September 27, 2013
The cost of EU regulation comes up almost weekly in the media, with various very large figures being quoted.
To read some reports one might think that the issue was simple: simply get rid of the regulations – or even of the EU altogether – and whatever astronomical sum has been quoted as the cost of EU law would be recovered for businesses and the taxpayer.
But that is far from the case and many reports on this issue are at best one-sided and at worst deliberately misleading.
Here are twelve points reports often do not have room to mention, or choose to ignore.
1/ The cost figures mentioned – which in many cases are highly contentious anyway – nearly always refer to estimates of the gross economic cost. In other words what it costs companies and individuals to comply with EU rules, without taking account of the benefits of those rules or the costs of not having them. Most UK businesses, while they might well have concerns about certain aspects, recognize the net economic benefits EU-wide regulation brings – see this recent CBI survey, where eight out of ten say they want the UK to remain in the EU.
2/ Some benefits are not primarily economic, but perhaps even more important. Having strict requirements at EU level to ensure that toys are safe, for example, certainly has a financial cost to producers but also saves children from injury and death. Rules on food labelling help ensure that consumers know what they are buying and feeding to their families. Restrictions on tobacco packaging and advertising and rules on air quality of course involve compliance costs. But they prolong life expectancy and reduce illness. They also reduce public healthcare costs.
3/ The UK government has estimated that the EU single market is worth up to £92 billion in additional wealth annually to the UK. There could be no single market without EU regulation. EU single market rules either replace national rules or, under so-called “mutual recognition”, allow UK companies to trade Europe-wide while complying only with UK rules. There is certainly a gross cost to UK exporters for complying with EU rules requiring minimum standards and consumer safeguards for, say, electrical products. But complying with one set of rules represents a huge reduction in regulatory burden – and thus a big net benefit -compared to having to deal with a patchwork of different sets of national rules.
4/ Opponents of the EU sometimes claim EU regulation places additional burdens on UK companies that do not trade across borders. This presumes national regulation would be lighter, often not the case (see below). In any case, over 300,000 UK companies do trade with other countries in the European Union. Moreover, the reduction in bureaucracy and in costs resulting from being in the single market benefits all businesses and not just those who export to other EU Member States. Many UK SMEs purchase supplies from elsewhere in the EU at competitive prices or employ migrant workers, without excessive red tape. Others – especially in the services sector – benefit from increased demand in the economy that would not be there without the additional wealth generated by the single market.
5/ Some EU regulation is specifically designed to cut business costs and slash red tape. The Services Directive, for example, has eliminated hundreds of discriminatory, unjustified or disproportionate national requirements stopping services providers big and small from trading across borders. To take another example, the unitary EU patent will cut the costs of getting patent protection EU-wide by 80%.
6/ Other types of regulation do create extra costs for businesses, but do so in order to ensure fairness for consumers. For example, EU rules drastically cutting the cost of mobile phone roaming or those requiring proper compensation for airline passengers stranded by delayed or cancelled flights.
7/ Some other regulations may have a significant short-term cost, but help to avoid the risk of a far greater cost in the long-term. For example, rules prohibiting the use of dangerous pesticides that harm bees have an economic cost if the replacement products are more expensive – but if bees do not flourish then many vital crops will not either, causing far greater economic and environmental damage that does not stop at national borders.
8/ The run-up to the financial and economic crisis is one of the best examples in history of the potential cost of insufficient regulation. Earlier laxity is being corrected in the EU and other jurisdictions. For example, tougher requirements on the level of capital banks must hold are being introduced. This means that banks’ ability to issue loans and trade in the markets is reduced, which reduces profits and has a cost to the economy. But the lack of sufficiently strict capital requirements before the financial crisis was one reason why banks could borrow more and more money, issue bad loans and speculate recklessly. A repeat would cost the economy trillions of pounds and millions of jobs, a huge multiple of the cost of implementing the stricter rules. EU financial regulation aims to stop that happening. By creating a level playing field, it avoids a “race to the bottom” where jurisdictions with weak oversight could attract business unfairly and endanger everyone in the process.
