Conclusion - a reform agenda that supports the UK’s global trading future

Conclusion - a reform agenda that supports the UK’s global trading future

Business wants to remain in the EU – it is better than any realistic alternative as a means to achieve British growth ambitions through increased openness. But the EU has to change. If the UK engages in the right way, it can work with allies to reform the EU in a way that supports the UK’s global future.

The world’s economic geography is being reshaped as emerging markets industrialise, urbanise and a middle class develops – growing rapidly and contributing a greater share of global growth. In the developed world growth will remain lower in the foreseeable future, although opportunities remain. Creating new trade patterns will be key for the UK, but it doesn’t face an ‘either–or’ choice between developed and emerging markets – it can do more to create trade and investment links to high growth markets while keeping links to established economies.

To exploit these opportunities, the UK must tackle the challenge of falling productivity by maximising its openness to the global economy. Although the multilateral agenda has helped boost openness, bilateral and regional trade deals have now taken the lead.

The EU has, to date, been by far the best vehicle to maximise openness for the UK, with benefits of membership significantly outweighing the costs. The EU has opened up markets in Europe and abroad and secured access to capital, labour and funding. While there are aspects of the EU that are less positive – the costs of membership in terms of budget contributions and regulation – they are a price worth paying. In fact, the UK has been actively influencing the EU, driving it towards liberalisation and competitiveness and helping to create the very benefits it has enjoyed.

However, the EU is changing, pushed by the largest crisis since its establishment, and the contours of a new Europe are emerging. Although a more integrated Eurozone could see the UK potentially sidelined, it is perfectly possible for the UK to continue to shape the EU in a way that meets its goals of boosting trade and investment, but only if the UK keeps a seat at the table and joins its colleagues across Europe to reform the EU to achieve growth and competitiveness.

Business wants the UK to remain a member in the EU; it is better than any realistic alternative as a means to achieve British growth ambitions. But the EU has to change. Business wants an EU that is outwardlooking, open and competitive; an EU rooted in member-state priorities, working for all its members, both inside and outside the single currency, and respecting the boundaries of power granted to it; and an EU in which the UK is a committed member working with allies through an active EU–strategy. Reform is essential if the UK is to fully realise its global future. Without it, the EU cannot hope to compete with the rising economic giants.

The UK is not alone in wanting a better EU for the future, nor can it achieve its objectives without the help of others. The differences between 28 member states should not be underestimated, but there is a growing consensus around the need to change the EU to meet the challenges of the 21st century. As Chancellor Merkel has said, “If Europe today accounts for just over 7 per cent of the world’s population, produces around 25 per cent of global GDP and has to finance 50 per cent of global social spending, then it’s obvious that it will have to work very hard to maintain its prosperity and way of life”. The CBI believes that the right approach is to champion reform for the whole of the EU, not on the basis of negotiating a special deal for the UK. It is important that the limits of the Commission’s responsibilities are clearly defined, but British business sees the principle of ‘subsidiarity’ as the right mechanism to achieve this, rather than unpicking the existing balance of competences. An unrealistic attempt to repatriate powers rather than reform the whole EU could lead to the exit door by default. The changes underway in the EU and global economy represent an opportunity for the UK to push for a more market-orientated EU that can support the UK’s global trading future. This reform agenda has support from a number of member states across Europe.  

£10 bn

Annual boost to UK GDP from signing the Transatlantic Trade and Investment Partnership agreement with the US.

7.1 An outward-looking EU: opening up new trade opportunities for business

Chapter 1 explained the need to maximise trading opportunities with both emerging markets and developed economies, and Chapter 3  argued that the EU has historically been aligned with, and supported, the UK’s international trade and investment objectives. To capitalise on new global growth opportunities, the EU must increasingly look outward to open up global markets and help set the terms of global trade, using the Single Market effectively as a springboard to break down conventional and regulatory barriers to trade.

Putting trade at the heart of the EU’s strategy

Following European elections in 2014 and the formation of a new College of Commissioners, the EU should ensure that an open trade policy remains at the forefront of the EU’s long-term growth strategy. The new Commission should set out an ambitious trade agenda in the Commission President’s political guidelines and the first State of the Union in 2014, and embed clear trade targets in the Commission’s first work programme for 2015.

The EU should negotiate and sign deep Free Trade Agreements with key established markets and sources of FDI for the UK such as the US and Japan, with the conclusion of the Transatlantic Trade and Investment Partnership (TTIP) negotiations a priority for business. Given that tariffs with these markets are already low in many cases, the scope of negotiations should be broad and conducted at a high level of ambition, containing binding provisions to reduce non-tariff barriers. FTAs should open up trade for sectors of the future including high-tech goods and environmental technologies, and the EU should use these FTA negotiations as an opportunity to develop compatible approaches to regulatory formulation and compliance that help set the standards for global trade.

Chapter 1 highlighted that the UK also needs to do better at exporting to high-growth emerging markets. The EU has a major role to play to help UK companies access these markets, whether this is through FTA negotiations to reduce trade barriers or through other formal engagement strategies. While the EU has successfully concluded FTA negotiations with emerging markets such as Singapore, Colombia, Peru and Central America, moves to improve links with the BRIC economies have been less successful.

