Legislative policy, law and competitiveness: A mysterious and difficult relationship in the EU

European Law Journal

Volumn 15, Issue 1, 2009, Pages 98-120

  Lynch Fannon, Irene ^a  

^a UNIVERSITY COLLEGE CORK   (Ireland)

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EID: 70449564527     PISSN: 13515993     EISSN: 14680386     Source Type: Journal    
DOI: 10.1111/j.1468-0386.2008.00452.x     Document Type: Article

References (76)

1. R. J. Gilson, 'The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, And Covenants Not To Compete', (1999) 74 New York University Law Review 575.
2. H. Hansmann and R. Kraakman, 'The End of History for Corporate Law', (2001) 89 Georgetown Law Journal 371. There is some evidence that the failure concept has been internalised, at least by certain parts of the EU civil service. See Lisbon mid-term assessments: Communication to the Spring European Council: Working Together for Growth and Jobs. A New Start for the Lisbon Strategy, Communication from President Barroso in agreement with Vice-President Verheugen, COM (2005) 24 final; Communication from the Commission on the Social Agenda, COM (2005) 33 final - the Commission issued documents on other matters less central to this discussion such as the Communication on Sustainable Development; Communication from the Commission to the Council and the European Parliament: The 2005 Review of the EU Sustainable Development Strategy: Initial Stocktaking and Future Orientation, COM (2005) 37 final. European Commission: DG for Employment and Social Affairs, Report of the High Level Group on the Future of Social Policy in an Enlarged EU (May 2004). Kok Report on the Lisbon Strategy in an Enlarged Europe (November 2003) (The Kok Report)
3. Much of this work is emanating from a group at the LSE in the UK; see, eg, M. Lodge, J. Black and M. Thatcher (eds), Regulatory Innovation: A Comparative Analysis (Edward Elgar, 2005
4. J. Black, 'Decentering Regulation: The Role of Regulation and Self-Regulation in a "Post-Regulatory" World', [2001] Current Legal Problems 103
5. C. Scott, 'Regulation in the Age of Governance: The Rise of the Post Regulatory State', in J. Jordana and D. Levi-Faur (eds), The Politics of Regulation (Edward Elgar, 2004
6. C. Scott, New-ish Governance and the Legitimacy of the EU, CLPE Research Papers (17/2007).
7. See extracts from the EU documents referred to in text accompanying nn 23 and 24 infra.
8. Much of the author's interest in this area derives from literature which has considered the relationship between corporate governance models and economic outcomes, for example K. Gugler, Corporate Governance and Economic Performance (Oxford University Press, 2001); F. Barca and M. Becht, The Control of Corporate Europe (Oxford University Press, 2001); M. Calderini, P. Garrone and M. Sobrero, Corporate Governance, Market Structure and Innovation (Edward Elgar, 2003) and D. Murphy, The Structure of Regulatory Competition: Corporations and Public Policies in a Global Economy (Oxford University Press, 2006).
9. See previous study in relation to EU-US comparative labour market regulation and its relationship to overall economic competitiveness: I. Lynch-Fannon, Working Within Two Kinds of Capitalism (Hart Publications, 2003). See also I. Lynch-Fannon, 'The European Social Model: Prospects for Success in an Enlarged Europe', in P. Ali and G. Gregoriou (eds), International Corporate Governance after Sarbanes-Oxley (John Wiley & Sons, 2006), 423-443, on the very strange dissonance between extensive legislative efforts on the part of the EU to encourage workers to combine work and family life and falling birth rates in Europe. For an interesting study on reasons for success of some industrial districts in the USA compared with others (Silicon Valley CA and Route 128 MA), see Gilson, op cit n 1 supra on the surprising effects of some legislation on competitiveness.
10. R.La Porta et al, 'Corporate Ownership Around the World', (1999) 54 Journal of Finance 1131; and 'Legal Determinants of External Finance', (1997) 52 Journal of Finance 1131. M. J. Roe, Political Determinants of Corporate Governance: Political Context, Corporate Impact (Oxford University Press, 2003).and others on path-dependency issues, which adds an additional layer of complication regarding the role of regulation in a comparative context.
