Is the UK winning the argument on EU regulation?

Yesterday afternoon Open Europe hosted Business and Energy Minister, Michael Fallon MP, the man responsible for pushing the UK's 'smarter regulation' agenda in Brussels. This is a subject close to Open Europe's heart as we have produced a number of highly detailed reports on the cost of EU regulation - £124bn gross between 1998 and 2010.

In his speech, Fallon argued that while the single market had the potential to be the "greatest platform for economic growth", overly burdensome regulation coming from the EU was choking off potential jobs, growth and competitiveness, and as argued by David Cameron in his EU speech, Europe could not afford this in the global context. "The burden of unnecessary costs" was carried more heavily by Europe than by its competitors, he said.

He argued that this burden falls particularly hard on SMEs, citing a consultation which found that many had to employ a dedicated member of staff simply to process the workload stemming from the EU's REACH (Registration, Evaluation, Authorisation and Restriction of Chemical substances) Directive. Other areas of EU legislation identified as particularly onerous were the Working Time Directive, the Agency Worker's Directive and other social and environmental rules.

During the Q&A session he pointed out that leaving the EU was not a panacea - as UK companies exporting to the EU would still have to comply with many of these regulations without having any say over them, something currently vexing the Norwegians (see here for a more detailed look at this issue).

Fallon argued that progress had already been made on over-regulation on both the UK and EU fronts, pointing to strong support from other member states including Germany, which resulted in the recent letter signed by twelve member states calling for a reduction in the overall EU regulatory burden. Fallon pointed out that as a result of the crisis, many member states had become a lot more receptive to UK-style reforms, with France and Poland adopting a 'one in, one out' approach to regulation based on the UK model. He was also hopeful that Mediterranean countries would become allies in this fight given their need to restructure their economies and said he was disappointed they had not done so already.

On the UK front, Fallon claimed that the coalition's six-point transposition plan for EU laws had resulted in the elimination of costs associated with gold-plating, i.e. that when adopting new EU laws, the UK would only impose the minimum standards necessary to comply.

However, as Fallon acknowledged, there is still more to be done, arguing for example that EU impact assessments ought to be independently verified, and that a "cultural shift" needed to take place in Brussels.

Shooting yourself in the foot

At risk of sleep walking into a proposal for an EU financial transaction tax, the UK Treasury is now receiving some well-needed, and wholly unintentional, diplomatic help from Algirdas Šemeta, the European Commissioner for Taxation.

Mr. Šemeta took to the European comment pages over the weekend, trying to convince those countries that remain opposed to the FTT to come to their senses – literally. Calling for a debate based on “common sense and facts”, he claimed that the evidence in the Commission’s own impact assessment had been mis-used by those who oppose an FTT. A spokesperson for Mr. Šemeta said they now intend to “fine-tune the economic analysis”, presumably to put an end to the outrageous practice of using the Commission’s own economic evidence as evidence when considering the desirability of a proposal.

In any case, amongst other countries, Mr. Šemeta seems to have targeted Sweden – a country which actually had a go at implementing a financial transaction tax in the late eighties (with pretty disastrous consequences). In an article in yesterday’s Svenska Dagbladet, he argued, “The Commission understands the Swedish hesitation, given the experiences the Swedes have had with an FTT. But we want to ensure that the Swedish experiences have been taken into account when we formulated the proposal.”

This didn't quite have the desired effect.

A leader in today's Swedish daily Sydsvenska Dagbladet – hardly a eurosceptic publication – carried the headline ”The Commission is too cocky”. Here goes:

"Šemeta starts by requesting a debate based on ‘common sense and fact’. Then he discards those who have questioned the proposed transaction tax, saying that ‘they either haven’t read the Commission’s proposal or haven’t understood it'. The Swedish National Debt Office, which in its opinion for the [Swedish] Finance Department labelled the proposal 'exceptionally poorly thought through'?…Finance Minister Anders Borg has read but not understood – or perhaps not even read? [He doesn’t] get the facts? Or lacks common sense?”

It goes on,

“One rationale [behind the tax] which the Commission has referred to, is that there are currently around ten countries that have some sort of tax on financial transactions. This is not good, thinks the Commission, as it distorts the competition on the internal market. But why wouldn’t the tax proposed by the Commission have similar distorting effects, albeit on a different level? There is high probability that businesses will move to different countries.”

The paper then gives it both barrels,

"Šemetas intervention shows that the EU-commission has a serious communications problem which seems to stem from an even more serious attitude problem. A slightly more humble approach wouldn’t hurt from an institution that lacks a popular mandate. In particular considering the tricky situation that the EU is currently in, or rather, has put itself in.”

Similarly, Karl Sigfrid, Swedish MP for the governing party Moderaterna, takes Šemetas to task in a reply in Svenska Dagbladet,

"Šemeta wants to kill off three alleged myths, the first being that a financial transaction tax would give us fewer jobs and lower growth. The interesting thing about this myth is that it’s from the EU Commission’s own analysis, which says that the reduced productivity resulting from the EU-tax is just as large as the income generated from the tax, and probably even greater.”

Sigfrid concludes,

“The article by the Tax Commissioner hints that if we only get an EU tax, indebted countries will not need to consolidate their budgets to any greater extent. Instead of trying to sell us miracle cures, it would be better if the Commission emphasised the importance of work and responsibility.”

Note to George Osborne: put Šemeta on your Christmas card list.

Showdown over alternative investment

In HFM Week, we're today setting out our thoughts on one of this year's most contentious EU proposals: the Directive on Alternative Investment Fund Managers (i.e. stricter rules for hedge fund and private equity managers and various other more or less obscure managers with alternative investment styles). The proposal is up for discussion and amendment in the European Parliament and the Council this autumn.

It's clear that there will be a Directive, but exactly what it will look like is a completely different story. In a nutshell: The Directive will - quite literally - force more transparency on fund managers, while giving them the opportunity to market their products across the EU once they've been authorisied to do so. Within reason and market practice, these are no bad things.

However, overall, the Directive is in danger of becoming a prime example of bad business law - especially when viewed through the prism of the Commission's own 'better regulation' principles. As we argue in the article, the Directive's objectives and benefits are unclear, it is riddled with legal uncertainty, and it is inconsistent with both existing regulations and prevailing market practices. Perhaps most critically, the Directive is protectionist to its very core.

The battle will primarily take place over the Directive's protectionism and the provisions which seek to overturn how managers are stuctured and how they go about their business (which could seriously harm the industry, restrict investor choice, etc.).

In the absence of a proper Impact Assessment on the proposal from the UK Government, Open Europe will soon publish a report on the possible impact of the Directive on the industry, investors and the wider economy. Watch this space.