Brazil EU–Mercosur FTA negotiations were launched in 1999, suspended in 2004, and resumed again in May 2010. Divisions within the Mercosur bloc make the prospects for an agreement in the near future very unlikely, which is hampering efforts to boost UK-Brazil trade.
Russia There are ongoing discussions to insert new trade and investment provisions into the Partnership and Cooperation Agreement (PCA), but talks are not progressing quickly.
India EU–India FTA negotiations were launched in 2007 but are not close to completion, meaning that many UK businesses are still faced with high trade barriers and restrictions preventing investment in India.
China UK exports to China are on the up but, as with Brazil, Russia and India, no FTA is in place. Opportunities to address investment issues are being looked at through the means of an EU–China Investment Agreement.

As desirable as concluding comprehensive FTAs with the BRICs and other key emerging economies within a short timeframe would be, the reality is that this is not always politically feasible. Ultimately, high-quality FTA negotiations need to reflect a willingness of both negotiating partners to take decisions that increase openness and expose industry to greater competition. The negotiating weight of the EU – and the prize of access to the large Single Market – is the best vehicle for encouraging emerging economies to open themselves to trade.

When FTAs are not possible in the short term, there are other tools of bilateral engagement that the EU can use that can help set the path for future negotiations, in much the same way that the Transatlantic Economic Council (TEC) with the United States has helped prepare the ground for the TTIP negotiations.

Many bilateral working group structures to discuss economic issues have already been set up between the EU and key emerging markets, which the UK has often helped to promote. However, a more co-ordinated approach at a European level is needed to help exploit these structures further. For example, while EU–China economic relations are promoted through formal dialogues such as the Joint Committee and the High Level Economic and Trade Dialogue, and many other bilateral initiatives also exist, an overall clear strategy of engagement with China is currently lacking. In the long-term, building a clearer strategy could help ensure that market access barriers in services trade, public procurement and FDI restrictions can be addressed.

Continuing the push for global solutions at the WTO

The WTO faces a major challenge to stay globally relevant in the wake of a very long round of negotiations that has yet to deliver on its agenda. The ‘single undertaking’ approach and lack of political compromise and engagement at crucial times have so far blocked progress. However, it is important to stress that the WTO and its rules-based mechanisms remain a key force against protectionism, and it is essential to maintain the credibility of the multilateral trading system. WTO members urgently need to demonstrate how the organisation is going to move forward in order to preserve the reliability and treaty-based discipline of the organisation. The EU must remain a leader in making the case for trade liberalisation commitments at the WTO level, while also taking advantage of other international forums like the G8 and G20 to support the objective. The EU should continue its detailed monitoring work such as the Trade and Investment Barriers Reports (TIBR) and the yearly Report on Potentially Trade-Restrictive Measures (RPTRM) to hold other trading partners to account on their WTO commitments.

Protecting the market openness of the EU

In addition to opposing protectionist measures in third countries, the EU also has a job to do to maintain its own level of openness to trade and investment. Recent proposals such as overly strict third country rules for financial services, measures regulating third country access to the EU’s public procurement market and mandatory origin marking, all contain elements that could run counter to the UK’s trade policy priorities if approved. The UK needs to remain vigilant to ensure that the EU follows through on its trade policy narrative.

Signs of progress could include:

  1. The EU should successfully conclude a high-quality Free Trade Agreement with Japan, and sign the Transatlantic Trade and Investment Partnership agreement with the US.

    The EU should negotiate and sign a Transatlantic Trade and Investment Partnership (TTIP) agreement with the US by 2015, which, according to conservative studies, could give the UK economy a boost of £10 billion each year.[1] The final agreement should include ambitious commitments to:

    • Eliminate tariffs
    • Liberalise trade in services
    • Improve access to US public procurement contracts
    • Reduce any remaining barriers to foreign direct investment
    • Reduce current non-tariff barriers to trade in key sectors like automotive, chemicals and pharmaceuticals upon entry into force of the agreement
    • Prevent new non-tariff barriers to trade from arising in the future
    • Simplify customs rules and administrative procedures to facilitate trade.
  2. The EU should push forward a more dynamic trade agenda with key emerging markets to support member-state trading ambitions.

7.2 An open and competitive EU: updating the Single Market for the 21st century

Chapter 3 demonstrated that the Single Market has provided substantial benefits to the UK economy and further improvements, particularly in the services market, could create new opportunities for business, adding potentially up to 7.1% to UK GDP.[2] The EU must continue to exploit its main strength – the 500 million people strong consumer market – by advancing key initiatives and tackling obstacles that impede growth. Continued efforts should therefore be put into delivering the Single Market Act I and II, with a particular focus on proposals that will substantially improve growth and competitiveness, including legislation on infrastructure, the deployment of high-speed broadband and access to long-term investment funds.

Chapter 3 also showed that regulation can enable Europe’s companies to harness economies of scale, but inadequately assessed or badly designed rules can stifle growth and competitiveness. The EU’s regulatory approach is integral to maximising access to markets here and abroad, and there needs to be a better approach to regulation at EU level to help business and support enterprise.