11. It is fair to say however that the Lisbon Agenda, as originally conceived, embraced wholeheartedly the concept that innovativeness and economic growth was the result of many contributory factors. In some way, this appreciation of the complexities of the matter led to a 'golf umbrella' effect for Lisbon by 2005, where the many different strategies being pursued under the 'Lisbon Agenda' rendered it unmanageable. The Barroso Report was specifically and trenchantly critical of this effect in 2005. See further COM (2005) 24 final, n 2 supra, in particular Section III on improving the governance of Lisbon.
12. See below regarding the 'Scandinavian approach' to these issues.
13. Norway, one of the most regulated economies in the world, is also one of the richest, largely due to oil revenues. Similarly, the spectacular economic growth of the Irish economy from the mid-1990s on occurred against a backdrop of an increase in legislative and regulatory initiatives, both domestically and emanating from Brussels. Recent economic down turns have in turn occurred in a relatively static regulatory landscape.
14. Some states such as Sweden, which are highly regulated, perform well, others with less regulation, for example Ireland, perform equally well if not better but Ireland's spectacular economic performance has occurred against a backdrop of an overall increase in regulation. See Business Regulation Forum Report March 2007, available at http://www.businessregulation.ie.
15. COM (2005) 24 final, n 2 supra. Following this between April and September 2005, the Commission examined the possibility of developing an EU common methodology for assessing administrative costs of EU-derived legislation. In January 2006, the Council invited the Commission to start measuring administrative burdens as part of an integrated impact assessment approach to legislation and in Spring 2007 the Commission published its first initiative in this area. See also OECD, From Red Tape to Smart Tape (OECD, 2003).
16. Within each Member State, the source of administrative burdens will be domestic, EU or other international. In many Member State countries up to about a half of such burdens emanate from Brussels.
17. In the Netherlands it has been estimated that the cost of the compliance burden on business is 2.2% of GDP and significant steps have been taken to reduce this burden. In Germany this figure is 4.4%. Many Member States including Ireland and UK have adopted 3% as a guideline estimate of the overall administrative burden. In Ireland, assuming that 15% of this guideline figure of 3% is unnecessary, the cost to Irish business has been estimated at €582 million in 2002 alone (Department of the Taoiseach, Regulating Better (PRN 1395, January 2004)
18. n 2 supra: 'The governance of the Lisbon Strategy needs radical improvement to make it more effective and more easily understood. Responsibilities have been muddled between the Union and the Member States. There are too many overlapping and bureaucratic reporting procedures and not enough political ownership'.
19. 'Boston or Berlin'; 'Chicago or Copenhagen' are phrases which neatly encapsulate Ireland's ambivalent attitude to the European social model of economic progress and these are often used by politicians and policy makers in Ireland: P. Sweeney, The Celtic Tiger, Ireland's Continuing Economic Miracle (Oak Tree Press, 1999); P. Sweeney, The Celtic Tiger, Ireland's Economic Miracle Explained (Oak Tree Press, 1998).
20. COM (2005) 24 final, n 2 supra, at 2
21. The identification of the European Social Model as being communitarian in character is particularly significant for legal theorists when contrasting this approach to the more contractarian approach evidenced in the USA and championed by the 'law and economics' scholars of the Chicago School; Lynch-Fannon, Working Within Two Kinds of Capitalism, op cit n 6 supra. I. Lynch-Fannon, 'Employees as Corporate Stakeholders: Theory and Reality in a Transatlantic Context', [2004] Journal of Corporate Law Studies 155; Hansmann and Kraakman, op cit n 1 supra; W. T. Allen, 'Contracts and Communities', (1993) 50 Washington and Lee Law Review 1. Scholars opposed to the law and economics view of corporate function in the USA are often referred to as the progressive corporate law scholars.
22. For a description of what is involved in the open method of coordination, see Report of the High Level Group, n 2 supra, 35, para. 2.2.2. In addition, the open method of coordination procedure will be included in the Constitution in relation to social policy under Art III-107; see ibid, 36.
23. USA, EU15 and EU25 figures for men of prime age between 25-54 are similar. See ibid, 42 with figures from Eurostat, European Foundation for Living and Working Conditions and OECD.
