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In her book The Brussels Effect, Columbia Law School professor Anu Bradford argues that the European Union is now a power to be reckoned with and is likely to become stronger. Europa United’s Frances Cowell agrees and busts some myths.

CC-BY-4.0: © European Union 2020 – Source: EP

Nuclear fusion is perpetually 30 years away and quantum computing has long been promised in “a few years’ time”. Similarly, the EU and the euro have for much of their history been bound to collapse. How could they not? After all, alliances of traditional enemies rarely survive the first challenge, let alone crisis. But the EU and its improbable single currency have seen off serial “existential” crises, including, crises of debt and insolvency of a member state, the departure of a large member, and now a severe recession and health crisis. Yet far from falling apart, the EU responds by adapting and growing stronger, echoing Nietzsche’s famous dictum. Has this latest win merely delayed the EU’s inevitable break-up?

In her book, The Brussels Effect, Anu Bradford, Professor at the Columbia Law School, argues that there are good reasons to think not. She cites three factors that underpin the EU’s persistent success: size, standards setting and consumer focus. Start with its consumer focus.

The consumer is always right

The EU is often accused of being “unfriendly to business” and the private sector, which, to some, explains why there is no European Google, Apple or Amazon. Whether that is true or not, consumers certainly figure more prominently in EU policy than they do in, say, the US, a similarly-sized and in other ways, comparable, economy, where policy leans closer to laissez-faire capitalism, which tends to put priority on corporations.

Although the EU’s political centre of gravity tends more toward social democracy than laissez-faire market capitalism, which is typically associated with “unfriendliness” to business and markets, in maintaining fairness and balancing the interests of established, small and new businesses and individual consumers, the EU is in fact more firmly wedded than most big economies to economic and market efficiency.

The EU’s tradition of decision-making-by-consensus discourages member states from compromising fairness and efficiency by favouring their own national champions and other large businesses. Together with the fact that EU elections, being relatively inexpensive, are less reliant on corporate donations than in, say, Washington, DC, this tradition discourages political lobbying by large commercial enterprises, which, while hardly invisible in Brussels, has for these and other reasons less scope for political influence there than elsewhere.

In fact, the EU’s balance of corporate and individual interests, far from being unfriendly to business, helps it by damping the forces of inequality inherent in a laissez-faire capitalist system. EU member states are among the most equal and socially-mobile on the planet. This is a virtuous circle: efficiency promotes equality, which in turn enhances efficiency.

Setting standards

Compensating for the distortions in a laissez-faire capitalist system requires well-designed regulation. Many say that the EU’s regulation is unwieldy and rigid, hampering innovation and entrepreneurship without adding value, in contrast to the US, which, since the 1990s, has pursued a deregulatory agenda.

But not all regulation is bad: Regulatory policy reflects the EU’s aim of overall market efficiency and the most equitable balance of interests by ensuring that all firms compete on as equal a footing as possible. Clear rules encourage innovation and the growth of small and medium-sized entreprises by making investment decisions easier and reducing the risk associated with new and on-going investments.

The EU insists that its trading partners comply with its regulations, which tend to be more demanding than those of other big jurisdictions. And although some are necessarily complex; they do tend to be transparent and hence administratively easy to apply. At the same time, because it is expensive to comply with multiple sets of rules, trading partners find it more expedient simply to adopt EU standards and rules, which then serve them for other markets too. The result is that dozens of non-EU countries, large and small, have adopted EU standards or use them as benchmarks for their own regulatory targets. There is a strong incentive to do so: 500 million, mostly wealthy and educated, consumers are hard to ignore, and many countries and firms simply cannot afford not to sell to EU consumers.

EU regulations and standards fill a void and provide a global service. Professor Bradford observes that the deregulatory agenda pursued by the US since about 1990 forfeited its potential influence in global regulation and standard-setting, rendering it a rule-taker. That is unlikely to change soon, if only because, being hobbled by domestic issues and political grid-lock, the US Congress is unable to reach the agreement necessary to make standards, regulations and international treaties work.

The net result is that the EU is the global rule-setter across multiple sectors and policy domains, leading the world in standards for food, medicines and merchandise safety and labelling, data privacy, financial services and, of course, targets for clean energy, among others. Third countries’ “voluntary compliance”, is an important source of the EU’s soft power and a vote of confidence in the bloc: they would hardly do so if the rules added no value or if they thought the EU was about to implode.

Untapped potential

So, if the EU is getting so many things right, what is holding it back? Why is there no European Google, Apple or Amazon? We argued in our July 2019 article https://www.europaunited.eu/why-the-eu-has-no-google-apple-facebook-or-amazon-or-does-it/, that at least two factors contribute to America’s relative success in germinating giant enterprises.

The first is size, both economic and geopolitical. It is easier for a fledgling entreprise to raise capital and sell goods and services into its home market. If that market is big, then it can develop critical mass before venturing abroad. Like the US, the EU is a giant market, but in some important ways, it doesn’t function like one. For one thing, the EU lacks deep, liquid capital markets that so benefit fledgling U.S. firms. Most European capital raising happens through bank loans, regulated by national authorities and famous for demanding hard collateral, which many entrepreneurs struggle to provide. By contrast, US entrepreneurs have long been able to finance their projects by borrowing from a deep and liquid market for corporate bonds or from big, US-spanning banks. Failing that, they can turn to any one of thousands of venture capital firms.

The other is fear of failure: Venture capital investors are readier to take risks in US entreprises than in the EU because US entrepreneurs can generally shrug off failure when it happens and start again. For an EU entrepreneur, by contrast, the consequences of failure can be devastating.

Professor Bradford proposes two solutions for the EU:

The low-hanging fruit is to complete the Capital Markets Union. This would allow firms to raise investment capital from a deep and diverse pool of funding for risky, innovative projects and would help close the gap with American firms.

Related to this is the need to establish EU-wide bankruptcy laws that encourage, rather than discourage risk-taking by entrepreneurs. Individuals could feel more confident backing their bright ideas if they know that failure will not ruin them financially.

Together, these measures would tap the EU’s formidable existing potential for innovation and growth and help realise the full potential of the single market. In this, they would do more to help those entrepreneurs create successful firms than throwing any amount of money at them.

Bigger is better

Were that single market even bigger, it would offer commensurately more potential. But can it become bigger while maintaining and enhancing existing standards of living? Professor Bradford thinks so: for example, it can attract more outside talent and innovative ideas both by adding member states and by welcoming individual talent from outside the bloc. She notes that many US ideas were far from home-grown, relying on immigrants, such as Jeff Bezos, Elon Musk, Steve Jobs, Satya Nadella and others. The US also imported from Europe many of the ideas or inventions it deployed, including the World Wide Web, Linux, VOIP and mobile telephony.

Enlargement may be for another day, but a capital markets union, EU-wide bankruptcy laws that encourage, rather than punish, risk-taking and innovation and an enlightened EU-wide visa scheme should all be possible is the shorter term. Will the EU bag the prize without the catalyst of another existential crisis?

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Frances Cowell
Australian-born and European by adoption, Frances Cowell writes and speaks at conferences about investment risk and governance, financial market stability and business ethics in financial markets – and the implications for the wider political economy. She believes Europe must urgently assume the lead in protecting and preserving liberal democracy, the rule of law and the multi-lateral institutions and alliances that it depends on.

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