Mats Persson: The costs of EU regulation and the related challenges that will face a Conservative government

Mats Persson is Director of Open Europe.

Broadly speaking, the UK Government has two tools at its disposal to achieve its aims: budgetary policies and regulatory policies.  But while one will feature heavily in the debate leading up to the general election, the other will be almost completely absent.

This is unfortunate, because as boring as it may sound, regulation matters. Good regulation can free up markets, increase liquidity and boost stability and consumer confidence – all of which are needed in the wake of the crisis, not least in financial markets. Bad regulation can have the complete opposite effect, ultimately hurting jobs, growth and competitiveness at a time when we can least afford it.
 
Open Europe this week published a study – based on over 2,300 of the Government's own impact assessments – which showed that regulation has cost the UK economy £176 billion since 1998. Of this amount, £124 billion, or 71%, had its origin in EU legislation. This cost is unnecessarily high.

We also found that despite some good efforts by the European Commission and UK Government to streamline regulations, the cost of red tape continues to rise every year. Since the UK Government launched its 'Better Regulation Agenda' in 2005, the annual cost of regulation introduced since 1998 has doubled, now standing at £32.8 billion, 59% of which stems from EU legislation.

Mats Persson is Director of Open Europe.

Perhaps most importantly, we found the benefit/cost ratio of EU regulations to be 1.02, while the ratio of UK regulations is 2.35. In other words, for every £1 of cost, EU regulations introduced since 1998 have only delivered £1.02 of benefits. Without simplifying too much, it is therefore 2.5 times more cost effective to regulate nationally than it is to regulate via the EU.

Critically, EU laws tend to be less cost-effective in the areas where regulatory powers overlap between Brussels and Whitehall – environmental and social policy are the two most conspicuous examples.

This is not that surprising: Due to the one-size-fits-all nature of EU laws, and the difficulties involved in changing them once agreed, European regulations can continue to generate heavy and unnecessary costs year after year without being addressed. Changing a domestic law which has proven inappropriate in light of experience and evidence is far more straightforward.

What this amounts to is a resounding argument if favour of more localism – regulating as close as possible to the citizen is not only more democratic, it’s also cheaper! The sitting Government’s failure to address over-regulation owes to a failure to employ this principle in practice. In this context, the Government’s inability to bear down on the continuous flow of new EU regulation is critical, as these laws are made at the level farthest away from citizens, while also having the most impact on businesses and the public sector in relative terms.

But let’s be clear. It may not be popular in some corners, but the EU’s Single Market also generates plenty of benefits – free trade and open markets are two of Europe’s main achievements in the last sixty years.  Withdrawal from the EU would trigger a whole range of new costs while leaving us with at least some of these regulations still in place. For trade in goods, just imagine the nightmare of suddenly having to adjust to the EU’s external tariff bands and complex rules of origin. The restructuring cost would be massive.

However, an equally unfeasible answer is to sit back and accept the status quo. Our research gives further evidence the EU should focus on genuine single market legislation and leave the rest to be handled nationally, regionally or locally. In environmental legislation – clearly a cross-border issue – this can translate into overall targets but with national discretion in how to achieve them. For a range of reasons this would be a far more cost-effective way to reduce emissions.

So where does this leave the Conservatives on Europe?

As we’ve argued before, the party’s focus on EU social policy – which is the key example of an area that has inappropriately been bolted on to Single Market legislation – is encouraging. EU social and employment law is responsible for 22% of the total cost of the regulation in this country and therefore should be addressed.

But at the same time it’s disappointing that the Conservatives have chosen to focus their regulatory reform proposals almost entirely on the domestic level – on paper arguably even more so than the current Government. Given that the bulk of the regulatory cost stems from Brussels, the lack of EU focus could lead to contradictory or undeliverable policy proposals. For example, the Tories have proposed a ‘one-in – one-out’ system in which for every law passed, another law has to be scrapped in return. This, in itself, is a great proposal. However, without some seriously innovative thinking, it’s unclear how this would work when adding EU laws to the equation, particularly for departments such as DEFRA, Transport and the Health and Safety Executive where the EU proportion of the cost of regulation is between 71% and 91%.

It’s a bit like George Osborne announcing a series of spending cuts, with the aim of reining in public spending, while controlling less then 30% of the actual budget to which these cuts are meant to apply. Would that be credible? Therefore, the Conservatives need to start seriously considering how they intend to apply their ‘post-bureaucratic’ reform programme to EU laws.

We have set out 30 ideas as to how this can be achieved, with particular focus on strengthening the filters at the beginning of the EU decision-making process and taking a radically more assertive stance earlier in EU negotiations.

A defeatist attitude is no good: despite being one of the EU’s Big Three, its contribution to the EU budget, its role as a financial centre and its liberal instincts, the UK is punching far below its weight in Europe – particularly in regards to building viable coalitions or simply putting its foot down à la Chancellor Merkel.

Should the Conservatives get into power, they must grasp the chance to embark on a new course to compel the EU to do much less, and concentrate on doing it better. That is not euroscepticism; it is pragmatic localism.