Red tape - gives a broad sense of difference between countries

 

SEEMA SHAH

Europe must slash red tape if it wants its moment in the sun

Spain’s economy is shining and the Continent is wooing investors fleeing the US. But for this to be a true turning point, we need a bold regulatory reappraisal

Seema Shah

Sunday March 30 2025, 12.01am, The Sunday Times

With full hotels, busy shopping centres and bustling restaurants, my trip to meet investors in Madrid last week felt more buoyant on the streets than any other visit to Spain I’ve made in the past decade.

The Spanish economy is the fastest growing in Europe, and during my week-long trip to the capital, there was a tangible sense of consumer confidence. The country’s new-found mojo reflects Europe’s recent “glow-up”, which has been given greater momentum by investors taking fright at the US administration’s scorched-earth approach to international trade and diplomacy.

According to the data firm Morningstar Direct, European exchange-traded funds have enjoyed an 18 per cent jump in inflows. With President Trump’s efforts to Make America Great Again having the opposite effect on domestic stocks, Europe appears to be the main beneficiary of capital leaving the US.

• Booming Spain is on track to a new age of prosperity

With this and Spain’s hot growth streak in mind, you might have thought the investors I met in Madrid would be especially bullish. But this wasn’t the case. The sense of economic optimism I detected on the streets didn’t extend to the meeting rooms of the city’s financial district.

It wasn’t that the investors I spoke to were entirely downbeat. They acknowledged there had been a “vibe shift” in European markets, and Germany’s scrapping of the “debt brake” — its longstanding, Scrooge-like rules on government borrowing — was hailed as highly significant. The rationale for this reform is to fund a massive increase in defence spending, but it’s assumed that the ripple effect across both Germany itself and Europe as a whole will extend far beyond tanks, planes and cybersecurity.

Investors are betting on a substantial increase in public investment, and particularly an overhaul of Germany’s creaking public infrastructure.

• Merz wins vote to ditch decades of German caution and rearm

Yet the consensus was that easing the debt brake, even with the mammoth investment it will unlock, isn’t enough to Make Europe Great Again over the long term. True growth needs accompanying reforms to Europe’s over-burdensome regulation.

Between 2019 and 2024, the EU produced 13,942 legal acts, while the US produced just 3,725 pieces of legislation and passed 2,202 resolutions. The Madrid-based investors I spoke to fret that German fiscal stimulus will be ineffective at breathing new life into Europe’s ailing economy because it is simultaneously being strangled by red tape. Given Donald Trump’s zeal for deregulation, the transatlantic divide in bureaucracy will only widen.

Parts of the EU’s statute book read as though they were dreamt up by a whimsical toddler — such as the laws governing the curvature of bananas and cucumbers. These oddities may be fairly innocuous in themselves but speak to an endemic and economically unhealthy obsession with rules. When this is applied to labour laws or the burdens placed on the Continent’s banks, which constrict their ability to lend, investors really begin to despair.

Germany has a particular issue with sick days, with the average worker there taking 15 days a year, almost double the US average of eight and (a little surprisingly) three times the UK average of five. You don’t need to be Elon Musk to see the issue here.

The EU’s stringent capital requirements for its banks (known as CRD IV) are generally loathed by investors and blamed for limiting lending to small businesses and stymieing innovation. Critics point out that the US has about 550 more “unicorns” — start-up companies valued at more than $1 billion — than the entire EU, and that, as of last week, European stocks trade at 17 times earnings, compared with the US’s multiple of 26.

Last year Mario Draghi, the former Italian prime minister and European Central Bank president, wrote a 400-page tome of recommendations to boost the EU’s moribund growth, with deregulation as a key component. Most dismissed it as a pipe dream, with European countries seen as too stuck in their ways.

Germany’s recent constitutional reforms would have been considered unthinkable at the time, but the result of them is that investors are now piling into European companies. For this to be a true turning point rather than just short-term respite — as the investors I met in Madrid feared — the radical fiscal rethinking we are seeing in Europe needs to be matched with an equally bold regulatory reappraisal.

Seema Shah is chief global strategist at Principal Asset Management

That little devil, Red Tape - read for some ideas how to write about it:

 

ROBERT COLVILE

Is this a bonfire of red tape — or yet more smoke and mirrors?

If Keir Starmer is serious about cutting the costs of regulation, he needs to get serious about measuring them

Robert Colvile

Sunday March 16 2025, 12.01am, The Sunday Times

Keir Starmer is the last person you can imagine going on Stars in Their Eyes. But in his big speech on Thursday he did a pretty convincing impression of Elon Musk. The prime minister complained that Whitehall was harbouring a “cottage industry of checkers and blockers”; that it’s too hard “for the most enterprising people in the country to just get on with the job”. But no more! Under Labour, compliance costs for business will fall by a quarter. Yes, a full 25 per cent.

