to (10).”  This is not untypical: a few moribund regulations have been removed but to no benefit to competitiveness as they had already fallen from application.

An EU Memo of 18 June 2014 summarised the Brussels position: “The Regulatory Fitness and Performance Programme (REFIT) launched in December 2012 is a programme aimed to make EU law lighter, simpler and less costly so that it benefits citizens and businesses and helps to create the conditions for growth and jobs. It does notput into question the EU’s policy objectives, but seeks for more effective ways to achieve them….

On 2 October 2013, the Commission defined an ambitious agenda with over 100 individual actions including 46 legislative actions to simplify and reduce regulatory burden, 7 initiatives to repeal existing regulation and 9 initiatives to withdraw proposals for new regulation. In addition, the Commission committed to carry-out 47 Fitness Checks and evaluations under REFIT to assess the efficiency and effectiveness of EU regulation and prepare future initiatives for simplification and regulatory burden reduction.”

In other words, of the 40,000[1] or so EU regulations, Brussels found just 16 that could be withdrawn after 18 months study. Furthermore, “A decision by a Commission official in the name of and on behalf of the Commission is just as binding on member states as treaty articles. There is no hierarchy of laws in the EU. The number of more or less binding acts passed 134,500 in 2015 if these different types of acts are counted together.”[2]

Clearly, the UK government is not going to sift through all those by the end of 2015.  What the government probably wants, but has not spelled out, is a return to the Social Chapter opt out secured by John Major and an ability to opt out of finance sector legislation of the grounds that the sector is well regulated by London and it is as critical to the UK economy as agriculture is to France (which has a veto on changes to the CAP). But the reality is that we do not know from what regulations the UK seeks exemption, nor the mechanism for achieving it.

Alternative regulatory regimes for the EU

The neat solution where one authority regulated a single international market has probably never existed and never will.  Some argue that it never should, as such a monopoly would endlessly seek more power and regulatory control for itself without being prevented by countervailing forces. On the other hand, can regulatory authorities compete to attract more business as brands of soap powder do?

Income taxes work that way: to some extent companies and individuals move to lower tax countries but the tax differences have to be big enough to justify what can be a large upheaval. But under international agreements, income is usually only taxed once.  Tax paid in one authority offsets the need to pay it in another.  That does not apply to regulation: conforming to UK regulations does not mean one is exempt from conforming to French ones.

Patents and trademarks have a different arrangement.  Each country registers its own but trademarks can also be registered in all member states simultaneously (Madrid system) or collectively at the European Patent Office as a “Community Trade Mark”. Similarly for patents.

So in principle there are many options for the future of EU regulation. The alternative regulatory regimes include (there may be others):

1. An untrammelled single EU regulatory authority with divisions for each sector.  This would respond to consumer concerns and complaints but have to justify itself to member states in terms of compliance costs, the effect on internal (EU) and external (global) competition, barriers to entry and innovation.  This is the ultimate “a single market requires only one set of regulations” approach. The justification is that if a consumer needs protection in one member state, she needs it in all of them. Conversely, if she does not need it in one she does not need it in any.
2. No central EU regulation at all.  National regulation being accepted throughout EU as for Cassis de Dijon. But the income tax principle could be applied to regulation, namely that any firm complying with the regulations of its HQ member state would be deemed to be complying EU-wide. Consumer confidence would affected by country of regulation but the EU would still be a single market.
3. Regulation tailored by size of business (SMEs to have less regulation not least because they are more subject to competition) and by business sector risk and complexity. As a rule of thumb, the less well the consumer can be expected to understand the products and the bigger the risks from them (e.g. medicines and financial services) the more regulation will be required.
4. The present situation: EU regulation throughout EU plus member state regulation in each country.  This is not “single market” at all.  It is inconsistent for the UK to press for the single market at the same time as introducing an unceasing flow ofUK regulations. At present both EU and national regulation is out of control with no consideration compliance costs, effect on internal (EU) and external (global) competition, barriers to entry and innovation.  This is the worst option.

Regulatory principles versus precision

Principles-based regulation would be far easier to understand and use far less paper. It would not be difficult to produce a set of regulatory principles for each business sector on one sheet of paper.

The regulators, legislators and larger companies are working against the public interest in putting precision (and complexity) ahead of principle. Competition, costs and innovation all suffer.  By relying on principles only, these regulation factories both at national and supranational levels could be closed down and a commission of interested parties meet once a year to deal with any necessary revision to those principles.

A genuine return to principles may be too radical for the present time but some such drastic approach is needed to reverse the tide of regulatory excess.

Competition between jurisdictions

As noted above, competition between jurisdictions, e.g. the US and EU, could either slow the pace of regulation or enhance it or make no difference. The self-interest of the current regulation factories promotes more regulation and complexity.

Governments do know the cost burden of excessive regulation but do little more than call on business to name the regulations they could do without and then having civil servants consider the suggestions until the long grass covers them over.  So far as I know, only New Zealand has ever taken the radical approach of doing the opposite, namely asking civil servants to identify the regulations they had to keep and then jettisoning the rest. It worked splendidly.[3]

With the rise of emerging economies in Asia and Latin America, maintaining global competitiveness is going to become more and more crucial for the US and EU, the twin regulatory powers. At present their business is more inhibited by regulation than the newcomers and as things stand, this is likely to deteriorate.  We need to campaign for turning regulatory competition around so that it becomes a drive towards less rather than more.

Proposed policies

I began this paper believing that governments would need to agree regulatory reductions and perhaps have just one global rule factory rather than the many we have now.  Others have pointed out the danger of giving such a monopoly such powers, especially given their track record.  A Damascene conversion may be unlikely but that is what is needed for any of the alternatives above.

So which of those first three alternatives is chosen matters little compared to a determination to reverse the flow.  The policies that do are:

1. Governments to be brought to realise the economic damage from current levels of regulation with the prospect of worse to follow.
2. A determination to make deregulation real and to use competitive pressures downward either unilaterally or by negotiation..
3. Principles to take the place of precision.

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[1] “There are now more than 40,000 legal acts in the EU. There are also 15,000 Court verdicts and 62,000 international standards, all of which must be respected by citizens and companies in the EU.” http://en.euabc.com/word/2152

[2] Ibid.

[3] See Tim Ambler and Francis Chittenden, Deregulation or Déjà Vu? UK Deregulation Initiatives 1987/2006, British Chambers of Commerce, January 2007.