24. However, it is important to note that some differences in GDP growth as between the USA and EU can be explained by factors which are particular to the economic structures of both trading blocs: R. Gordon, Two Centuries of Economic Growth: Europe Chasing the American Frontier, available at http://faculty-web.at.northwestern.edu/economics/gordon/2Cent-CEPR.pdf, at 14; R. Gordon, Why Europe Was Left at the Station when America's Productivity Locomotive Departed?, NBER Working Paper Series (w10661, August 2004), available at http://faculty-web.at.northwestern.edu/economics/gordon/P368-CEPR.pdf.
25. Eurostat, Euro Indicators (April 2007), available at http://epp.eurostat.ec.europa.eu/portal/page.
26. Included in an Annex to the report a great deal of matters and policy initiatives pursued under the umbrella of the Lisbon Agenda, ranging from Information Society initiatives, environmental initiatives, education and so on (Report of the High Level Group, n 2 supra, Annex 3).
27. For more detail of the types of issues which are being referred to here, see Lynch-Fannon, op cit n 17 supra.
28. From Communication from the Commission to the Parliament: Common Actions for Growth and Employment: The Community Lisbon Programme 7, COM (2005) 330 final.
29. From the excerpts above we can see that there are proposals to subject new policy proposals to 'solid impact assessment' but how this will be done in any satisfactory manner is not clearly outlined. Experience with the practice in the UK and Ireland of what is now known as RIA (regulatory impact assessment) has yielded results which are the subject of much scepticism. See S. F Copp, Company Law Reform: The Role of Regulatory Impact Assessment, presented at the SLS Conference (September 2006). However, RIAs are not the subject matter of this article, nor will it consider any other mechanism for the assessment of new policy initiatives.
30. A. Marshall, Principles of Economics (Macmillan, 8th edn, 1964), at 222-230
31. F. Masahisa and J.-F. Thisse, 'Economics of Agglomeration', (1996) 10 Journal of Japanese and International Economics 339, at 341. See further Gilson, op cit n 1 supra, at 581 ff.
32. Gilson refers to Marshall's work on agglomeration economies or what is now described as 'Marshallian factor market externality'
33. P.A David and J. Rosenbloom, 'Marshallian Factor Market Externalities and the Dynamics of Industrial Localization', (1990) 28 Journal of Urban Economics 349, at 368 (arguing that spatial distribution of economic activity is highly sensitive to small differences in initial conditions)
34. Gilson refers to a number of author's to support this argument: D. B. Audretsch and M. P. Feldman, 'Innovative Clusters and the Industry Life Cycle', (1996) 11 Review of Industrial Organization 253, at 256 and 'R&D Spillovers and the Geography of Innovation and Production', (1996) 86 American Economic Review 630, at 638. See further Gilson, op cit n 1 supra, at text accompanying nn 29-33
35. A. Hyde, 'Real Human Capital: The Economics and Law of Shared Knowledge' (May 1998), unpublished manuscript referred to by Gilson. There may be many significant differences between Silicon Valley and Route 128. The apocryphal stories of brilliant men engaging in hugely successful start ups in garages may also have to do with the availability of investment capital, other legal rules which facilitated venture capital investment and reward, and so forth. See also A. L. Saxenian, Regional Advantage: Culture and Competition in Silicon Valley and Route 128 (Harvard University Press, 1994). This work is relied on extensively by Gilson.
36. J. Armour and D. Cumming, 'The Legislative Road to Silicon Valley', (2006) 58 Oxford Economic Papers 596.
37. See a similar conclusion regarding the significance of regulatory planning for successful venture capitalism in I. Lynch-Fannon, 'The Luck of the Irish or Just Plain Old Tax and Regulatory Planning? The Success of Venture Capitalism in Ireland', (2006) 2 Entreprenuerial Business Law Journal 231.
