Examination of Witnesses (Questions 326
- 335)
MONDAY 15 OCTOBER 2007
Ms Ruth Lea
Q326 Chairman: Thank you very
much indeed for coming; it is very kind of you. I think you have
a few opening comments to make and then I am going to go round
the Committee. I am sure questions will arise naturally. As you
know, we are expecting to produce our report some time in the
middle of January, commenting on the work the Commission has done
in reviewing the Single Market. We are half way through our evidence
taking session and we look forward to your guidance.
Ms Lea: Thank you very much; I am very pleased
to be here. The first thing I would say is that I was
actually a DTI civil servant in the mid to late 1980s.
I was in the Invest in Britain Bureau and when we were talking
about the Single Market we were talking with great enthusiasm.
This was really going to open up the markets for Europe; it was
going to be a tremendous thing for developing trade and attracting
foreign investment. I very much believed it at the time but I
have been somewhat disappointed to see how the Single Market has
developed. Sure enough there are benefits; there is no doubt there
have been benefits to the Single Market—we can talk about
the figures later if we need to—but I am afraid that with
the Single Market has come a lot of regulatory costs and according
to Gunter Verheugen, who is the Enterprise Commissioner, these
costs actually appear to be outweighing the benefits. This leads
me to question what is going wrong with the Single Market as it
has currently developed. I think we have to look at the Single
Market model now based on legislation, harmonising regulations,
gap-filling if you like, and ask if it is really delivering what
we want it to deliver. I would suggest that it is actually under-performing.
I think the whole way we have approached the Single Market needs
to be re-thought in an age of rapid technological and global change
and I think we need a fresher and more flexible approach to how
we go around the Single Market, something that is based perhaps
less on the traditional model of regulation and heavy legislation
to something that is more focussed on key industries that will
actually deliver the biggest bang for your bucks and also looking
at a wider range of tools, not least of all competition policy.
Q327 Lord St John of Bletso:
Thank you very much for that rigorous introduction. We have had
a lot of evidence over the years about the escalating amount of
regulation in the European market, the red tape. I have two questions
if I may, the first is: what is the scope for de-regulation and
secondly, clearly one of the main key drivers behind the Single
Market has been the economic benefits. I have spent a lot of my
time in Eastern Europe where there is a lot of scepticism as to
whether those benefits have been delivered. Could you perhaps
comment on the other drivers other than economic of the Single
Market?
Ms Lea: I think that is true. Certainly when
I was a DTI civil servant we were looking at the economic and
businesses benefits, there is no question about it. That was very
much the perception, if I remember, of Lord Cockfield and Mrs
Thatcher; that is how they saw the Single Market. However, the
British were probably on their own here because as far as a lot
of the other key political members of the EEC as it was then,
they saw the Single Market not just as an economic end in itself
as we did but of course they saw it as another stepping stone
to political union. I do not think there is any doubt about that.
Jacques Delors who, of course, was the Commission President at
the time and scourge of the Sun newspaper if I remember
correctly, saw the Single Market as a step towards political integration,
economic integration and indeed a social Europe. For him the Single
Market opened up the door to a lot of the extra regulation that
a lot of the British people thought was completely unnecessary.
I think there has been a lack of alignment as to how the British
saw the Single Market back in the 1980s as purely economic and
how a lot of the European continentals saw it as something different,
something building up more of a political and economic integration.
I think this is the problem why we have so much regulation that
is not purely economic; it seems to be much more about building
up political and social integration. This is why it has turned
out to be so expensive because it is actually aiming to do different
things. Could I just quote the figures that Gunter Verheugen was
using? He said last year that the total costs of the regulations
associated with the Single Market were something like 600 billion
euros, which is about 5.5 per cent of EU GDP, the size of the
Dutch economy. However, if you look at the benefits, I have here
a document from the Treasury and the DTI they are talking about
the benefits of about 225 billion euros, in other words almost
a third of the costs. Something else is happening; it is not just
about the economics, it actually about politics, it is about building
up a social Europe as well.