It’s an admirable ambition. Every poll of businesses, large and small, finds that compliance and admin are an ever-growing burden. In the City, for example, the ratio of regulators to workers has roughly quadrupled since 2011 — having already risen almost 40-fold since 1980. And God knows our economy needs an injection of dynamism: the latest GDP figures have us shrinking once more, after year on year of stagnant growth.

But there are a few small problems.

The first is that, compared with what’s going on Stateside, this is pretty small beer. Musk and Donald Trump are targeting whole categories of compliance — DEI, ESG, AML, KYC. Hell, Trump has even said it’s OK to bribe foreigners again. I’m not sure folding one financial quango into another, with no planned reduction in headcount, shows quite the same drive.

The second is that, as Dominic Lawson points out, Starmer is simultaneously increasing the regulatory burden, via Angela Rayner’s Employment Rights Bill — a package of pro-union, anti-business measures so detested by the private sector that the government cannot name a single small firm that supports it.

But there’s an even bigger problem. Starmer has promised to cut compliance costs by a quarter. Yet we have no idea how much they actually are. Only one department, Defra, has a full list of the regulations it has imposed. Even when the government was deciding which European rules to keep after Brexit, there were no costs attached.

• What are Keir Starmer’s reforms — and will they be effective?

Admittedly, even if we don’t know the size of the pile, there is a system that is meant to estimate the scale of the burden we are adding to it. But that system is utterly unfit for purpose. And I can say that with some authority, as one of the few people masochistic enough to have studied it in detail.

Last year I co-authored a report for the Centre for Policy Studies think tank examining the impact assessments attached to every piece of legislation from the 2010s. We showed that the Tories’ promises to lower the burden of regulation were bunkum — in fact, the official estimates demonstrated that costs rose by £6 billion a year.

But we also showed that those numbers were wildly, woefully out. It was clear from the assessments, and from conversations within Whitehall, that the estimates were too often done at the last minute, by the most junior people in the office, to justify decisions that had already been made.

Take MiFID II, a massive set of reforms to the financial markets introduced while we were still in the European Union. Anyone in the City would put the annual cost to the UK well into the billions. But the official estimate is just £105.2 million a year. Except that it isn’t, because the form was filled in wrongly. So the government’s official position is that legislation widely blamed for wrecking the financial research industry in fact brings annual benefits to the economy of £105.20.

Or what about the second staircase rules brought in after Grenfell to make evacuation easier? A noble and necessary measure, you might think.

Except that the Grenfell inquiry did not actually recommend second staircases. And the impact assessment could not find evidence of a single life, anywhere, that would have been saved — not least because fire brigade practices in buildings under 50m tall “are effective to the point that mass evacuation via the stairwell is an extremely rare occurrence”. Yet the Tories not only introduced the requirement but unilaterally lowered the height limit for second staircases from 30m to 18m.

But this, too, isn’t the end of the story. Because the impact assessment included the cost of building the additional staircases. But not of the floor space, and flats, that would be lost to make room. It glibly claimed the towers could be made wider or taller. Which is not, to say the least, how our planning system works.

In truth, once you ran the numbers properly, the estimated annual cost of £268 million was closer to £2 billion. But there was no way for builders to challenge the figures. The result has been fewer new homes, an effective ban on the construction of traditional mansion blocks over that 18m threshold — and long months of frozen construction, across England, as the consultation dragged on.

If Starmer is serious about cutting the costs of regulation, he needs to get serious about measuring them. That means, as our report set out, a complete transformation of how Whitehall thinks about regulation — putting the costs front and centre, getting independent estimates rather than letting departments mark their own homework, and much more. It means eliminating scams like the plastic bag trick, in which civil servants rebadged the obligation for customers to save the planet by paying for their shopping bags as a deregulatory measure — think of the savings for the supermarkets! — and magically met their targets for slashing red tape as a result.

Above all, it means changing how ministers think — and what they are rewarded for. Because the problem is not just over-mighty regulators, but politicians whose positive headlines — and cabinet careers — depend on being seen as legislative dynamos, constantly responding to the latest clamour that something (anything!) must be done about the problem of the day, whatever the cost.

Will Starmer be able to turn things round? Well, here’s a final case study: his own Employment Rights Bill, nodded through the House of Commons on the very same day as his big speech on deregulation.
The impact assessment says it will cost business between £0.9 billion and £4.5 billion a year. But the independent Regulatory Policy Committee says those estimates are garbage. It “red-rated” seven of the 23 sub-assessments for the bill, including many of the most important. As a result, it declared the overall assessment “not fit for purpose”, not least because key costs were missing entirely.

Starmer is absolutely right that Britain’s addiction to regulation is a drag on growth. But his government has done nothing but increase the burden on the private sector — with disastrous economic consequences.

As for making a speech promising to cut compliance costs on the same day that his party blithely votes through a massive hike in them without even pausing to get an accurate estimate? There’s a word for that. But not one I can use in print.