Speech to the Civitas EU Conference

"EU legislation: a help or a hindrance to business performance?"

Ruth Lea, Director, Global Vision

Introduction

My aim today is to discuss a few key issues relevant to business to thrive and link them to EU legislation, rather than regale you with lists of EU Directives and regulations. If you would bear with me, I'll spend some time talking about business and the economy in general, we live in such extraordinary times, before I get to the EU. 

1a Conditions for business/economy to thrive

The first issue concerns the conditions required for business to thrive, for business to perform at its best. Of course, I believe that business success is fundamentally a "positive thing". Economic growth and vibrant businesses are the way to improve people's living standards and drag people out of poverty - though I'm also aware that there are other considerations. Business doesn't exist in a social or moral vacuum. It has responsibilities to its employees and to the environment for example. But I start from the basic premise that it is better that businesses thrive and provide employment rather than fail and have to make people redundant.

What the conditions for business to thrive? Going back to basics:

• The rule of law, respect for property and a stable political background. Business does not thrive if the country is lawless and theft endemic.
• A supportive tax system and one that is clear and not too complex. The current Government has undoubtedly increased the taxes businesses have to pay - thus adding to their cost base. And they have increased the complexity of the tax system significantly, making it a minefield for small businesses.
• There are of course, many other factors - including trained and keen employees for a start.
• Finally, a positive regulatory background. Yes, good regulation of markets is essential if they are going to work properly. I shall now discuss this.

1b The need for regulations

Yes there is a need knowledgeable supervision and regulation of markets if they are going to work properly and fairly and for businesses to thrive. Far too often the issue of having regulations is a matter that regulation is right or wrong - and therefore EU regulations are right or wrong. The situation is far more complex than that.

The current dreadful state of the financial system is a dramatic case in point. Without doubt it is one of the major causes for our economic woes. This is one of the unique features of the current recession.

• The financial system has stopped functioning properly in the US and the UK - needing vast bailouts by the taxpayer. Why has this happened? Because the lenders were lending too much and much lending was irresponsible and risky. In the US lenders were encouraged to lend mortgages to people who had little chance of paying them back. In the UK the banks were taking huge risks and yet the regulatory authorities did nothing. On the contrary, when the risk regulation officer at HBOS, one of our stricken banks, raised the alarm, the FSA essentially ignored him - and then he got the sack. Northern Rock's borrowing policy was inherently risky and dangerous. Financial institutions were creating financial "products" that were being sold round the globe that clearly few people really understood. What on earth was happening? Well, the regulatory authorities failed - let us be clear it was a major failure of regulation. The FSA has conceded that its supervision of the lenders was inadequate. The financial system, so necessary for the rest of the economy and business to thrive, has stopped working properly and the consequences are truly appalling. Good regulation is necessary.
• By the way, there's a 2^nd factor that makes this recession unique. It's a truly global recession. All the major economies (bar China and possibly India) are in recession. Globalisation is usually something that can balance these problems out. In the past as the US was down, Europe tended to be up and vice versa. But not this time.

Finally on the need for regulations: no-one disputes that Health & Safety regulation is necessary.   

2 Conflicts in policy  

Now I come onto my final set of comments before I discuss the EU on the general matter of regulation. Having said certain regulations are necessary for markets to function there needs to be a qualification. Not all regulations are helpful to business. On the contrary they can be complex, costly & time-consuming to comply with and distract employers from running their businesses.

Let us take the employment regulations - many of which originated in the EU. Indeed they are some of the most complex areas of law that small businesses have to deal with. Let us take the example of the Working Time Directive (in British law as the Working Time Regulations). This stipulates the maximum hours a person can work, minimum holidays and minimum breaks. The British Chambers of Commerce estimate that it costs business £1.8bn annually. Britain currently has an "opt-out" in the sense that employees can choose to waive the 48 hour maximum. This "opt-out" is under threat from the EU. 

The Working Time Directive is therefore costly for business. Many businesses would prefer that such expenses were not imposed on them. But you may argue they are necessary to prevent people working excessive hours - therefore they are enabled to have a better "Work-Life Balance" and prevented from being exploited. There are "social" reasons for having the legislation. There are therefore conflicts in policy. Businesses would like one thing - but other people want another. You cannot avoid these conflicts.

There are, of course, economic implications of these extra regulations. The extra costs on business reduce their competitiveness and undermine their success in global markets - and we live in a global world where international competitiveness is supremely important. They will not perform as well as they could, not grow as well as they could and, therefore, not create as many jobs as they could. At the end of the day decisions are about policy priorities and politics.

3 The influence of the EU on business legislation

I've just touched on the Working Time Directive which brings me to the influence of the EU in British legislation affecting business. The impact of EU law is now very substantial indeed. I've mentioned employment law - a very big one. But there's also legislation on health & safety, company law & corporate governance, consumer regulations, environmental regulations etc. And every sector is affected: fisheries, farming, financial services, building trades etc. Ask any fisherman, farmer, builder, banker, insurance salesman or shopkeeper.

You may ask why the EU has to concern itself with the minutiae of regulation. After all, if we trade with the US or China, we don't have all this harmonisation, this sharing, of legislation. We decide whether the goods we import from China comply with our product specifications - no exploding fireworks - and then buy the goods. We don't insist that there employment regulations are the same as ours.

Well the answer is, of course, that the EU and its Single Market is much, much more than a free trade area. It's an entirely different animal. It's not just about trade. It's about political integration as well. In fact, it's primarily about political integration.    

