How big an issue is EU regulation?

It’s sometimes said that Brussels imposes red tape and excessive regulation that hampers British businesses activities and results in lower output and profits and wages. We can test this claim: if it is true then you’d probably see it in the data on productivity or hours worked, two key elements in output — at least in the long term.

First, let’s look at the impact on productivity. Higher productivity drives both higher wages and higher profits and worthless regulation reduces productivity and reduces wages and profits. Take a look the chart below, which is based on OECD 2014 data (which I am sure is familiar to most readers of this kind of blog). This shows that UK productivity is indeed low — and much lower that of the US. But it’s hard to say that this is due to EU regulation — because so many other EU countries (like France and Germany for example), which are subject to the same EU regulations on health and safety and rules of origin, have much higher levels of productivity (and higher average wages) than the UK. In fact, the productivity levels in France and Germany are as high if not higher than those of the US. So whatever is holding back UK productivity, it’s not EU regulation.

Next let’s look at hours worked. It’s said that the EU restricts the number of hours that people can work and that this hampers UK business. While it’s certainly true that France has a big problem with restriction on working hours, this is a French decision not an EU one. Take a look at these charts which illustrate the point that the it would certainly be possible to increase hours in the UK.

But of course, there are EU restriction that relate to paid holiday entitlement, maternity and paternity leave and the rights of part time workers to receive certain benefits would could be abolished on EU-exit and this might bring the UK position closer in line with say the USA. There is considerable evidence that the US workers work many more hours than Europeans do when GDP head is taken into account. See this interesting piece for example.

It is possible that EU regulations have a disproportionate impact on the UK relative to other countries owing to differences in the structure of the UK economy compared with the other large EU ones. I am thinking mainly about the relative size of the large UK services sector.

Outside finance, there are few EU rules on services at all and market access tends to be variable — an area perhaps where more EU rules would benefit the UK materially, particularly in relation to mutual recognition of professional qualifications, rights of establishment and cross-border provision of services.

Harmonisation of matters such as accounting standards, listing rules, company law, and corporate governance and a mass of EU case law on cross-border property rights have undoubtedly fostered genuine improvements in the overall management and quality of EU business, and lowered costs for investors and workers. These rules have increased the attraction of a hub and spoke structure for the financial services industry and the UK (and London) as the hub in this structure has been the biggest winner in the restructuring that has taken place. Arguably, the scale of its EU clout is what has given London the critical mass to develop into the global financial centre.

Within financial services more narrowly, its is clear that the UK seeks even more onerous regulations than the EU authorities — on capital standards and ring-fencing of retail banking activities for example. EU-wide regulation on the conduct of fund mangers’ behaviour with respect to leverage, risk management, pay and other governance related issues under the Investment Services Directives (and UCITS and AIFMD rules) enable financial firms to market their activities across the EU in an way that wasn’t possible before and, given the international breadth of most financial firms, its hard to say that these rules represent avoidable red tape. (I know some very wealthy hedge fund managers bristle at the idea that they should be subject to any regulation in these matters at all.)

Of course, the EU has discussed and proposed some odd measures for the financial sector such as Tobin taxes, caps on bankers’ (and fund managers’) pay and discrimination against firms based outside the Eurozone but broadly it seems better to deal with these from within the Single Market than to lose access and influence over matters which have such a large impact on overall welfare.

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