Myths of Europe’s overregulation

We are all deregulators now, it seems. European leaders embrace deregulation with the zeal of converts. Both the European Commission and those in the UK government seem convinced that slow growth relative to the US is the fault of more onerous rules for business than across the Atlantic.

The curious thing is that they have not absorbed this world view because the Trump administration has told them to. (Although it has: well beyond vice-president JD Vance’s latest European crusade, the most consistent talking point of President Donald Trump’s henchmen is about stopping Europe regulating US tech.) The Kool-Aid is largely homemade. For the past two to three years, a steady chorus from business has convinced so many politicians that it has drowned out the pre-Covid optimism on decarbonisation and given the new US tech oligarchs a door to kick in that, if not open, is at least slightly ajar.

I exaggerate, of course. But the recent revolt against regulation in Europe — and not just the EU, mind — does strike me as thin on evidence. So for the sake of balance, below are several observations that go the other way, and which those blaming slow growth on overregulation should be made to address before being believed.

To be clear: there is always room to improve the rules. European businesses are probably right to complain that the new sustainability diligence and reporting requirements are inefficiently designed and costlier to comply with than they need to be. So aiming for better regulation is a worthwhile goal, and listening to sensible input from companies can make regulation better.

But much of the debate has an ideological hue whose premise is that setting rules for what companies may do is by that very fact bad for growth. There is a belief, for example, that the EU’s constraints on some of the outrages committed by US Big Tech are behind low investment in the digital economy. But, too often, these arguments do not go beyond the level of slogans — which may be enough for political support, but nowhere near enough for actually accelerating growth. Just like regulation itself should be evidence-based, so should calls for regulatory reform, let alone deregulation.

Here are some of the points that come to mind when I hear Europeans complain about overregulation.

It’s not just Europe. The most recent “revolt” is explicitly premised on the claim that Europe has been falling behind US growth because it is more heavily regulated. But stop and think for a second: aren’t Americans complaining just as much about red tape? The US, too, is a master of throwing bureaucratic spanners in the wheels. Remember the Biden administration’s pathetic record of installing electric vehicle chargers — 58, according to Marc Dunkelman, author of a new book aptly titled Why Nothing Works.

In fact, those who measure such things find that the EU has more streamlined regulation than the US. Every five years, the OECD collects data on how competition-friendly its member states’ regulation is. Below is the 2023 vintage, for both the overall indicator and the sub-indicator “Administrative and regulatory burden”.

A lower number is better on these scales (which go from zero to six), in terms of what the OECD thinks of as international “best practices” to promote competition. It’s immediately clear that the US is one of the worst performers. To be fair, nobody claims these indicators measure the growth-friendliness of regulations. But they are supposed to measure their competition-friendliness. So they focus on the openness of markets, the regulatory difficulties of starting a business, and the ability to contest the position of incumbents.

Economists tend to think that more competition is good for growth. Perhaps they are wrong, and it’s the power of incumbents that is good for growth. Or, just perhaps, the fact that businesses whine about rules does not necessarily mean that those rules are bad for growth — just that those rules mean established businesses have to work harder not to be outcompeted by upstarts.

Your dislike is not the same as a brake on growth. Regulations can be annoying, stupid, or mean-spirited. They can also be a brake on growth. But these are not the same thing. There are plenty of regulations that could be got rid of or improved, without doing anything for growth. At a recent dinner I was seated next to the chief executive of a large German company, and when the topic of overregulation came up, this person’s go-to examples were that you apparently can’t buy cars in the EU any more that don’t emit annoying beeps when you exceed the speed limit (“Who wants a car that beeps all the time?!”), and that plastic bottle tops remain attached to bottles when you unscrew them (“Have you tried drinking from them?!”).

It is anyone’s prerogative to hate nanny state car settings or bottle designs. But how could these possibly be harmful for growth? All modern cars have adaptive cruise control and speed-limiting options, so software is already programmed to trigger certain actions when the speed limit is reached. We’re talking about a few extra lines of code. As for bottles, once the plastic moulds have been redesigned, there is surely no extra cost involved in the production of the new caps — and a lot of costs are saved in recycling collection.

One in, 27 out. Some fans of deregulation swear by a “one in, two out” rule — whereby no new rule should be introduced unless two old ones are scrapped at the same time. This is a silly approach because the mere count of regulations does not reflect how beneficial or harmful they are. But there is a way for the EU to secure “one in, 27 out” where the 27 are the member states’ regulations of the same area. As Enrico Letta underlined in his report last year, such a thicket of national regulations is costly to growth because it fragments the single market. One solution is for the EU to pass more regulations and fewer directives. (An EU regulation applies identically throughout the bloc, but a directive is adapted separately by all 27 member states.)

A more original approach is a “28th regime”, which does not supersede the 27 national ones but allows companies to opt into registering under that regime and being able to do business throughout the EU without having to confront any of the national rules. 28th regimes written in business-friendly ways are favoured by Letta and by Mario Draghi, the second former Italian prime minister to write a weighty report last year on how to give the EU more economic vroom.

Whichever way you do it, the point is that here more is less — in the sense that judicious additional regulation (at EU level) actually relieves the overall regulatory burden on companies.

Deregulation can make it harder to plan. Here are two examples of “deregulation” that are being mooted in EU discussions: pushing back the 2035 deadline for ending sales of new carbon-emitting cars, and undoing the fines about to hit European carmakers that have fallen short of their targets for the electric vehicle share of their fleets. Both would be “deregulatory” insofar as they would remove a regulatory requirement.

They would also give a windfall to companies that had failed to adapt — and a loss of competitive advantage for those companies that had adapted, investing real resources along the way. Is that good for growth? It’s more likely to be bad for growth, because it penalises creative destruction and rewards holding on to past business models rather than investing in new ones.

There is a simple lesson to draw from these examples. Some regulations no doubt hold back growth. Some may even do so because they try to enforce the wrong thing, not just because they enforce the right thing in a dumb or inefficient manner. But many regulations only determine the direction of growth, not its pace. So when you hear complaints that government rules limit growth, do ask precisely how.

As Meg Hillier, chair of the UK parliament’s Treasury select committee, asks in an op-ed for the FT: “Rhetoric and vested interests aside, where is the proof that stripping away financial services regulations will generate meaningful growth across the UK?”

You could ask the same questions about regulations and about Europe generally. You may be left without an answer more often than you expect.

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