What Europe really needs is a single market for entrepreneurs

#CriticalThinking

Digital & Data Governance

Picture of Albert Bravo Biosca
Albert Bravo Biosca

Founding Director, Innovation Growth Lab (IGL)

We often ask ourselves where are Europe’s Google and Microsoft, or for that matter new European high-tech start-ups that dominate world markets. Very rarely do we ask ourselves “Where is Europe’s Starbucks?” Yet the one simple answer to all of these questions is that Europe does not provide a good environment for start-ups to grow and challenge incumbents.

‘Creative destruction’ is what ultimately drives economic growth, and Europe doesn’t have enough of it. We have a much larger share of ‘static’ companies that neither grow nor shrink compared to the U.S., and very few of our largest companies are young. In other words, Europe is a great place for doing business, but only if you are an old-established incumbent.

Imagine an entrepreneur who would like to set up a coffee retail chain in all 28 EU member states. It has to face 28 different legal regimes, tax rules, business registration requirements, labour legislations, commercial laws, judicial traditions and bankruptcy regulations. No wonder European coffee retail chains are mostly national, and haven’t really tried very hard to cross borders. Yet coffee shops are an industry where, compared to the U.S., Europe arguably had a competitive advantage.

Europe is a great place for doing business, but only if you are an old-established incumbent

It’s an example that highlights a common problem with European business regulation. It is excessive in some regions or areas, often very complex and it’s tilted in favour of incumbents. And of course it’s different from one EU country to another, even if harmonised. Dealing with 28 different jurisdictions may be no more than an annoyance for large multinationals, but it can be an insurmountable barrier for innovative smaller companies.

Let’s instead consider an alternative: Creating a new, separate, optional and fully-fledged 29th regime for Europe’s new companies. In other words, a single market for entrepreneurs. The building of Europe’s single market has so far combined two different approaches: full harmonisation, in which countries agree on a common set of rules, even if implementation varies in practice, and the country of origin principle, in which a business that complies with its home country legislation can operate anywhere else in the EU. The 29th regime would therefore represent a third way between these two approaches, and would overcome some of the pitfalls that hamper both. It has already been used to create the single European patent, and it underlies current attempts to create an EU-wide corporate tax system (the common consolidated corporate tax base) and a single legal form for SMEs (the unsuccessful European Private Company – SPE). Yet rather than tackle each domain separately, it is now time to be more ambitious and build a comprehensive 29th regime that encompasses all forms of business regulation.

It is now time build a comprehensive 29th regime that encompasses all forms of business regulation

A single market for entrepreneurs, sitting alongside the 28 national regimes without replacing them, would give new start-ups the option, but not the obligation, to operate under the same set of simplified rules and procedures across the EU. At the same time, it would preserve member states’ rights over issues like tax rates or employment rights. There would be 3 levels of regulation in this 29th regime. Domains like bankruptcy legislation would be fully harmonised. In others definitions and processes would be unified, but countries would be free to set their own parameters (e.g., a harmonised tax base but freedom to determine the tax rate). In other domains, countries would have absolute freedom to impose additional regulation, but on condition that entrepreneurs can access it and comply with it through a common EU-wide online platform. The principle would be simple; no entrepreneur operating under this 29th regime could be forced to comply with any regulation if they were unable to do so through this online platform.

Fitting existing rules and regulations for businesses across Europe into an EU-wide online one-stop shop may sound a nightmare, yet if business regulation has become so complex that even full-time bureaucrats can’t simplify it, then it must be far too complex for entrepreneurs to comply with. The solution is therefore a radical simplification.

Freeing entrepreneurs from regulations not covered by this new platform creates a de facto sunset clause for all existing forms of regulation. It changes the default, forcing governments to rewrite and update current rules, provided they are still needed. Creating an EU-wide online platform would not only encourage simplification but also transparency. It would provide real-time data for all jurisdictions on all the rules and procedures in place, as well as the time it takes to comply with them. It would, in short, be a much more fine-grained and up-to-date version of the “Doing Business” ranking published by the World Bank, which by raising awareness and creating a degree of competition has been very effective in encouraging behaviour change among governments.

The launch of a single market for entrepreneurs would not be a small undertaking. There are, though, three powerful reasons that make it crucial.

The currency union will not be sustainable if southern and northern economies still diverge in the long term

First, it will reduce the fragmentation of Europe’s internal market, which is hampering long-term economic growth. Not only is it still very difficult for European entrepreneurs to take full advantage of the EU’s potential market of 500m customers, it is also difficult for companies from different countries to work together, because regulation and its enforcement are fragmented along national lines. For instance, enforcing a contract if a cross-border collaboration fails may mean recourse to another country’s courts, with all the complexities and costs this involves.

A 29th regime that incorporates regulation and enforcement would make it easier for companies to work with international partners, and to undertake the relationship-specific investments that underpin innovation. The 29th regime would also create a much less fragmented market for business services providers, from IT to accountants to lawyers, leading to more services innovation and improved solutions. The new EU-wide regime would also facilitate the development of pan-European financial intermediaries, and so boost cross-border investment, since at present business angels, venture capital and specialised mezzanine finance providers need to make substantial efforts to understand how the local regulatory environment, from taxation to bankruptcy procedures, might impact their returns.

The second reason for the 29th regime is the urgent need to address the competitiveness differences that have been at the core of the eurozone crisis. Europe’s banking union is a crucial step, but the currency union will not be sustainable if southern and northern economies still diverge in the long term. The high barriers to growth that southern European companies face keep them small and hamper productivity growth. One of the commonalities that Spain, Italy, Portugal and Greece share is the comparatively small size of their companies. Some of the reasons for this are cultural, but their regulatory framework is an important one as well.

The strains imposed as part of the eurozone crisis are instructive. While some of the structural reforms imposed on bail-out countries by the EU-IMF-ECB Troika could be implemented relatively quickly, institutional inertia risks hampering growth-enhancing reforms in many other areas, particularly once the spotlight shifts away. After all, asking these countries’ elites to reform is like asking Sir Humphrey, the devout permanent secretary in Yes, Minister, to reform the civil service. Once the minister leaves the room nothing happens. The Troika’s missions to Greece have often ended with a similar frustration. This is why starting from scratch with a parallel regulatory regime may be easier than trying to fix existing ones.

Therefore, rather than putting all our hopes on the willingness and ability to reform of governments in southern Europe, it would be better to offer entrepreneurs an opt-out option: a 29th regime that frees them from the burden of their countries’ inefficient regulatory framework, allowing them to thrive while also putting additional pressure on governments to reform, since with choice comes competition. The prize would be the sustained improvement in the competitiveness of southern European economies that would in turn contribute to the long-term sustainability of the euro. The 29th regime could be part of a grand bargain, trading increased support for southern economies now in exchange for accepting a 29th regime, a more credible commitment than vague promises of reform.

There is a third reason why creating a 29th regime could be highly beneficial: the opportunity to rethink how business activity is regulated as well as how this regulation is implemented and enforced. It would open the door to the creation of a new system adapted to the 21st century, not one inherited from the 19th century as we have today.

The single market for entrepreneurs outlined here offers an ambitious vision whose spirit is to make it easier for start-ups to thrive, to help close Europe’s north-south divide, and to underpin long-term growth in Europe. The new EU Commission should put the creation of this single market for entrepreneurs at the core of its growth agenda.

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