May 8, 2003

From Four Freedoms To 1,500 Rules

The European Union's one shining, unequivocal success, aside from 60 years of peace, is surely the single market that stretches from Portugal in the west to Germany in the east. So we have always taken a particular interest in European Commissioner Frits Bolkestein's semiannual Scorecard of progress in breaking down the barriers to the exercise of the EU's "four freedoms" -- free movement of capital, people, goods and services.

The latest installment came out this week. The bad news is that many member states have been backsliding in the last year in bringing their laws into line with the requirements of the Single Market. The other bit of bad news is that the number of regulations underpinning the Single Market continues to grow. Some 200 new directives have issued from Brussels in the name of the four freedoms since the commission started keeping score six years ago; they now number over 1,500. Put the two together, and a picture emerges in which the regulators are out-running the ability of member states to effect these rules.

This situation cannot be laid entirely at the feet of the commission. The Council of Ministers must approve these regulations, and if they're approving rules that they can't or won't put to a vote in their national parliaments, they must share some of the blame. Further, to the extent that the rules are approved, it's hardly conducive to the integration process to have these directives in place in only some member states, but not others.

In its latest report, the commission noted that the percentage of Single Market directives not fully adopted by member states, whose job it is to turn them into law, rose to 2.4% of all rules, from 1.8% a year ago. It also highlighted 10 "key" directives in particular that are over two years overdue.

The first concerns the protection of personal data, which has become something of a crusade for the EU. It has even required the U.S., Switzerland and other third countries to implement equivalent rules to protect people against "misuse" of their data. They don't mean identity fraud, either. Apparently, the Single Market cannot function unless everyone enjoys equal protection against junk mail.

The second, concerning interoperability of high-speed train networks, is more sensible, for obvious reasons. That one, anyone traveling on the Thalys or Eurostar will be relieved to know, has now been fully adopted since the report was compiled. Others, such as one concerning consumer protection for those ordering online or through catalogues across borders, seem obvious enough. But we can't quite figure out why the EU is so worked up about the "free movement of lawyers." Go figure. And rules on the availability of consumer information on automobile fuel-economy would seem to be the sort of thing consumers could demand for themselves. Germany, France and Italy still have not complied with the EU on that one. You get the idea; we'll spare you the rest of the list.

Mr. Bolkestein's report also focuses on certain tax issues -- VAT and corporate income tax in particular. The Scorecard argues for a unified tax "base" in the EU. Basically, that would mean that national governments would continue to set tax rates, but that what counts as profit for tax purposes would have a single definition.

We've no doubt that this would hold certain advantages to corporations, who would only have to calculate profits according to a single definition EU-wide. That may be a good thing in itself. But the determination of the corporate income-tax base always has an element of the arbitrary, and countries may well choose to favor certain types of activity over others by, for example, adopting accelerated capital-equipment depreciation schedules, or somesuch.

We don't know what the "right" rate of depreciation for tax purposes is, but neither does the commission, and that's where a little experimentation -- and even competition -- can come in handy. We also admit to a twinge of hesitation that the establishment of a uniform tax base could later prove to be the first step on the road to tax-rate harmonization, although we're confident that's not why Mr. Bolkestein has proposed it.

All in all, we'd score Mr. Bolkestein's latest assessment a disappointment. And while it's important that members all enforce the same rules when there are rules in place, we suspect compliance would prove easier if the EU sat down and figured out which of those 1,500 directives (plus another 300-odd direct regulations) really were vital to the four freedoms on which the Single Market is founded.

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