ROHAC: Europe’s regulatory noose

Excessive regulation ties up EU economies

During his electoral campaign, Francois Hollande declared war on “unfettered capitalism,” which he identified as the main contributor to the current economic crisis. His presidency promises a re-regulation of financial markets and marginal tax rates of up to 75 percent for top earners. Mr. Hollande also has announced a new labor-market reform, which — among other things — would prohibit profit-making companies with growing sales from firing their employees.

Regardless of what one thinks of his policies, what “unfettered capitalism” is Mr. Hollande talking about? European economies are among the most heavily regulated in the world, with new regulations being churned out by both national legislatures and European institutions. Unsurprisingly, no regulations are ever repealed — not even when they can be shown to be damaging, inefficient or redundant.

One area where European Union-wide regulations are of notoriously dubious value is health and safety. New directives issued by the EU every year, binding for all member states, often lack proper evaluation of costs and benefits and are not subjected to systematic peer review.

According to the United Kingdom’s national regulator, the Health and Safety Executive (HSE), the European Artificial Optical Radiation Directive, adopted in 2010 to protect workers from exposure to laser displays and ultraviolet, infrared and visible light, was “expected to bring no additional benefit to health and safety.” In the United Kingdom alone, the costs in the first year were estimated between $4.76 million and $10.73 million.

In recent years, the EU also has issued two directives to address the problem of “work-related musculoskeletal disorders (MSDs)” (workplace-induced back pain and repetitive strain injuries). Again, the HSE concluded that “the costs associated with the proposal will have a disproportionate impact on [small and medium enterprises] and micro-businesses without any demonstrable benefits to health and safety.”

But there is much more to EU regulation than just health and safety. An EU working-time directive stipulates that a person’s average working week must be no longer than 48 hours. This year, a “cookie directive” was issued by the EU, aiming to protect computer users from unwelcome cookies from websites by requiring explicit permission before downloading any such content. The cost of its adoption in the United Kingdom was estimated at $16 billion in a “worst case scenario” outlined by the customer data platform QuBit.

While some of these examples may seem trivial, the costs add up quickly. Between 1998 and 2010, the overall costs of regulation were estimated at $284 billion by Open Europe, a London-based think tank. Regulations adopted at the EU level account for about $200 billion of that burden, or 71 percent of the total regulatory costs. In 2006, even the European commissioner for industry, Gunter Verheugen, admitted that the annual cost of regulation to the European economy as a whole was around $652 billion — more than the gross domestic product of the Republic of Poland.

Europe finds itself in the deepest economic crisis since the Great Depression. On top of a debt crisis, prohibitive taxation and mounting economic uncertainty, Europeans willingly are shooting themselves in the foot by obstinately sticking to a regulatory regime that burdens entrepreneurs and businesses.

Although much harmful regulation is encouraged by interest groups in individual nation-states, European institutions are in a unique position from which to promote an omnibus deregulatory bill across various areas, repealing all the directives that are not needed for the functioning of the common market, as well as those with costs exceeding benefits. Going forward, the EU would benefit from a much more stringent set of criteria, including proper impact assessment, as a condition for adopting any new regulations.

Would an across-the-board deregulation get the EU out of the crisis? Probably not, but it could help. There is no doubt that the deregulation of airlines, trucking, railroads, telephones and natural gas, undertaken during the Carter and Reagan administrations in the United States, contributed to the success of Reaganomics. In New Zealand, a massive deregulation in the 1980s by Roger Douglas made the country one of the most prosperous in the world. In the early 1990s, massive deregulation in Sweden, followed by other Nordic countries, set the stage for previously unseen economic growth.

In the current crisis, European leaders are doing nothing to alleviate the existing regulatory burden, at either the national or EU level. Instead, they’re busy trying to use the crisis to construct a European superstate. The cost of their hubris will be felt on both sides of the Atlantic.

Dalibor Rohac is an economist at the Legatum Institute in London.

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