There is appetite across Europe for a push on EU competitiveness. In 2012 the UK signed a letter with 11 other countries – including the Netherlands, Sweden, Denmark, Finland, Estonia, Poland, Lithuania and Latvia – calling for EU with ambition and commitment to global trade, a push on services, a truly digital market, completion of the internal energy market and reduced burden of regulation. But this new drive for competitiveness could also receive significant support from countries that have historically been less aligned with the UK on these issues. For example, a senior French official echoed these calls for fresh impetus to the Single Market: “On the Single Market, we need a strategic discussion at leaders’ level. Why is there such a gap between the UK and France? Our economies are comparable, so why don’t we have the same interests [on a Single Market focus]?”[3]

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The EU economy urgently needs a more integrated, deepened Single Market for services. European Commission

Making further progress on unlocking the Single Market for Services

 ‘The EU economy urgently needs a more integrated, deepened Single Market for services’ – European Commission[4]

The Commission should look to further open up the EU’s Single Market for services which could substantially advance the EU’s competitiveness as Europe exits the crisis. The EU needs a renewed high-level political commitment to the liberalisation of services markets across the 28 EU member states supporting the implementation of existing rules and taking new action where necessary. The EU and its member states must commit to:

Ensuring implementation and enforcement of the Services Directive: The Commission and member states should continue to push for progress through the Annual Growth Survey, the mutual evaluation process and scorecards of national performance, but other means could be envisaged including more formal enforcement measures by the Commission.

7.1 %

Potential boost to UK GDP from improvements to the Single Market.

Improve the framework for regulated professions: There are currently 800 regulated professions across the EU[5] - 25% of which are regulated in only one member state (including “photographers, barmen, corset makers or chambermaids”[6]). This non-tariff barrier reduces the ability of domestic firms to offer their services right across the EU. More work should be done to substantially reduce the number of regulated professions in member states, particularly focusing on those regulated in only one or a few member states and ‘specialisation’ requirements fragmenting the provision of certain services. This could be done through member-state level action recommended as part of the Country recommendations in the European Semester and monitored by the Commission.

In a number of member states – including Germany, Sweden, Spain and the Netherlands – governments are ready to do more to promote the integration of services, although few are ready to contemplate new legislative initiatives. As Chancellor Merkel has put it: “We have a Single Market of goods, but not quite a Single Market for services. We still have to work at it”. The first step for many member states is to ensure that the Services Directive is fully implemented, with the former Spanish Economic Minister, Elena Salgado, calling this “the most important structural reform” the country will make, and the Swedish Minister for Trade, Ewa Björling, hailing it as “a fantastic vitamin injection for the EU economy”.[7]

However, if action across the EU28 remains impossible, the use of enhanced co-operation should be considered for a smaller group of countries to move ahead to break the political deadlock on services. According to Open Europe, use of enhanced co-operation here could still produce a boost to EU GDP of €147.8bn. Although the impact would have to be further assessed, this indicates that there are potential benefits of moving ahead with a smaller group if action at the EU level remains impossible.

Focusing on sensible progression of the Digital Single Market

Digitalisation is revolutionising the way firms do business, generating a large ‘online’ consumer base and opening up new opportunities for job creation and retention, but cross-border online trade remains stubbornly low.

The EU has acknowledged the importance of the growing digital economy to the EU’s future competitiveness pushing ahead to complete the Digital Single Market in Europe.  The CBI supports a sensible approach to completion – a pragmatic exercise which identifies barriers to the Single Market where these legitimately exist, while keeping competencies at national level where necessary.

The CBI recommends the EU looks to:

Remove barriers to e-commerce to boost trade and investment, by: easing cross-border trade through supporting technological innovation in payment systems; establishing an ‘e-commerce’ test in impact assessments for all forms of new EU regulation, to ensure that regulation does not hinder the ability of firms (particularly SMEs) to access cross-border online markets; and encouraging member states to collaborate on how they can streamline different national requirements for retail products. 

Boost connectivity for business and consumers by driving the roll-out of digital infrastructure. This would include:

  • Establishing digital infrastructure as a funding priority and streamlining financing arrangements through the prioritisation of financing for digital/communications networks during future Multi-annual Financial Framework (MFF) negotiations, as well as encouraging the European Investment Bank to make greater use of project bonds alongside other sources of EU funding to support private capital expenditure in telecommunications.
  • Working with competent national authorities to harmonise long-term arrangements for the allocation of spectrum in order to support the Single Market: The growth in mobile data represents a significant opportunity for the global digital economy. To make the most of this opportunity, operators in Europe will require swift and efficient access to spectrum in order to deliver in-demand services to businesses and consumers alike. 
  • Focusing on network access to come up with a more competitive offering for businesses and consumers in the EU through pursuing plans to introduce a ‘virtual’ European network access broadband product which complements existing domestic regulatory settlements and which preserves national ‘physical’ access remedies where these already exist; moreover, the European authorities should engage with industry on a common European product for business connectivity including a focus on, for example, ‘lease-lines’.
  • Ensuring policies on ‘digital demand’ keep up with the supply-side, perhaps through the establishment of a forum by DG Connect to enable member state governments to ‘swap notes’ on digital inclusion strategies, allowing the UK government to feed in perspectives from its current work to develop a cross-government strategy on this issue.

Recognise the fundamental economic worth of IP to EU businesses by supporting a robust and rewarding environment for content at home and abroad, by: the government ensuring that the EU uses its economic weight to press for robust IP protection provisions in international trade negotiations. This requires active and transparent UK engagement on IP initiatives in the EU, including copyright.