4a Single Market, the European Social Model

The Single Market is at the heart of the EU. It concerns the Four Freedoms of Goods and Services, Capital and Labour. But unlike an ordinary trading bloc, it insists on harmonising regulations on labour market standards, aspects of the tax system, environmental regulations, health & safety etc. Why? It's because of the belief that no one country in the Single Market should have an "unfair" competitive advantage over any other. So EU members should have similar, harmonised employment standards, similar tax regimes and similar environmental standards. If, goes the argument, one country has more lax standards than any other it will gain an "unfair" competitive benefit.

So, for example, if one country has less onerous employment regulations, they are accused of "social dumping", "unfair competition" etc. This was a big argument for the UK in the mid-1990s because at that time the UK had more lightly regulated labour markets than say France or Germany. And, as already mentioned, there is still pressure on the UK to give up the opt-out from the Working Time Directive. But as we have complied with all the EU legislation since the mid-1990s, this accusation is not made so much against the UK anymore.

Now this would not be so important if the EU took the view that these areas should be lightly regulated. But they don't. They believe in heavy regulation and this has been especially the case in employment regulation. One reason for this is the fact that the EU has been a major driver behind developing the European Social Market Model throughout the EU. This model believes in employment protection and heavily regulated labour markets.

Turning to tax policies: soon after enlargement, Estonia cut its corporation tax to 0%. Germany complained because this was "fiscal dumping". But do you want these economies, under the stultifying Soviet yoke for over 50 years, to grow or not? And they are not just competing with the other economies of the EU - they are competing with the economies of the rest of the world, which represent 80% of world GDP. The EU should not be so inward-looking. 

4b Single Market: costs & benefits

I find this emphasis of the Single Market on unifying, harmonising, heavy regulation unhelpful to business in the EU.  And I'm not alone. About three years ago Günter Verheugen, EU Commissioner for Enterprise and Industry, announced that EU regulations were costing the European economy some €600bn a year. €600bn is some 5.5% of total EU GDP, equivalent to the size of the Dutch economy. Mr Verheugen also complained at the time that any attempts at deregulation had been thwarted by powerful civil servants within the Commission. He was admonished for his honesty. But it was clear that he felt the regulatory burden was too great.

Comparing the Single Market's costs with its benefits makes for painful reading. In 2003 the Commission published their assessment that EU GDP in 2002 was around €165bn higher than it would have been without the Single Market. Even after allowing for the extra GDP growth since 2002, this means that the benefits are less than a third of the costs.

I'm all in favour of trade within the EU. But the Single Market, and its endemic tendency to regulate, has more costs than benefits for European businesses.

5 Man-made Global Warming: Climate Change policies

I've mentioned environmental regulations already. And my final remarks are about the EU's policies on combating man-made Global Warming. The EU's policies, especially for the UK, could be very expensive indeed and put enormous extra costs on business.

Indeed for the UK, and according to official figures, climate change policies already account for 21% of the average business electricity bill - already very damaging for heavy energy users including chemicals, cement and steel. But by 2020, the burden of green policies is expected to rise to 55% of the average business electricity bill. These policies guarantee the further migration of industry out of Britain and, therefore, continuing "de-industrialisation". People will lose their jobs and the country will be all the poorer.

The main tool of the EU's climate change policies is to cut man-made CO2 emissions in the belief that they are the main cause of dangerous, planet-damaging, global warming. The EU has signed up to the UN's Kyoto protocol, agreeing to cuts in CO2 emissions by 2008-12. In addition, the EU has a target of a 20% cut by 2020. In order to achieve these necessary CO2 emissions cuts, countries need to "decarbonise" economies. In other words, they need to switch from fossil fuels to renewables (for example).

Of course you may say that the cost of losing businesses overseas is nothing in comparison with "saving the planet from dangerous global warming". As I said earlier there are conflicts in policies. But consider the following:

• In the EU there are already signs from eastern European countries, Italy and, indeed, Germany that these countries are not prepared to adopt costly policies to meet the EU's CO2 targets. The current financial crisis is focussing minds.
• But even if they were, there is no guarantee that the rest of the world will go along with "decarbonising" their economies. The jury is still out for the US, even under Obama, (not least of all because of the current financial crisis) and China (a new coal-fired power station every week) and India will certainly not go along with this. The EU's total share of global CO2 emissions is less than 15%. The rest of the world has 85%.
• The UK could end up almost being on its own. It accounts for less than 2% of global manmade carbon emissions.
• There is a sizeable body of climate scientists who challenge the hypothesis that man-made CO2 emissions are the major cause of climate change. They point to the importance of the sun in driving climate and the fact that it was hotter 5-8,000 years ago, probably warmer in Roman times and in the medieval period (1000-1500). Their voices should be listened to. There is no consensus on the science of climate change.

6 Conclusions

I shall finish at this point. I am an unapologetic supporter of the need for good relations with the EU. And I believe unreservedly we should trade with the EU.

But the EU's legislation and policies, under the Single Market, are intrusive and expensive for business. On balance, they are more hindrance than help. By the way, this is not just true for the UK. It is true for the rest of the EU. Perhaps costly regulations were OK when the EU was benefiting from boom times. We are now in bust times. It is all the more important that the EU should think ahead and put together policies that will help Europe recover and compete in the future rather than stick with the policies that were developed in a different age and are now looking very old-fashioned indeed.