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So Encrusted With Regulatory Barnacles

Kitty Miv, Editor
20 September, 2012

Recommendations are not action, so it is with hesitation that I award Italy a star for proposing a sweeping reform of small business start-up procedures. The problem is that, like a ship's hull after 30 years in the water, Italy's polity is so encrusted with regulatory barnacles, rights and privileges, and the trade unions are so intertwined with big government, in all the nastiest senses of the word, that it a devilish job just to know where to start. In fact the problem goes way back: Italy was a founding member of the EU in 1952, so there has been 60 years for the Brussels gravy train to infect and undermine economic sanity in all branches of the Italian state, not just in the mezzogiorno (the south). Then there's the mafia, under its various names, and we all know how they react to any attempt to take away their patrimony. So, fingers crossed, and good luck to Mr Monti, who knows what to do. But don't hold your breath!

The UK is on the same path, announcing some quite significant relaxations in audit requirements this week for small companies and subsidiaries. That's good as far as it goes, and the government is also planning (but only planning) to improve the ghastly employment tribunal system, which for a quarter of a century has acted as a serious disincentive to hiring people, has been a charter for vexatious claims and has wasted incalculable quantities of management time. There is only so much that the government can do, because of the dead hand of EU employment law, but at least they seem to have got the message at last. What they don't realize, or don't want to realize, is that the combined pressure of high individual taxation, social security charges and the ever-increasing burden of regulation makes the UK a thoroughly unattractive place to start a business. People still do it, because if you are an unemployed shipyard worker in Belfast you don't have much choice; but they only do it once they've exhausted the possibilities of working 'on the black'. A job is still a job, you might say, whether the government knows about it or not, but it's a crazy system that forces people into illegality. Indeed, from that perspective, just about every major European country has a crazy system.

What a contrast to turn to the United Arab Emirates, where the DIFC (Dubai International Finance Centre) announced the latest stage in its growth and success. It's only one of a number of tax-free zones in Dubai: imagine the number of jobs that have been generated in the wider economy as a result. OK, the UAE has all that oil, but don't let that obscure the message, which is that in order to attract international business, and that holy grail of modern economies, FDI, you have to compete. And that is exactly what the blessed European Union won't allow its member states to do. How nutty is that? If Italy was allowed to create a tax-free yacht-building plant and marina in say Genoa, amid the rotting remains of Benito Mussolini's navy, or in Sardinia, where officers from the Guardia di Finanza (tax police) are camped out on the hillsides around the marina with night-glasses, tormenting businessmen who have been clever enough to make the money to buy yachts, it would be a wild-fire success. But it can't. So off go the jobs and the yachts to Dubai or the Cayman Islands.

China and the United States are at it hammer and tongs, squaring off for a long-term battle over subsidies, dumping and countervailing measures. It's difficult to say which is more to blame, so I'll blame both of them; and I'd give an execration to the EU as well if it was a country, because it's playing the same game. You can stop reading now if you believe in free trade, and understand why dumping doesn't exist but had to be invented by politicians for electoral purposes. For those who still need convincing, here it is, it's very simple: if Country A can produce widgets more cheaply than Country B, because of having cheap resources (materials, labour etc) then Country B should happily accept those cheaper widgets because it will then either be able to improve the standard of living of its citizens or will in its turn be able to make cheaper cars, or whatever else the widgets go into. And this is true even if Country A deliberately underprices its exports: Country B should smile, and say, thank you very much. Only if Country A systematically sets out to wreck an industry in Country B for long-term competitive advantage is there a case for intervention. That's unusual, and what stops free trade operating is most usually an entrenched labour force, whereas the correct response for the country concerned is to re-train the people affected, not protect them, which simply exacerbates the problem. You can see why politicians, with notoriously short horizons, fail to behave as they should, and prefer instead to go to war. At least nowadays it's usually just with words.

So Austria and Germany 'remain committed' to a financial transactions tax. France has already implemented one. But by now Angela Merkel is just pretending: Germany has too much to lose with Finanzplatz Frankfurt to take silly chances; even the modified idea of a stamp duty like the British one on share sales proved distinctly unappetizing when German economists started really chewing into it. Werner Faymann, Austrian Chancellor, is a different proposition; the Austrian government genuinely believes in the power of the EU and thinks that an FTT can be made to work. He's right in the sense that if all 27 members (plus presumably Switzerland and Liechtenstein) joined in, then the inevitable damage could be limited, and would take some years to show itself; but this is an impossible hypothesis. The best that can be hoped for (if you are a Continental) or the worst that need be feared (if you are an Anglo-Saxon) is a variable geometry group of six or seven committed Europeans built around France, Germany, Austria and Luxembourg, and as a piece of self-evident collective suicide it will simply never happen, which is what Angela knows, allowing her to dissemble so successfully. The French on the other hand are going to go down fighting, which is glorious but not very sensible. Ironically, the famous 'C’est magnifique, mais ce n’est pas la guerre: c'est de la folie,' was uttered by a French soldier watching the charge of the English light brigade. A good epitaph for Francois Hollande?

Kitty's Encomiums and Execrations

Methodology: each week (this is the 20th) three countries are given encomiums and three are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany has a ranking of – 1, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so it's now in neutral territory.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but hopefully one day they will become useful for decision-making, even if for the moment it is all just an amusing game. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums:

Dubai powers ahead

Italy has good intentions

United Kingdom listens to business, for once

And Kitty's Execrations:

Austria communautaire to the death

China and the US disgracing themselves over trade




Tags: Dubai

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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