Q328 Lord St John of Bletso:
Particularly when it comes to Eastern Europe huge amounts have
been sidelined with structural and cohesion funds. These countries
are finding it extremely difficult to utilise those funds because
of all the red tape. Do you see the situation easing, whereby
it will be a swifter process for them to gain access to those
funds?
Ms Lea: I do not know the details of that but
it strikes me that there needs to be a much more flexible approach
generally towards the Eastern European countries. I think one
of the questions that was suggested to me was how are you going
to deliver the Single Market in 27 countries? The truth is that
with different countries—especially with Eastern European
countries—you are going to have to take a more relaxed attitude
than perhaps has been the case with the EU 15. I do not know the
details but I suspect that there needs to be a more flexible approach
adopted.
Q329 Lord Haskel: The Single
Market sets out to deliver four freedoms, freedom of movement,
choice, et cetera. How can we deliver those without initially
having the regulatory regimes that you have been talking about,
without Member States liberalising their internal markets, without
all these arrangements being made? Obviously people do not want
to forego these freedoms, one wants to improve on them. How would
we set about improving on that?
Ms Lea: I think there is a certain minimal legislative
regime that is required. I would humbly suggest now that we have
gone beyond that point. I am not anti the Single Market; I want
it work better. I think there are benefits from the Single Market,
I would emphasise that again. In the goods and services and the
capital and the labour, there have been huge improvements but
these wretched costs tend to outweigh the benefits. That is the
problem. I think what we need to do is actually say that if we
are going to make the Single Market work better, where do we go
from here? I actually thought the paper from the Treasury and
the DTI (which is called The Single Market—a Vision for
the 21st Century) got it bang on. Of course I used to work
in the DTI and the Treasury so perhaps I have rather too much
affection for these two departments, but I think they are absolutely
right. They are essentially saying now that we have got to the
point where the impact of regulation is to some extent counter-productive.
They actually use the phrase that regulation now should be used
as a last resort. They talk about regulations and legislation
as being inflexible in a very changing world. This is the point
they make time and time again but the world is so rapidly changing
now. I think if you and I had been talking about the world economy
in the late 1980s we would not have discussed China or India;
we would not have thought of some of the huge technological advantages
that you see now. Now we do and so if you have a lot of hard prescriptive
regulation and legislation it actually boxes people in, it is
too inflexible. The Treasury's response to this—and no doubt
the DTI agree with them—is to look to other things, look
to other types of policy and the one they favour hugely is of
course competition. Sometimes we tend to think that the only way
we can achieve certain goals is to regulate, to force people,
to tell them what to do. Being a free market economist I also
think the free market has a role here and competition certainly
has a huge role. I think with the Competition Directorate in the
European Union I would like to see that particular Directorate
have more teeth. You may be surprised to hear me say that some
aspects of the EU should have more teeth, but I certainly think
that one ought to have more teeth.
Q330 Lord Haskel: When we
have spoken to the Competition people they say they have enough
powers; their problem is implementing their powers, using their
powers. Do you not think that a lot of these objectives are very
social objectives? Is there not a more social way in which we
can have the Single Market achieving the objectives through inspiring
society rather than just economic efforts?
Ms Lea: The first thing I would say is that
I rather challenge the assessment of the Competition Directorate.
If they are saying they have enough powers but somehow they are
not implementing them, the question is why are they not implementing
them? The truth is that some of the Member States do not want
to play ball. Of course within the energy markets we have been
discussing about liberalising the energy markets for at least
ten years now (if my memory serves me correctly). This is a huge
area where there could be major advantages if you can open up
the energy markets, not least of all for the less well-off in
society. We did it, we broke up, we unbundled production from
transmission before we actually de-regulated and as you are probably
only too aware—more aware than I am—that that is what
the Commission is trying to do now but the French have said, "Non"
and the Germans have agreed with them. It is quite clear that
what the French and the Germans want is national champions, huge
companies with huge national power. They are resisting everything
that the Commission can do to try to break up the particular energy
markets. I am afraid that even though they say they have implementation
problems, whatever the reasons are, the truth is that competition
policy is perhaps not as effective as it might be and that is
very much to the detriment of the consumers throughout the European
Union. I think of the social aspects, at the end of the day economics
is about consumption. People find this very odd when an economist
will say that economies are not about investment, they are not
about building huge roads or anything; it is about consumption,
it is about people's living standards. In order to achieve better
living standards you really do need to focus hard I think on the
economic facts of life. Perhaps this might seem rather unromantic,
but then again economists were never noted to be terribly romantic
people, and this is jobs, growth and it is prosperity. Out of
those things I suggest that you will actually find better living
standards and a better social Europe.