Ensure that regulatory frameworks support FDI and innovation through being flexible, adaptable and outward-looking, by: avoiding the creation of standards which contradict, exceed, or run contrary to international practice; and not pursuing a prescriptive approach to data protection and cyber security regulation that undermines business competitiveness

Signs of progress could include:

  1. EU member-state leaders should organise a high-level symposium on the Single Market by the end of 2015 to give political impetus to the completion of the Single Market. The symposium will take stock of progress achieved by the last Commission during the crisis – in particular with the Single Market Act I and II – and set out priorities for the further development of the Single Market, enabling the next Commission to focus on delivering on the opportunities that lie in more open services and digital markets.

Regulating for a modern, globally competitive EU

Although a Single Market needs commonly agreed rules for all, there is no doubt that a number of rules at EU level do not work on the ground, reducing public legitimacy for the important regulatory framework at EU level. The EU needs to ensure that all regulation (new or revised) supports Europe’s growth. Particularly at a time of crisis, the overall burden of regulation matters as companies are working to drive recovery through investment and job creation. The Prime Minister’s Business Taskforce report on EU regulation in October 2013 was a welcome kickstart to this debate, and the EU Commission must respond to the broad thrust of this agenda. For the CBI, rules must be made with the aim of making the European regulatory framework more competitive, commensurate and considered.

Competitive: Making rules work in a global context

If it is to stay competitive, the EU must not take a regulatory approach that puts European companies at a disadvantage or shut the EU off from the world. The EU should introduce a ‘Think global first’ test to make sure that proposals support the EU’s global competitiveness. It should be applied throughout the policymaking process, particularly in the impact assessment phase where currently international competitiveness is only one of many criteria. This could be done by rethinking the EU’s competitiveness proofing tool to increase the weight of global competitiveness and make the use of the tool mandatory in the impact assessment for all proposals, including once the proposal has passed through the legislative process into a final text.

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A change of culture is needed in all institutions to make sure rules adhere to the principle of subsidiarity.

Commensurate: Reducing the burden, particularly for SMEs

The EU should focus its attention on the minimum level of regulation needed for the Single Market to operate. A change of culture is needed in all institutions, including EU authorities and agencies, to make sure that rules adhere to the principles of proportionality and subsidiarity. This should include a mindset that sees flexibility in the labour market as a strength, not a weakness.

The EU must continue its work to reduce the overall burden of regulation. The Commission 2007 target to reduce administrative burden of 25% was fully achieved, and the REFIT exercise on regulatory fitness has been helpfully introduced.[8] The proposals announced in October 2013 are a good first step, but much more needs to be done. The new Commission should continue this work and put the smart regulation agenda high on its list of priorities, and the Parliament also has a role to play to ensure that all EU institutions are focussed on creating a regulatory environment that is not overly burdensome.

The Commission must particularly continue and strengthen its work to make rules appropriate for SMEs and microbusinesses. Although the Single Market provides opportunities to these companies, not all of them are able to take advantage of it: only 8% of SMEs engage in cross-border trade and about 5% have set up subsidiaries or joint ventures abroad.[9] The 2008 Small Business Act[10], the ‘SME test’ for new regulations and ‘reversal of burden of proof’ principle for microenterprises have been helpful initiatives. Work should now be taken forward on the ‘top-ten’ list of regulations that are burdensome to SMEs and other challenging rules. In particular, SMEs would like to see:

  • Improved access to public procurement
  • Suitable exemptions in data protection rules
  • Better guidelines to make REACH clearer to complement the March reduction in fees
  • Exemptions in the Waste Framework Direction
  • Calibrated ways to assess environmental impact
  • Access to finance for SMEs to be given greater consideration in financial services regulation, such as in the Prospectus Directive and the Markets in Financial Instruments Directive
  • Proportionate rules under the Temporary Agency Work Directive
  • Easier EU VAT rules.

This push for a reduction in regulation is gaining traction across Europe, including in Germany, where a senior German official has suggested that “Germany might be prepared to countenance the abrogation of some secondary legislation”.[11] As Wolfgang Schmidt, member of the German Parliament, put it: “We’re not always happy with the way Brussels works and what comes out of the system. It seems like many Commissioners are just doing business as usual and want to pass their “nice-to-have” laws rather than concentrating on what is really necessary in these times of crisis. One could get the impression that we’d need a moratorium on new initiatives, at least until the Euro-crisis is properly sorted”.[12]

Considered: Adequately assessing the regulatory framework

The Commission must take a new look at its impact assessment and processes for evaluation. Too many rules are being put forward with unconvincing evidence of the overall benefits or with weak assumptions and a weak evidence base. Others are put forward without proper evaluation of existing rules, or introduced at such a speed that countries are yet to implement one set of regulations before new rules are proposed.

