Expert View: Europe trips up in the race for trade

Last Tuesday the European Commission released a scathing report accusing Germany, France and Italy of dragging their feet on market liberalisation. The Commission claims that, in doing so, these countries are jeopardising the success of the so-called Lisbon agenda – agreed by EU members at the Lisbon summit in 2000 – calling for Europe to become the most competitive trade bloc in the world by the year 2010.

There are many obstacles in the way of the agenda, of which market reform is only one. Another is the increasing environmental regulatory burden placed on industries operating in the eurozone. This has had a direct impact on creativity and innovation and so, indirectly, has also affected financial and property markets.

Don't get me wrong: regulation is good. It holds obvious benefits for both public health and the environment. Without regulation, there would be more pollution and lower safety standards in the the workplace.

However, too much regulation can be harmful. This is not (officially, at least) a view shared by the majority of policymakers within the European Commission, where it is argued that it is possible to combine strong economic growth with strict environmental regulation. The idea is that companies will increase market share as consumers flock to greener producers.

One of the most celebrated examples of this thinking was the Swedish decision to ban the bleaching of paper with chlorine, leading the country's pulp and paper companies to develop chlorine-free paper. By chance, Greenpeace launched an anti-chlorine bleach campaign in Germany shortly afterwards, and as a result the Swedes captured 25 per cent of the paper market virtually overnight.

But this is the exception rather than the rule.

Regulation that is too strict generally stifles innovation. A study by Business Decisions for Fedesa (the European Federation of Animal Health) has recently examined the cost of EU regulation on the animal health industry. It showed that between 1997 and 2001, the timescale for developing new products to improve the health of livestock increased by two years (and costs more than doubled).

More than one third of R&D in Europe is now "defensive" (compared with one sixth in the US). The share of R&D spending in Europe by multinational drugs companies has dropped from 50 to 35 per cent as these companies have started locating their R&D facilities outside Europe.

Markets have been further destabilised by court rulings such as the recent failure of the appeal by the drugs companies Pfizer and Alpharma against a European Commission ban on antibiotics in animal feed (a ban for which there is no supporting scientific evidence).

This all means that the European Commission will find it difficult to meet the 2010 target set by the Lisbon agenda and promoted by Tony Blair and Gordon Brown. To achieve this target, the Commission needs to encourage innovation, and that means ensuring that companies spend more of their R&D budgets within the EU. If the EU presses on with ever stricter regulation, industry R&D spending will leave Europe and go elsewhere.

To achieve its economic goals, the EU needs further regulatory reform. Regulators must pay more attention to the costs and benefits (not only the financial costs but the social and environmental ones) before putting forward new measures. They must also move away from confrontation, and re-embrace consensus by working with industry and other stakeholders.

Professor Ragnar Lofstedt is director of the King's Centre for Risk Management at King's College London.