Friday, October 31, 2014
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Europe’s Red-Tape Economy

WARSAW – Over the past 60 years, the project of European integration has confronted many challenges: post-war economic hardships, the heavy yoke of communism, and the uncertain footing of the post-Cold War world. But, while it has overcome them all, with the European Union now comprising 28 states, many of which now share a common currency, the EU faces another, equally important challenge – that of reducing the burden of regulation weighing down its major industries.

European business is bound up in rules and regulations, many of which originate from unelected officials in Brussels, whose laudable intention to harmonize business conditions across the EU is instead sapping the continent’s commercial creativity and dynamism. As a result, economic performance has become sluggish as competitiveness declines and unemployment, especially among young people, remains stubbornly high.

EU institutions issue thousands of regulations, directives, and decisions every year. In 2012, 1,799 laws were enacted; in 2011, there were 2,062. Some laws, enacted long ago for a European Community of six founding members, are still on the books. It is this thicket of red tape that hampers business and deters entrepreneurs.

One small but important example of this is the average cost of setting up a business, which is €158 ($212) in Canada, €664 in the US, and €2,285 in the EU (and as much as €4,141 in Italy). The sheer cost of getting started is as big a deterrent as one can imagine for a young entrepreneur trying to escape the bounds of unemployment.

European industry is afflicted by similar problems. The refining and petrochemical sector supplies the EU with a large proportion of its fuel, and is also a major source of tax revenue. The downstream sector, together with fuels distribution, contributes a total of around €240 billion annually to treasury coffers. By any reckoning, this is an important industry that should not suffer from overregulation. But, while the industry faces the threat of inflated gas prices from around the world, its concerns closer to home are the abundance of EU and national energy regulations.

Excessive law-making has pushed up prices and pushed out investors, not only from refining and petrochemicals, but from all energy-intensive sectors, including aluminum, steel, and cement. In some EU states, electricity prices for industrial customers are twice what their North American counterparts pay. Overly complex climate regulations, political resistance to shale-gas development, and energy policies that favor expensive, ineffective technologies are largely to blame.

Some policymakers in Brussels are gradually beginning to recognize that lower energy prices might be good for the economy. But most still believe that protecting society and the environment from the wider effects of the energy business should take priority over the industry’s development and broader economic growth. They assume that robust recovery and job creation will emerge simply of their own accord; as a result, rather than enjoying sustainable growth, Europe is heading toward a model for which a new term – “sustainable stagnation” – might be appropriate.

This approach is a colossal waste of money. As Bjørn Lomborg of the Copenhagen Consensus Center notes, “The European Union will pay $250 billion for its current climate policies each and every year for 87 years. For almost $20 trillion, temperatures by the end of the century will have been reduced by a negligible 0.05ºC.” By contrast, the EU is allocating a paltry €8 billion over seven years to alleviate youth unemployment, which currently runs close to 60% in some member states.

But Europe’s economy will not grow, and a sufficient number of jobs will not be created, if such vital industries as aluminum, steel, fuels, plastics, and cement are not allowed to thrive. This outcome would be bad not only for the economy, but also for the environment, because these industries will simply continue relocating to markets with far worse environmental records.

The problem is not a lack of investment capital. In 2011, Europe’s publicly traded firms had an estimated €750 billion in cash sitting on their balance sheets, equivalent to twice the decline in private-sector investment in the EU from 2007 to 2011. But, despite the dire state of public finances, the desperate need for growth and jobs, and historically low interest rates, the authorities are doing nothing to encourage investment.

Europe’s governments urgently need to undertake a root-and-branch review of the regulatory environment, especially in those industries that have the greatest impact on the wider economy. And, after six decades of meddling, EU policymakers should step back and consider which restrictions have become harmful or irrelevant, and how better to support the entrepreneurs and industries of the future.

Much of the groundwork has already been laid by the OECD, in several guiding principles: economic goals, especially growth and competitiveness, should be as important as social and environmental goals; a regulation’s benefits must justify its costs; regulations should be reviewed frequently, and a cost-benefit analysis of all the alternatives – including simply maintaining the status quo – should always be carried out.

With 7% of the global population, 25% of global GDP, and 50% of global welfare expenditure, the EU has created a model that inspires millions of people to dream of emigrating to Europe. However, the EU’s historic emphasis on achieving its social goals, to the exclusion of industry’s long-term needs, is undermining the entire European project. The EU cannot be the inclusive, thriving, and democratic home that millions dream of if red tape is allowed to strangle the industries that are crucial to European prosperity.

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