To improve quality and legitimacy, the Commission should, as part of a continued process for improvement:[13]

  • Introduce an independently verified annual statement of the total net cost to business of regulatory proposals issued by the Commission – and consider a move towards a more independent impact assessment structure outside the Commission to avoid bureaucratic capture.
  • Strengthen the role of the Impact Assessment Board (IAB) by giving greater consideration to IAB opinions on Commission Impact Assessments before it adopts a proposal, and by making regular use of independent expert knowledge. In particular, there should be a requirement for new regulatory proposals to have a positive opinion from the Commission’s IAB before they can emerge from the Commission.
  • Increase transparency by publishing Impact Assessments during the consultation stage providing estimates of the net cost to business of regulatory proposals, instead of publishing the impact assessment together with the proposal.
  • Commit to give more serious consideration to alternatives to regulation.
  • Improve evaluation of proposals and existing legislative frameworks. A first priority should be to do a fitness check on the existing stock of financial services regulations, including those adopted in the last reform programme, to determine whether the framework – its accumulated impact, overlaps, inconsistencies and/or obsolete measures – sufficiently enables the financial services sector to perform its role in providing capital and financial services to businesses across Europe.

Signs of progress could include:

  1. The new Commission should bring forward to the Council a target for burden reduction to be achieved within its five year term, with mid-term objectives and a fitness check for the current stock of financial services legislation a priority. This should add to targets to minimise the administrative burden and compliance costs, as well as sectoral targets, to minimise burdens in those sectors that are vital for EU growth, as called for by the European Council in March 2012. It should also include a specific measure for cost reductions for SMEs and microbusinesses.
  2. The new Commission’s work plan should include clear commitments to improve the way in which impact of proposals is assessed, with a requirement for a positive opinion from the Impact Assessment Board before Commission proposals are published for consultation.

7.3 An EU rooted in the priorities of member states: striking the right balance between the EU and its member states

Chapter 5 highlighted that the changing nature of the EU, driven by the integration of the Eurozone, presents a potential risk to the influence of states outside the single currency such as the UK. It is essential that the ‘new Europe’ that emerges from the economic and currency crisis continues to work for all its member states. That needs an EU that allows some members to integrate but others not to, without compromising the integrity of the Single Market. It also needs an EU that is better aligned with member states’ priorities and respects the borders of its power set by the Treaties. That requires a more focused EU, prioritising areas where the EU adds most value. The recent Dutch declaration that “the time of an ‘ever closer union’ in every possible policy area is behind us”[14] offers a positive indication that other member states are also looking at how to refocus the EU, rethinking the areas the EU needs to be involved in and those it should leave to member states to pursue.

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Each member state is different and the EU…is more diverse than it was a decade ago. Europe 2020

Ensuring the EU works for all its members

The Eurozone needs to take steps to strengthen the Economic and Monetary Union and countries outside the currency bloc have supported many of the measures for further integration needed to achieve this – a stable Eurozone returning to growth will benefit all European countries, the UK included. However, with an increasingly integrated EU ‘core’, legal and procedural safeguards should be put in place to ensure that the Single Market is not affected for countries outside the Eurozone.

This is not about ‘protecting the UK’ but about ensuring the benefits of the EU remain available to all. If the Single Market no longer provided for the free movement of goods, services, labour and capital, it would seriously weaken the business case for the EU supporting the UK’s global trading ambitions.

The legal safeguards obtained in the Markets in Financial Instruments Directive (MiFID) that guarantee non-discrimination, and the procedural double majority voting safeguard adopted as part of the Single Supervisory Mechanism, should be replicated where possible in future financial services legislation, particularly in rules relating to the Banking Union and EU-wide financial supervisors. These safeguards could be replicated in other areas and should also be a key aspect in any future Treaty change.

As Chapter 5 suggested, these safeguards are achievable given the willingness of the Eurozone member states to ensure that moves towards further integration to strengthen the single currency do not adversely affect non-members. As a senior French official covering European affairs put it: “Eurozone integration should not lead to a distancing of the UK”.[15]

Signs of progress could include:

  1. EU leaders should adopt a declaration that explicitly calls for steps to be taken to ensure that further Eurozone integration does not undermine the Single Market and protects non-members from discrimination. This should then be formalised in any new Treaty.
  2. Procedural safeguards such as the double majority voting rules created for the Single Supervisory Mechanism should be introduced for remaining supervisors in the upcoming review of the European Supervisory Authorities and the proposed MiFID legal safeguard should act as a precedent in other areas of legislation where there is a threat to the integrity of the Single Market. Legal safeguards should be enshrined in any new Treaty.

Respecting the boundaries set by member states

The mindset in the EU and its institutions needs to change; the EU has moved too far from ‘adding value’ to ‘adding functions’ resulting in ‘mission creep’ in several areas.

The Treaty sets out what tasks are to be done at EU level and what should be left to member states. However, in a large number of areas, under ‘shared competence’, the EU can legislate but has to respect the principle of subsidiarity. This dictates that the EU may only intervene in a particular policy area if it is able to act more effectively than member states. A strong principle in theory, the Treaty’s Subsidiarity Principle has proven more difficult to apply in practice, and judicial reviews have taken a very narrow view of what the Commission must do to show it has respected the principle. This puts the responsibility with the Commission and other EU institutions to honour the principle, but the sheer volume of EU legislation and lack of respect for subsidiarity has undermined its legitimacy in many member states.

Member state leaders and governments must restore the principle of subsidiarity in EU policymaking by signalling to the Commission that it must refocus its activities based on a more limited interpretation of its remit – as the Dutch Subsidiarity Review put it, pursuing “Europe where necessary, national where possible”.[16] Following the Dutch example, member states should look together at how to halt this ‘mission creep’ in some areas, as well as investigate how powers could ‘flow back’ to member states through applying the principle of subsidiarity on existing legislation.

