Europe Is Overregulated. And It Is Going to Be Worse…

The slowly passing crisis has started making out the bill which is going to be settled at the expense of the freedom of individuals. Unfortunately, that is a universal truth (already valid or forthcoming) in the majority of European countries, the Czech Republic including. Czech taxpayers are facing early parliamentary election in October 2013, and proclamations such as “the government should intervene in…”, “we must fix the market with…”, “we will protect you against…”, “we will actively help you with…” are tools not just of leftists, but also of the so called right-wing political parties. My friends and colleagues living abroad share with me the same experiences.

Do we really need such care from our governments?

In the table below, you can see some important world-changing documents. They are products of human geniality and, some of them, also tools for regulation of human behaviour.

Table: Evolution of regulation

Pythagorean Theorem          24 words
Lord’s Prayer          66 words
Archimedes’ Principle          67 words
Christians’ 10 Commandments        179 words
US Declaration of Independence    1.300 words
US Constitution (with amendments)    7.818 words
EU directive on the sale of cabbage  26.911 words


We can use all of them as benchmark to compare with the last one, the EU directive regulating the sale of cabbage. This norm is definitely NOT a product of human geniality, but rather a simple, efficient example of how much the world is overregulated today.

EU decision-makers often say they would like to ensure growth and sustainability of the EU economy. The problem is that they should firstly define the crucial words – GROWTH and SUSTAINABILITY – and answer these questions:

  • How do they understand the word GROWTH? As growth of GDP measure, or growth of the standard of living?
  • And how do they understand the word SUSTAINABILITY? As sustainability of the project of the Euro Area and the European Union as a whole? Or as sustainability of competitiveness and credibility of our markets?

For me, as an economist, the answers to the latter questions are correct. However, I am not sure European politicians and public servants have the same point of view.

The last but not least, the big plan to “fix something” is related to the so-called Banking Union, a regulative project built on three pillars: a single bank supervision; a common bank crisis management and resolution system; a uniform system to protect depositors’ savings. People arguing in favour of this project talk about the need to regulate internationally operating financial institutions internationally, to improve activity of supervisory bodies in some European countries and to strengthen the position of the European Union (as a whole) on the global financial market. These arguments seem to make sense, yes, it might be so, but they also have one thing in common: they don’t answer the questions and reproaches of their critics. Which ones?

Firstly, the system will create another dimension of moral hazard. Considering financial markets, it is pure information asymmetry between involved subjects on one hand and politicians on the other hand. As G. Stigler brilliantly concluded in his famous contribution to economic theory, The Capture Theory, a failing regulator is captured by knowledge of subjects from the market, so the final form of regulation is in full favour of regulated subjects. This means it does not meet the purpose of the regulator. Are we sure it won’t happen again here? We do not know.

Secondly: disparity. Differences between individual countries, their financial systems and the quality of work of supervisory bodies are so big that it is almost impossible to create sufficient regulation which would work appropriately and would not harm the market competition. Talking about the Czech Republic, it has one of the most credible, stable and profitable financial systems in the world; and it is only because of the fact that it was cleaned up during transformation of the economy and privatization at the expense of Czech taxpayers. Do you also want such healthy environment? Do the same in your country with the money of your taxpayers and explain it to them directly!

From Wikimedia Commons, the free media repository

Thirdly, although all information about the Banking Union is followed by many MUSTs and “it is unavoidable to do it”, the only thing we can safely observe here is vagueness. How to secure the same results in i.e. Germany and in Greece? What about countries with healthier banks and sectors? Will they have any benefits, or will they only be punished? Can you ensure that owners of pan-European financial institutions won’t bail their losses out at the expense of banks in non-member countries with better banking sectors? These and thousands of additional questions are answered with an illogical argument that firstly a country has to become a member of the Union and agree to fulfil all regulative (non-existing) requirements, and then the important questions will be answered.

The project of regulation of financial market is unprepared, insufficient and incredibly inefficient. You cannot start building a house with the roof, not even “a castle in the air”! The need to answer crucial questions about that is being played down with political phrases about vague necessity of integration. The recent development increases neither the standards of living nor the health of financial sector.

Doctor Mojmir Hampl, Vice-Governor of Czech National Bank, stated in June 2013: “Ambiguities and differences in individual countries’ opinions about financial regulation setting are so enormous that the recent situation could be marked as worse than before.” I do agree with him fully.