9/ Another issue rarely reflected in estimates of the cost of EU regulation is whether, if EU rules were removed, Member States would simply introduce their own similar ones. For example, there have been many criticisms of the Working Time Directive. It is being reviewed. But if it were not there at all, that does not mean national governments would completely dispense with rules limiting working time or stipulating minimum breaks. In most advanced industrial economies, there are such rules and voters might not tolerate their absence. A European framework of social and health and safety rules also means good employers in the UK cannot be undercut by less scrupulous ones elsewhere exploiting the work force and cutting corners on safety.
10/ Burdensome national rules are also sometimes blamed on the EU when they do not stem from EU law at all. In writing EU law into national law, Member States sometimes go much further than what has been agreed at EU level. This phenomenon is known as “gold plating”. One UK example, on unnecessary requirements for mechanics working on HGVs to be trained to drive such vehicles, can be found here. In the CBI survey referred to above, 46% of UK businesses saw reducing this sort of gold plating as a priority – more than 39% who cited reducing EU regulation itself as a priority.
11/ In some cases, purely national rules simply would not work. Take the case of pollution of the air or sea from an industrial plant across the Channel or North Sea from the UK. Strict UK rules on such things would be entirely ineffective if neighbouring Member States did not also have such rules, as windborne or waterborne harmful material cannot be stopped at the ports. EU environmental regulation ensures that citizens have equal protection wherever they are in Europe and that companies cannot gain an unfair advantage by scrimping on environmental protection. Again, having to make sometimes technically complex arrangements for disposing of waste or cutting emissions has a cost for businesses – but dealing with the consequences of laxer rules or of a patchwork of rules would have a far greater financial cost for taxpayers.
12/ Finally, EU-wide regulation brings benefits for trade with countries outside the European Union. Many other jurisdictions, including sometimes China, wholly or partially implement at home standards and rules similar to those applied in the EU – the world’s biggest market in GDP terms. They do this to make it easier for their companies to trade both domestically and worldwide without using different production lines and without facing “technical barriers” – obstacles to trade arising from a patchwork of fragmented rules in different jurisdictions. External access to the EU single market – and yes, to its body of rules covering a market of 500 million consumers – is also what encourages other large trading nations or blocs to negotiate trade agreements with the EU on terms they would not offer to individual Member States. This is evident in the current negotiations with the US.
What is Europe doing to improve regulation?
Of course, it is right that academics, think-tanks and media should scrutinise the costs of regulation and keep the pressure on the EU institutions to keep them as low as possible, consistent with proper functioning of markets – which cannot work without a legal framework – with safety and with consumer protection.
And EU regulations, just like national ones, are sometimes far from perfect. They have sometimes introduced avoidable costs. They need to be kept under constant review to ensure they have not become redundant thanks to technological change.
It is not good enough just for EU law to comprise a lower overall compliance cost on business than a patchwork of national laws. That cost should be reduced to the minimum compatible with the rules being fair and effective.
And sometimes, when rules or their absence have little or no cross-border effect or when there is no distortion of the single market from having different rules in different places, it is indeed more effective to leave regulation to the discretion of individual national, regional or local governments rather than seek agreement at EU level. That is the principle of subsidiarity. Commission President José Manuel Barroso recently reiterated its importance, saying: “The EU needs to be big on big things and smaller on smaller things”.
So the Commission has in recent years had as a top priority improving the way EU legislation is prepared.
Major consultation exercises with stakeholders and the public precede any European Commission proposal. When draft legislation is submitted to MEPs and national ministers – who collectively make the final decisions on whether EU law will be introduced or changed and in what form it will take – it is accompanied by a detailed impact assessment setting out what the costs and benefits are expected to be. Member State governments have the opportunity to scrutinise and question those impact assessments before taking a position on whether to support the proposal.
In parallel, the Commission has streamlined existing legislation and repealed nearly 6,000 legal acts since 2005. The Administrative Burden programme launched in 2007 is cutting costs to business across Europe by around €38 billion. More detail on these and other initiatives can be found here.
In 2012, the Commission initiated a Regulatory Fitness and Performance Programme (REFIT). It will publish on 2 October 2013 a report detailing the action to be taken to cut further the costs of EU regulation. That will be based on, among other things, a survey of SMEs asking them to identify the ten EU measures they found most burdensome.
Tags:Business, CBI, Red Tape, REFIT, Regulations, Regulatory Fitness and Performance Programme, single market, The Services Directive