The CBI believes the best way of achieving European consensus on issues like this is by working within the current framework rather than attempting to unpick the existing balance of competences through Treaty change, especially to see progress in the short term. Such attempts are less likely to achieve the outcomes sought by the UK business community and, given there is limited appetite for Treaty change in other member states, could lead to a UK withdrawal by default. There are undoubtedly some areas of EU legislation where UK government and business would seek a different settlement and thus prefer national control. However, the overall balance of benefits of EU membership remains positive, and CBI members are ultimately willing to accept these disadvantages in the interests of remaining in the club.

That said, the Commission itself should look to introduce a moratorium on any new rules in areas where arguments for subsidiarity are strong, including:

  • Social and employment laws: For example, the proposed EU action to ensure quality of traineeships is an area where national solutions are better suited – the EU should only facilitate sharing of best-practice.
  • The Working Time Directive is another example in this area, where currently 18 out of 28 countries are using the opt-out on hours worked. There is a strong argument for making this permanent, allowing members states to set their own rules in accordance with the realities of individual labour markets. Similarly, member states should be free to determine for themselves if on-call time counts as working hours or if employees who are ill while on holiday should have this holiday time reinstated.
  • The Agency Workers Directive is an example of poorly justified EU regulation. Many businesses agree that agency workers who spend long periods in a single user firm deserve protection, but the EU law goes too far in applying it immediately rather than after a reasonable qualifying period. The UK managed to get a slightly longer period – 12 weeks – before it applies, but this is nothing like the 12 months that businesses say is the real point at which workers can reasonably be said to be associated with the user firm as well as the agency.  Protection for agency workers was justified by the EU as a balancing measure to liberalisation of the market for agency work across the EU, but this liberalisation in other members states  hasn’t happened. In the short-term, the UK government must make its implementation of the directive more flexible, but the EU can help by rejecting attempts to make this anti-growth measure even worse by removing the exemption for temporary workers who are paid between assignments and making sure liberalisation of the agency market across the continent actually happens.
  • Lifestyle regulation: The EU’s attempts at introducing lifestyle rules such as rules on diets and gambling are good examples of how the EU is stepping into areas where an EU-wide solution is not necessary and solutions could be better found at member-state level.

Reducing the extraneous regulation coming from the Commission would help increase its legitimacy in those areas where it should have competence. Currently, as one senior Swedish official put it, “the Commission is seen as over-interfering. In Sweden, we have issues with [Commission regulation imposed on] chewing tobacco, VAT rules as applied to non-profit-making organisations, and the hunting of wolves”. This applies to Eurozone countries as well as those outside the single currency, with a senior German official covering European affairs expressing the attitude in the German government: “We are very critical of too much “lifestyle” regulation coming out of Brussels.”[17]

The Dutch government recently carried out a Subsidiarity and Proportionality Review across ministries, which suggested a halt to any new initiatives in the field of environmental and social protection. The review concluded that the EU should take a backseat approach and allow member states to take action in a number of areas:

  • Social security systems and working conditions: The EU co-ordinates and supplements national policy, but the member states must shape the fundamental principles of their labour market and social security systems themselves (including their financial balance).
  • Health & safety and welfare legislation: EU legislation in this area is highly detailed and specific about means, rather than ends. This can limit the options for tailoring implementation to national circumstances and lead to higher implementation costs.

In many cases, the EU unnecessarily involves itself in the process of how agreed outcomes are delivered; it should step back and allow member states to find the best individual means for their particular economies and societies to achieve these commonly agreed ends. For example, in the absence of a global deal to tackle carbon emissions, an emissions target set at the European level provides a helpful driver for low-carbon investment and emissions reductions across Europe. However, while it is the EU’s role to provide the overall framework for emissions reductions, it should be up to individual member states to decide the best way to meet the target in order to reflect the differences in their own national circumstances. For the UK, this means a diverse energy mix, with nuclear power, gas and renewable energy all having important roles to play.

It is important to be aware of the fact that law can be made by precedent as well as legislation, and that the ECJ has frequently taken an expansive view of EU powers. The Council and the Commission need to pay attention to this, by playing a stronger role in interpreting the law as drafted for courts, and addressing unlooked-for consequences of particular judgements.

Signs of progress could include:

  1. Member state leaders must work to restore the principle of subsidiarity. Until this is fully restored, there should be a moratorium on any new regulation where adequate legislation already exists or there is a strong argument for national decision-making, including in the area of social and employment law. The opt-out from provisions of the Working Time Directive should be made permanent.

Creating a better functioning EU that prioritises growth and competitiveness

Part of the driver for the tendency of the EU Commission to regulate is the large number of Commissioners and Directorates. Today, the Commission’s 27 different portfolios – each with a separate commissioner with an agenda for change – are hindering prioritisation and horizontal co-ordination. There is a natural tendency for post-holders to seek to use their term of office to effect change and thus to regulate.

