How to make European Policy Work
Martin Wolf
Sep 24, 2024
The key is to ensure that regulation doesn’t stifle growth
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So, why has that happened? It is not that the EU lacks the people. Informed commentators argue that it is largely due to overregulation. Two sorts of regulation are crucial: regulation of the tech sector specifically and wider regulation of the economy, especially the labour market, that particularly affects unpredictable new ventures. If you cannot fire, you will not hire and so you will go elsewhere.
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A paper by Oliver Coste and Yann Coatanlem, published by Bocconi University in Milan, makes another important and still broader point about regulation: new and dynamic companies have to be able to adjust their costs quickly in the light of market developments. Thus, note the authors, the costs of restructuring, largely the result of employment protection regulation, are fundamental. The more expensive it is to restructure, the more cautious the company. Cumulatively, such protections are crippling. The UK’s Labour government should note this potential danger in their plans.
Draghi agrees that regulation is a big issue. Thus, he notes, “the EU’s extensive and stringent regulatory environment (exemplified by policies based on the precautionary principle) may, as a side effect, restrain innovation. EU companies face higher restructuring costs compared to their US peers, which places them in a position of huge disadvantage in highly innovative sectors characterised by the winner-takes-most dynamics.” He even recommends a new “commission vice-president for simplification”. Good luck with that approach.
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