38. Reference deleted for the purpose of review.
39. COM (2005) 330 final, n 24 supra.
40. Report of the High Level Group, n 2 supra.
41. In the context of the EU as a whole it is instructive to consider Art 2(3) and 2(4) of the EC Directive 76/207 implementing equal treatment of men and women. These two provisions exempt both maternity provision and positive discrimination provisions from the principle of equal treatment. Decisions of the European Court of Justice (ECJ) have approved of positive discrimination measures in favour of working women adopted in some Member States: Case-450/93, Kalanke v Freie Hanestadt Bremen [1995] ECR I-3051 and Case C-409/95, Hellmut Marschall v Land Nordhein Westfalen [1997] ECR I-6363. Furthermore, the ECJ has approved favourable treatment granted to women workers in the context of maternity, where such favourable treatment is specifically exempted from the broader gender equality agenda. See Case 184/83, Hofman v Barmer Ersatzkasse [1984] ECR 3047
42. P. Craig and G. de Burca, EU Law: Text, Cases and Materials (Oxford University Press, 2003), ch 20.
43. J. C. Williams, 'The Family-Hostile Corporation', (2002) 70 George Washington Law Review 921.
44. See the website available at http://www.caf.fr for a complete list of specific financial supports provided under the French social security system ranging from allowances for each child, allowances for childcare, for annual return to school and so forth.
45. L Pech, Non-sense: France's No to the European Constitution, available at http://jurist.law.pitt.edu/forumy/2005/05/non-sense-frances-no-to-europe an.php: 'And above all, the French No is a patchwork of inconsistent claims: essentially a no to what is called "Anglo-Saxon" Europe and its "neo-liberal" policies, a no to unemployment and social dumping (the "Polish plumber2) and finally, a no to Turkey. With ideological absolutism on the left side of the political spectrum and a deeply unpopular government, these ingredients have proven fatal to the proposed European Constitutional Treaty'.
46. J. P. Balkenende, The Dutch Position in the EU (21 July 2005), available at http://www.minaz.nl.
47. Policy issues within the company law sphere began with a bitter debate about corporate governance models, which raged through the 1980s and saw the introduction of two failed directives seeking to incorporate the two-tier board model into the European corporate model. This was resisted vigorously by the UK and Ireland. Further legislative initiatives have sought to introduce the two-tier model by stealth such as the introduction of the SE Regulation (Council Regulation (EC) 2157/2001), the introduction of Works Councils and Information and Consultation Directives. The Company Law Action Plan indicates the debate still rages and even a most recent project on One Share One Vote represents a division between the German dominated model and the UK model: European Policy Forum. See further on company law actions the website available at http://europa.eu/scadplus/leg/en/s09000.htm.
48. Communication from the Commission to the Council, the European parliament, the European Economic and Social Committee and the Committee of the Regions: Action Programme for Reducing Administrative Burdens in the EU, COM (2007) 23.
49. The top four are company (corporate) law, pharmaceutical regulation, working environment/employment legislation, financial services.
50. Within company law, particular provisions of the second, third, fourth and sixth directives primarily on accounting regulations and information provisions. Within working environment, health and safety information requirements; within financial services directives regarding some aspects of the regulation of credit institutions.
51. The regulatory reform project is run under the auspices of the Dutch Ministry of Finance (http://www.minfin.nl) in cooperation with the Dutch Ministry of Economic Affairs (http://www.minaz.nl). It has a dedicated website available at http://www.compliancecosts.com run under the Ministry of Finance.
52. P. Hampton Reducing Administrative Burdens: Effective Inspection and Enforcement (HM Treasury, 2005
53. Regulatory bodies at national and local level enforce regulations in the UK. As discussed above, including both levels there are 61,000 people working for 674 regulatory bodies within the scope of the review. They have a combined budget of around £4 billion.': ibid, para 1.10.
54. Lord Neil Davidson QC, Davidson Review on the Implementation of EU Legislation (349597, TSO, December 2006).
55. Risk-based enforcement has been adopted effectively in Ireland by the Office of Director of Corporate Enforcement which has adopted a policy of identifying habitual non-complying companies but also has adopted a policy of identifying firms, accounting in this case, which seem to be advisors of non-compliant companies; see the websites available at http://www.cro.ie and http://www.odce.org.
56. See the websites available at http://www.betterregulation.gov.uk and http://www.cabinetoffice.gov.uk/regulation.
57. The type of academic debate mentioned in the introduction to this paper regarding regulatory architecture sits very well with the recommendations of this type made in the Hampton report, n 45 supra, Mccory Review on Productivity in the UK: Progress towards a Productive Economy, available at http://www.hm-treasury.gov.uk and the Davidson report, n 47 supra. It is interesting to note however that at a European level even these concerns are not addressed in the European approach. This is very indicative of the extremely narrow focus of the exercise.