A decision was made in 2013 not to implement the Lisbon Treaty obligation to reduce the number of Commissioners by two-thirds. [18] However, it would still be possible to tighten the organisation of the Commission by pairing ‘junior’ and ‘senior’ Commissioners on single portfolios. Some key portfolios, such as external trade and the Single Market, could have a number of Commissioners, similar to the UK’s departmental model of a secretary of state supported by a team of junior ministers.

The Commission should also redistribute resources at lower levels to Directorates responsible for the EU’s key priorities, such as trade and the Single Market. For example:

  • Currently the Directorate responsible for trade, an exclusive EU competence, has 533 staff – half as many as the Directorate responsible for development, only a shared competence, with 1,174 staff.
  • The Directorate responsible for environment policy, at 448 staff, has almost the same headcount as the Directorate responsible for every aspect of the Single Market, with 495 staff.

The EU must allocate its resources in a way that reflects the economic realities of its member states. In light of the current crisis, the EU institutions must seek to rationalise the EU bureaucracy in the short term, especially given the pressures on national governments to do the same. Establishing a single seat for the European Parliament is an important contribution to this process, although it is necessarily a longer term aim as it requires Treaty change.

50 %

The Directorate responsible for EU trade negotiations only has half the number of staff the Directorate dealing with development issues.

Furthermore, funding priorities in the EU need to continue to move towards supporting a dynamic and competitive economy that can successfully face the challenges of a globalised world. The government should be congratulated for its part in achieving the recent reduction in the EU budget at the same time as protecting the Framework Programme 7, although this was tempered by the significant reductions in broadband roll-out funding. The European Investment Banks’s initiatives should be further supported and extensions explored, for instance around project bonds and other forms of guarantees to incentivise lending to the economy.

Signs of progress could include:

  1. The Commission should reduce the number of portfolios in order to increase the number of Commissioners in key priority areas for the EU. Senior and junior Commissioners could be used to effectively push progress in a number of areas within a portfolio – such as having one Commissioner each in DG Trade for trade deals with developed and emerging markets.
  2. The EU must keep its budget in check, rationalise its bureaucracy, and focus funding on supporting a dynamic and competitive economy.

7.4 A fully engaged UK: helping the EU achieve its global future

Chapter 4 highlighted that the UK has been influential in the EU, securing significant overall benefits from membership. However, it also signalled that the UK cannot take this influence for granted and needs to improve its approach to maximising influence by working in Brussels, in other capitals and back home to ensure that the EU continues to provide net benefits for British business.

Securing a reformed EU will require the UK to build alliances both in Brussels and with other member states. The UK should strengthen its presence in EU institutions and develop a greater role for the UK parliament in EU affairs. The UK government should also improve the way it implements EU legislation.

Reforming how the UK engages with EU institutions

Across the board, UK representatives need to engage positively in Europe, finding co-operative solutions by using UK expertise, building up credibility and showing willingness to build alliances that benefit British interests and support its key sectors.

The UK should step up its ministerial engagement in Europe, building links with other member state capitals and increasing the number of ministerial visits to Brussels at key points in the policy process. At a working level, the UK must prioritise resources to enable the UK permanent representation and the civil service in London to sufficiently follow the development of EU rules, use their expertise and build alliances in Council dialogues. The UK government should draw up comprehensive plans for engaging with the European Parliament, and UK political parties should look to increase the accountability of UK MEPs at home for the output from the legislative process as well as better supporting UK MEPs to build alliances with MEPs from other member states.

The UK must also substantially increase the levels of British nationals in the staff of the major EU institutions. As a House of Commons report recently acknowledged, the UK faces a “serious problem with respect to its declining representation among EU staff”.[19] Improving this will need concerted efforts in assisting new entrants, including fixing weaknesses in the Fast Stream programme that to date have generated no additional permanent generalist EU official since its launch in 2010. The UK government’s EU Staffing Unit in the FCO, established in April 2013, should be a helpful tool, working to place additional seconded national experts in the short term and increase the number of permanent officials in the longer term by promoting recruitment opportunities to students, graduates and professionals. The government must also prioritise engagement in the EU by ensuring that the undertaking of secondments into EU institutions by UK civil servants is encouraged and formally recognised in terms of career development and progression.

Signs of progress could include:

  1. The UK government must set out a detailed EU engagement strategy. This should include an ambitious target for UK presence in EU institutions in the medium-term - slowing the negative trend of a six-year long decline of UK nationals on the staff of the European Commission by the end of 2015, and beginning to reverse this decline by 2017 – as well as comprehensive plans for how government intends to engage with the increasingly powerful European Parliament to best support UK interests.

Improving engagement with EU issues at home to underpin influence in Europe

The UK should increase interaction with European issues, policy and politics at home to allow for better engagement in Europe and a better relationship with the EU overall.

A more active UK parliament can improve the EU and increase its legitimacy at home. National parliaments must play a greater part in the EU policymaking process, and the government should consider looking at how to give the parliament enough time for parliamentary scrutiny, particularly in the case of negotiations and informal trilogues. Proper scrutiny creates not only informed decisions but an informed public as the UK media tend to cover UK parliamentary priorities more than developments in the EU.

The House of Lords should continue its extensive scrutiny of EU law-making, but the UK government and parliament as a whole should also seek best practice from other European parliaments. For example, the German, Danish and Finnish parliaments hold their governments accountable for the positions they take at the European Council and at the Eurogroup, a model which is increasingly duplicated in other Eurozone countries.