Q331 Lord Geddes: You waxed
vehement and, if I might say so, lyrical on the subject of costs
versus benefits and whilst this question is not to get you on
the subject of the Euro unless you particularly want to get onto
the subject of the Euro, but the Internal Market, the Single Market
has managed to develop with lack of uniformity within the EU on
the Euro. There are several countries, including the UK, who are
outside the Euro. You may think this is a little bit of an unfair
question, but you said rather strongly that you thought within
the amount of red tape there was a not very thinly veiled motive,
a political motive rather than an economic motive. If one got
into that situation where within the EU the political motive was
throttled back do you think that the Single Market could still
work or could indeed work better?
Ms Lea: I was not trying to make a clever political
point; I was just trying to explain that I thought the British
attitude to the Single Market was different from, say Jacques
Delors' and I think we ought to be honest about that to start
with. To my way of thinking it depends what you mean by Single
Market. If you are talking about a Single Market in which you
have a reasonable freedom of goods and services and capital and
labour I do not think you need a huge political panoply to back
that up; I do not think you need a huge regulatory background
to back that up. If I may quote Switzerland, which of course is
not in the EU but it does have trade relations, it has had free
trade in industrial products with the EU since 1972 and of course
it has other bi-lateral agreements as well. It is interesting
to look at the Swiss economy and how it has integrated and how
it functions within Europe, not putting aside the EU for one minute,
and comparing it with a lot of the other European countries. There
was a very interesting book out recently by Clive Church which
goes through all the economic arguments and I was very impressed
that Switzerland's economy is much more integrated with the EU
on just about every single statistic than any of the big EU countries,
which perhaps is not surprising because of course Switzerland
is a relatively small country. Ironically it is even more integrated
than Denmark and that really did surprise me. I know Denmark is
not in the Euro but Denmark is in the EU and has been in the EU
since 1973. The Swiss economy is de facto within the Single Market
but of course it does not have to take on the acquis, it takes
the bits that are sensible for its business relationships. However,
it strikes me very forcibly that sometimes when I hear about the
political integration that is required for economic prosperity
and trade and then you look at Switzerland, it rather sort of
sets you back on your heels and makes you realise that perhaps
that is not necessarily true. I was going to say you sounded rather
coy about dragging me onto the subject of the Euro; I do not feel
terribly embarrassed about discussing the Euro at all. I noticed
there was a lot of talk in the late 1990s that we needed to have
the Euro to complete the Single Market and indeed British trade
would collapse if we were not in the Euro. I remember all these
horror stories and yet there was a very fine piece of research
last year by the Centre for Economic Policy Research that showed
that Britain and Sweden—the two large out-countries—had
lost very little by not being in the Euro and the actual trade
benefits for the countries that have gone into the Euro at the
beginning in 1999 were relatively few. Again I think to myself
that when you hear a lot about the political integration and the
economic integration that people keep talking about, I increasingly
think that this is more about politics than it is actually about
economics. That is not necessarily wrong, but I just think that
is the conclusion I come to.
Q332 Lord Geddes: Do you think
the Single Market would work better if there was not this political
push?
Ms Lea: I certainly think there would be few
regulations or at least there would be an opportunity for individual
Member States to repeal a few of the regulations. If you talk
to a lot of businesses they have put up the flag, quite honestly,
especially those businesses that do not trade. This is always
another criticism of the Single Market, that it is fine if you
are a big company, it is fine if you have a lot of cross-border
trade, particularly in Europe, but it is not so great for the
majority of businesses that actually do not go in for cross-border
trade. If you can minimise the regulatory costs then I think inevitably
you help the general competitiveness of business with should help
generally the economies of Europe.
