TCS Daily

The EU's Regulatory Hydra; Hercules Needed

By Hans H.J. Labohm - October 13, 2005 12:00 AM

Hydra: In Greek mythology, a monster with nine heads; when struck off each head was replaced by two new ones. Hydra was slain by Hercules.

The European Commission, that fount of regulatory abundance, recently announced it would embark on a massive effort to cut red tape, eliminating unnecessarily burdensome laws. It's a welcome development, and one that should help in some small way to achieve the EU's vaunted Lisbon targets. But it's a bit to get in the deregulatory game.

The 1970s, with its stagflation, marked the end of the "golden years": the decades after World War II when year-on-year GDP growth in the Western world reached almost 5 percent. They triggered the supply side revolution in economic thinking, aimed at improving the functioning of markets. It was a reaction to the preceding preoccupation with aggregate demand, aimed at achieving full employment by "demand management", "pump-priming", and "fine-tuning" of the economy from the top, which were all part of the Keynesian paradigm.

Since then, political interest in deregulation has waxed and waned. But the number of rules on the statute book has only increased. Much of it is what we call red tape: non-essential procedures, forms, licenses and regulations that add to the cost of dealing with government; anything obsolete, redundant, wasteful or confusing that diminishes economic competitiveness, and stands in the way of job creation or wastes taxpayers' time and money.

All over the world governments are now engaged in deregulation (in Europe this is often called "privatization") to eliminate or at least reduce the burdens imposed on companies, organizations and citizens by government agencies. Their work is supported by organizations like the OECD and the World Bank. As the OECD notes: "One of the most common complaints raised by businesses and citizens in OECD countries is the amount and complexity of government formalities and paperwork. Enterprises and citizens spend much time and devote significant resources to activities such as filling out forms, applying for permits and licenses, reporting business information, notifying changes etc. In many cases, practices have become extremely complex, or irrelevant and cumbersome, generating unnecessary regulatory burdens - so-called 'red tape'. The costs imposed on the economy as a whole are significant. When excessive in number and complexity, administrative regulations can impede innovation, create unnecessary barriers to trade, investment and economic efficiency, and even threaten the legitimacy of regulation and the rule of law."

In response to these challenges, governments have over the past two decades increasingly focused on reviewing and simplifying regulation. Initiatives to improve the efficiency of transactions with citizens and business have included removing obsolete or contradictory provisions, producing guidelines on administrative regulations, and introducing new ways to measure administrative regulations and reduce their impact. Increasingly, innovative thinking and skillful use of information technology (IT) are leading to new approaches to administrative regulation.

The European Union is notorious for its ever-increasing number of rules. This is probably one of the reasons that voters in France and the Netherlands rejected the proposed EU constitution. Apparently, the European Commission has woken up to this public discontent, because it has recently decided on a wholesale withdrawal of 68 proposals for new regulation, which is unprecedented in the history of the Union. And the Commission has declared that this is only a first step. Henceforth, new regulation will be subjected to strict screening, in order to ascertain whether it is consistent with the EU Lisbon objectives and in particular the goal of promoting competitiveness. Moreover, the "acquis communautaire", the existing stock of legislation, needs to be simplified and updated, for which an array of measures is foreseen.

Earlier attempts to deregulate were a boulevard of broken dreams. Will it be different this time? Unfortunately, it does not look that way. In various fields, deregulation, including the reduction of red tape, may undoubtedly offer relief. But the overall picture is more bleak. Take for instance labor market deregulation. Although some trade unions are open to limited liberalization, labor market deregulation is mostly taboo in Europe. They just don't understand that "acquired labor rights" carry little weight if the markets fail to honor them.

More generally, however, all its deregulatory zeal has not stopped the EU from adopting the precautionary principle as key tenet of its policy on risk management, as well as from embarking on REACH (Registration, Evaluation and Authorization of Chemicals), and Kyoto (mandatory reduction of man-made greenhouse gasses in conjunction with a system of CO2 emission trading). These amount to frameworks for massive new waves of regulation. In those circumstances, fighting red tape amounts to fighting the mythical hydra; cutting the head off causes two more grow. And, unfortunately there is no Hercules in sight.


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