58. See the International SCM Network website available at http://www.administrative-burdens.com.
59. As espoused by the 'Chicago School'. See R. A. Posner, Economic Analysis of Law (Little, Brown & Co, 1st edn, 1972). See further R. A. Posner, The Problems of Jurisprudence (Harvard University Press, 1990
60. Note some notable legal philosophers reflecting on the over interpretation of Posner's work in J. J. Kelly, A Short History of Western Legal Theory (Oxford University Press,1992), 440 arguing particularly that Posner's statement regarding the operation of legislation as correcting a wealth maximisation tendency in the common law is misunderstood as providing a normative position regarding the proper scope of legislative activity in all cases: 'Posner's lucidly written work, moderate in its assertions and evincing full acceptance that there is more to both life and law than profit maximization, has still come under attack . . . for its supposed materialism'.
61. For a flavour of this debate, see R. Howse and M. J. Treibilcock, 'Protecting the Employment Bargain', (1993) 43 University of Toronto Law Journal 751
62. S.Schwab, 'Coase Defends Coase: Why Lawyers Listen and Economists Do Not', (1989) 88 Michigan Law Review 1171
63. J. Hoult Verkerke, 'An Empirical Perspecitve on Indefinite Term Employment Contracts: Resolving the Just Cause Debate', (1995) 4 Wisconsin Law Review 838
64. J. Wilson Parker, 'At Will Employment and the Common Law: A modest Proposal to De-Marginalize Employment Law', (1995) 81 Iowa Law Review 347.
65. For a very interesting overview of research in the area of environmental regulation, see G. Smith, Regulation and Competitiveness (OMB Watch, February 2006), where she concludes that 'regulation not only does not hinder U.S competitiveness but actually may increase the competitive advantage of the US. Overall, factors such as wages and trade agreements play a much larger role than regulation in determining US competitiveness. Economists have been unable to find the strong negative correlation between regulation and competitiveness. This finding may run counter to intuition, but it suggests that protecting public health, safety and the environment can have real economic advantages; the United States does have to sacrifice public protections in order to promote US competitiveness', available at http://www.ombwatch.org/regs/compete/regandcompetitiveness.pdf.
66. US Office of Mangement and Budget, website available at http://www.whitehouse.gov/omb/.
67. US Office of Information and Regulatory Affairs, website available at http://www.whitehouse.gov/OMB/inforeg/.
68. For details on the US experience, see A. Hunt, From Cutting Red Tape to Maximizing Net Benefits, Presentation made at Rotterdam, The Netherlands (1 March 2007). See further 2006 Final Report to Congress on the Costs and Benefits of Federal Regulation, available at http://www.whitehouse.gov/omb/inforeg/2006_cb/2006_cb_final_report.pdf.
69. COM (2007) 23, n 41 supra, at 2.
70. See the website available at http://www.dti.gov.uk/company.
71. Hampton, op cit n 45 supra: 'This burden is felt most heavily in smaller businesses. A recent NatWest survey claimed that a business with two employees spends over six hours per month per employee on Government regulation and paperwork, while a business with over 50 employees spends only two hours per employee (SBRC/NatWest survey of small business, 2003.) Research by the OECD suggests that the same is true internationally, with businesses with fewer than 20 staff bearing a burden five times greater than businesses with more than 50 staff. (From Red Tape to Smart Tape, OECD, 2003.
72. ibid, at 25.
73. OECD and World Bank, Administrative Simplification in the Netherlands - Main findings of the OECD and World Bank Group: Challenges of Cutting Red Tape (Rotterdam, 1 March 2007)
74. See the website available at http://www.compliancecosts.com.
75. In the Irish experience, reservations were expressed about the costs of the baseline measurement exercise. In addition, surveys of businesses yielded different responses. A recent ESRI report, for example, reported that businesses felt the amount of regulation was 'about right', which contrasts particularly with the results of similar surveys made during the Hampton Review and with responses received by other surveyors in Ireland.
76. Nowak-Far Co-ordination of European policy in Poland: The Importance of Path Dependence and Increasing Returns for the Determination of European 'Viability', presented at EUSA Austin TX (May 2005).