28 January 2015

The EU needs to reboot the Single Market


To paraphrase the famous beginning of Anna Karenina, all declining economies are alike; each growing economy flourishes in its own way. As the European Union strives to find ways to spur its economic growth, it should take seriously Leo Tolstoy’s lesson. Economic growth cannot come by decree, neither can it come by virtue of high, discretionary public spending. Development is, indeed, a product of human creativity, that requires an institutional environment where “trial and error” is made possible or even encouraged. Progress is always preceded by experimentation. Such an environment is one where the government gives up the task of making collective decisions, leaving it up to entrepreneurs to try to discover the different and evolving tastes of the consumers. They will show their preferences, and by so doing they will drive entrepreneurial innovation whenever they feel they are unsatisfied with the available offer. Profit-oriented businesspeople will follow the money.

From this perspective, there is both good news and bad news for Europe. The bad news is that over-regulation, both at the EU and national level, has prevented the economy from growing faster. The good news is that, by removing barriers to investment, trade, and innovation, an enormous potential can be unleashed. Releasing this potential is also consistent with the much-stated–and much less acted upon–political will to create a single market for goods and services within the European Union.

A measure of what needs to be done in order to catch this growth opportunity comes from the Index of Liberalisations, an annual report that the Istituto Bruno Leoni has been producing since 2007. The Index assesses the degree of market openness in ten key sectors of the economy in fifteen EU member states. For each sector the existence of barriers to entry in the market, entrepreneurial activity, exit from the market, and demand mobility is measured by means of a number of indicators and sub-indicators. The most liberalised country for each sector is given a score of 100%. Other countries are scored accordingly. The score of each country can be seen as a measure of the “distance from the edge.” Finally the sectoral results are averaged in order to define an overall index of liberalization.

All in all, in 2014 the most liberalised country in the EU15 was the UK, with a global score of 94%, followed by the Netherlands, Spain and Sweden (all at 79%). The least liberalised countries were Greece (58%), Luxembourg (65%), and Denmark, France and Italy (66%). For each sector–say, telecommunications, energy or transportation–the gap between the top performers and the other countries is very large. In these countries, productive factors are employed in less efficient ways. In fact, where the market is over-regulated, prices are typically higher and, more importantly, consumers’ freedom to choose is limited. Supply is less differentiated and there is little incentive to innovate. Eventually, however, innovation breaks through: the Uber revolution in local transportation is perhaps the most obvious case. When that happens, a liberalised market allows change to take place gradually and all stakeholders can adjust their behavior to changing conditions. On the contrary, a strongly protected market often leads to abrupt changes, making the costs of adjustment much higher. Such costs include, in particular, the need to help workers from inefficient industries to develop new skills that may be demanded within the new framework.

Liberalisation, though, is not just about creating better conditions for investments, growth, and employment. From a European perspective, deregulation of the economy is the most effective way to achieve the integration of markets within the EU itself. Market integration can be pursued in two ways: one being the implementation of harmonised regulations, the other being deregulation, where in the latter rule harmonization only refers to setting regulatory standards where it is strictly required (for example, interoperability in network industries). In today’s Europe, the adoption of a uniform, burdensome regulatory framework not only threatens to prevent economic growth, but finding an agreement among 28 governments on any single regulatory detail is virtually impossible to achieve. The EU Commission seems too weak, vis-à-vis national governments, to challenge them. Deregulation is, instead, politically easier, since a broad agreement is more easily found on “what not to do” (with reference to specific regulations that may unfairly impact each member states) than on “what to do” (i.e. the micromanagement of complex industries). Moreover, as paradoxical as it may seem, the seeds of liberalisation are often found in existing EU Directives, such as the “Bolkestein Directive” on service liberalization, even though it was watered down first by the EU Parliament, and then by national parliaments during the transposition process.

Liberalisation–as measured by IBL’s Index of Liberalisation–can deliver significant growth opportunities in a government budget-neutral way. It also provides the tools to achieve a greater market integration within the EU. While everybody agrees that the single market would make everyone better off, powerful vested interests are active at the national level to keep in place ad-hoc regulations.

A lot of opportunity is held back because of over-regulation at EU and national level. The EU Commission should consider the opportunity of creating the conditions for wealth creation by adopting an innovative approach to the road towards creating the Single Market. Instead of conceiving its role as one of “doing things” at the EU level, politicians should aim at “undoing things” at the national level, and start removing harmful regulations.

Carlo Stagnaro is Senior Fellow of Istituto Bruno Leoni (www.brunoleoni.it), a Milan-based free market think tank