The EU Economic Environment and Over-regulation

Article published on Nov. 2, 2002
community published
Article published on Nov. 2, 2002

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Contributed by Café Babel Bulgaria. Is Europe an over-regulated, over-legislating, bureaucratic nightmare?

Bastiat first formulated how incentives change in an over-regulated society. The government introduces laws, which in practice benefit only relatively small groups. This not only allows some people to live at the expense of others, but most importantly changes the incentives in the economic behavior of market entities. Thus profit seeking turns into rent seeking, self-interest into self-sacrifice and property rights into artificial rights.

(1) The natural resources of a country could be the driving engine of prosperity. But diamonds, gold and oil are worth nothing if human creativity is restrained. According to the liberal school of economics value can only be created in the process of exchange. Thus profit-seeking encourages people to discover and develop. When a law is introduced that favours a small group of people, for example an import tax, it actually creates a rent for the native producer whose production is encouraged only because it is within the boundaries of the country. The government aims to keep unemployment down because according to it cheap imports destroy jobs. It protects a branch that could not be competitive otherwise. It also aims at the nominal, present number of jobs, forgetting the flexibility of workers and their ability to change their qualification or merely their employer. What tariffs also do is change behaviour in the other non-protected branches. Market entities are thus encouraged to seek governmental help. The profit seeking turns into rent seeking. So people use their time, money and abilities not to discover and develop but to lobby for government aid. The result is less prosperity.

To what extent is the latter incentive change valid in relation to the EU? According to the recent study by Patrick Messerlin the costs of protection in Europe amount to 6-7% of GDP. 22 braches, among the most highly protected in the EU, are the subject of the study. The estimated effect of these huge costs is 3% of all jobs saved. In nominal terms this equals 220 000 for saving a single job. That is ten times the average yearly salary in the EU. Massive private rents are derived from protection by a happy few and resulting large costs are imposed on many European consumers. Nothing comes for free, 3% of the jobs are saved at the expense of all consumers. The rents for the local producers are estimated to be 30%. That is even higher than the tariffs that created the rent.

The process of European countries convergence is connected with a fall of internal trade barriers and the imposition of external ones. This will encourage European economies to grow and develop together. But will that also close the EU market for international commerce? How will the EU then grow after it accepts the rest of the countries of the Old Continent and touches the physical barrier of enlargement?

Free trade is always beneficial for both parties because of so-called comparative advantages and that is why protectionism in the EU is harmful not only for Europeans but also for the other potential trading nations. It is somewhat unwise to hurt some poor country with protective duties and at the same time to spend money for government aid for the same countries, it is also twice as expensive for the Europeans.

(2) Self-interest is not a sin as long as it does not hurt other people. Self-sacrifice is not a virtue as long as it concerns only a single man. What happens then if self-sacrifice is regulated by law and demanded from everybody? Taxes are a form of self-sacrifice. The main question is not however whether taxes should exist but rather to what extent income should be levied. When does obligatory self-sacrifice hamper self-interest?

The OECD has carried out an evaluation of the EUs tax burden including social security commitments on 42% for 2001. Nearly one half of the GDP goes in unfunded pension liabilities, agricultural subsidies, governmental programs and so on.

It is not an act of brigandage that people evade taxes when taxes are very high. All or nothing tactics is a reality in current economic behavior. The European Saving Tax Directive aims to reduce tax evasion but it could fail because tax-haven countries may be unable to afford the loss of investments. Money is most commonly compared with river movements that escape every barrier.

Forced self-sacrifice changes personal incentives and self-interest in activities. With the pay-as-you-go pension system social security is a tax on the use of labor, not an investment. The connection between effort and rewards is being broken down. People become disinterested when their income is distributed under such a system.

The European Stability and Growth Pact ensures that the governments will not run excessive budget deficits and high debt although it fails to limit the extent of the implicit debt burden, created by the unfunded pension liabilities. However the discussed ideas to unify the tax rates within the EU means absence of tax competition between the member countries which if implemented will lead to tax rates that are not optimal for the economic development.

(3) Property rights tend to turn into artificial welfare rights when society is over- regulated. The new trend of regulation in the EU is a technical barrier to trade. It is a relatively new kind of protectionism that aims to stop the low quality products from entering the European market. The assumption is that the wider public itself cannot appraise and evaluate the quality of the products. A huge amount of quality requirements of goods, food safety concerns, consumer protection are being imposed on trade. To sell and own a commodity is no longer an act of free will. It should comply with EUs regulations.

There are thousands directives concerning anything and everything from human treatment of pigs and other animals to the regulation of prices which require the difference between the prices of the same merchandise in different countries of the EU not to exceed 15%.

The EU is an over-regulated area where bureaucrats decide many things and people have less freedom to choose by themselves. The idea of creating a super European government means more unrestricted power far from the peoples control, which would deepen the problem of overregulation.

1 - Bastiat F., Selected Essays on Political Economy( on Bastiats political economy refer to Salerno J., Dorn J., Thornton G. and Alvarado E.

2 - Messerlin P., Measuring the Costs of Protection in Europe, 2002, Institute for International Economics,

3 - ibid

4 - See also

5 -

6 - Rodriguez J., Cato,,