Q333 Lord Whitty: I still
do not quite understand the strategy in relation to regulation.
All governments regulate.
Ms Lea: Yes.
Q334 Lord Whitty: If you did
not have European regulation in the field of competence in the
European Union then you would have 27 different regulatory frameworks
and they would not only regulate in competition policy and opening
markets or not and establishment and so on, they would also regulate
on the social and environmental, consumer protection and so on.
So you would actually be dealing with 27 different regulatory
functions. In order to create a Single Market is it not better
to harmonise that regulatory framework and then look at the nature
of the regulations that you have which is what the Commission
are now doing. The Commission are tying to introduce what you
might call British approaches to better regulation. Admittedly
it is slow, but it is slow here as well, but is that not better
that the Union are the prime regulator so that we are all on a
level playing field theoretically and then look at how Europe
improves its regulatory approach rather than saying, "Well,
let's get rid of it regulating in all these fields and put that
back to national level" because that surely undermines the
whole principle of the Single Market.
Ms Lea: I think, as I suggested, there is a
minimum of regulations that is more positive than negative and
I agree with you so far as that is concerned. However, you do
get to the point when you actually look at the figures—these
are Commission figures, they are not my figures—that when
the costs actually outweigh the benefits by three to one something
has gone sadly awry. When I said that we have got to the point
where regulation or extra legislation should be a matter of last
resort—I am actually quoting this Treasury document—they
too realise that it actually gets to the point where you think,
"No more regulation which is inflexible". It is difficult
to change regulation especially when you have 27 countries and
actually you do have to back off and look at other forms of improving
the Single Market.
Q335 Lord Whitty: If there
is a change of heart and the Commission decide, for example, that
we will repeal aspects of our environmental legislation or social
legislation, all that will happen is that the vacuum will be filled
by the national governments. Some will be more light touch than
others, some will be better regulated than others but it will
be counter-productive in terms of gaining a Single Market. How
you deal with labour, how you deal with the environment will vary
from Luxembourg to Germany and so forth. It is not as if absence
of European regulation means absence of regulation full stop;
it will not.
Ms Lea: No-one is saying absence of regulation,
full stop. I am not saying absence of regulation, full stop. I
trust I made that clear right at the beginning. It is a matter
of balance. Whilst I can only applaud the Commission and I know
Gunter Verheugen has said this on many occasions that he wants
to make the regulatory regime on businesses more business friendly,
he has also said that he finds other commissioners who stand in
his way. He got told off for saying that apparently, but there
we go. I think the problem is that if you have EU-wide regulation—now
we are dealing with 27 very disparate countries, perhaps it was
a different matter when you had just the rich man's club of the
EU 15 but it is now a very different world—then you are
going to ask how you get to the point where you actually start
repealing bits of legislation. The trouble is, if you repeal one
bit there is going to be somebody who is probably likely to object.
It is very, very difficult to repeal legislation; I suspect it
is better not to have it in the first place. I think the second
thing I would say, is that I hear what you say about regulations
being EU-wide but we know too that they are implemented in different
types of ways which in many ways is probably the right thing but
some countries are more likely to interpret them in a pro-trade
way, not least of all the United Kingdom if I may say so, than
some of the other countries who do have tendencies to protectionism.
I frankly do not see how you are going to change that but there
are several examples of that that have been brought to my attention
recently, one of course is the energy issue and the other one
is about the Financial Services Action Plan which, to open up
the retail services makes an awful lot of sense but there has
been some research done by Open Europe which shows that Britain
has taken these at face value and it is interpreting them as widely
as possible to help cross-border trade. However, other countries
that do have protectionist tendencies are not doing that and the
problem for Charlie McCreevy is what is he going to do about the
countries of the Member States that are less keen on implementing
this regulation. No-one is saying that there is an instant solution
to all of this; I am not saying that there is an instant solution
to all of this. Really my main point is that we have got to a
point here where the costs of regulations vastly outweigh the
benefits, according to Commission figures. Can this be right?
The answer to that for me is "No".
Chairman: Thank you very much indeed
for the clarity of your evidence. You have helped us as Mr Sutherland
has also helped us. The second part of the hearing is now closed.
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