The parliament should also strengthen informal ties with like-minded national parliaments and seek to use the Yellow Card Procedure (see Exhibit 47 in Chapter 4) more frequently where EU level proposals infringe the principle of subsidiarity. In 2011, the UK Parliament attempted to use this procedure once, compared to twice in France, Germany, Portugal and Spain, five times in the Netherlands, eight times in Poland and sixteen in Sweden. However, for the Yellow Card to be effective, two-thirds of national parliaments are required to attempt to use it. Inter-parliamentary co-operation remains weak in the EU, so the UK should attempt to build links with other parliaments to improve co-operation and ensure that the Yellow Card Procedure is an effective tool to uphold the principle of subsidiarity.

Although the mechanisms for interaction between UK government, civil service and civil society already exist, improvements could be made to assist the co-ordination of lobbying efforts in Brussels so that the full range of UK stakeholders can, where possible, speak with one voice.

The UK should strengthen the dialogue between the government and UK businesses in Brussels, and could consider business secondments to the UK Permanent Representation, formalised dialogues and informal network events. In the UK, a European business advisory group could be established to provide business views on current EU affairs and guide strategic aims for UK engagement in Brussels.

Finally, with nearly half of UK businesses perceiving UK ‘gold plating’ as the main challenge with EU regulation, the government must use the flexibility given at EU level when transposing legislation and ensure that it does not put the British economy and businesses at a disadvantage. Although progress has been made in this area, the government must address new legislation on a case-by-case basis to ensure that transposition does not put UK firms at a competitive disadvantage.

Signs of progress could include:

  1. The UK parliament should strengthen informal ties with like-minded national parliaments and seek to use the Yellow Card Procedure more frequently. The UK Parliament should take the initiative by creating an informal network of like-minded national parliaments to improve co-ordination on the Yellow Card Procedure.

7.5 Summary of the signs that progress is being made to reform the EU

The EU has helped open up markets in Europe and abroad and secured access to capital, labour and funding that drives the competitiveness of UK firms.

The changing nature of openness has, in part, pushed the UK to debate whether the EU can continue to deliver these benefits – especially in the context of the internal changes required to stabilise the Eurozone, potentially at the expense of those outside the single currency. However, British business is convinced that, by working with its European partners, the UK can help achieve reforms to the EU that will put it on a path to sustainable growth and global competitiveness – maintaining EU membership as the cornerstone of the UK’s open posture in the 21st century.

Business wants an EU that is outward-looking, open and competitive; one that is rooted in the priorities of its members and respects the boundaries of power granted to it. This reform agenda attempts to fashion such a union, in an achievable way that can work for the whole of the EU. Discussions around these ideas are already occurring in member-state capitals and EU institutions in Brussels. This reform agenda indicates the first steps on a journey that the EU must undertake to compete in the global economy.

This is an achievable reform agenda. If the UK engages in the right way, it can help shape the EU for the 21st century. For that reason, 8 out of 10 CBI members – including 77% of SMEs – said that they would vote for the UK to remain a member of the EU in a referendum if held tomorrow. Proactive, positive and permanent UK engagement will secure the outcomes that can support our global future.

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This is an achievable reform agenda. If the UK engages in the right way, it can help shape the EU for the 21st century.

The UK needs to see the following signs of progress to demonstrate that reform of the EU is underway to support our global future:

An outward-looking EU: opening up new trade opportunities for business

  1. The EU should successfully conclude a high-quality Free Trade Agreement with Japan and sign the Transatlantic Trade and Investment Partnership (TTIP) agreement with the US
  2. The EU should push forward a more dynamic trade agenda with key emerging markets to support member-state trading ambitions
  3. An open and competitive EU: updating the Single Market for the 21st century

  4. EU member-state leaders should organise a high-level Symposium by the end of 2015 to give political impetus to the completion of the Single Market
  5. The new Commission should set a target for the reduction of the regulatory burden to be achieved within its five year term
  6. The new Commission’s work plan should include clear commitments to improve the way the impact of proposals is assessed
  7. An EU rooted in the priorities of member states: striking the right balance between the EU and its members

  8. EU leaders should adopt a declaration that explicitly calls for steps to be taken to ensure that further Eurozone integration does not undermine the Single Market and protects non-members from discrimination. This should then be formalised in any new Treaty.
  9. Procedural safeguards should be introduced to maintain the integrity of the Single Market for all members, and legal safeguards should be enshrined in any new Treaty.
  10. Member state leaders must work to restore the principle of subsidiarity. Until this is fully restored, there should be a moratorium on any new regulation where adequate legislation already exists or there is a strong argument for national decision-making, including in the area of social and employment law. The opt-out from provisions of the Working Time Directive should be made permanent
  11. The Commission should reduce the number of portfolios in order to increase the number of Commissioners in key priority areas for the EU.
  12. The EU must keep its budget in check, rationalise its bureaucracy, and focus funding on supporting a dynamic and competitive economy.
  13. A fully committed UK: helping the EU achieve its global future

  14. The UK government must set out a detailed EU engagement strategy. This should include an ambitious target for UK presence in EU institutions in the medium-term and comprehensive plans for engagement with the European Parliament.
  15. The UK parliament should strengthen informal ties with like-minded national parliaments and seek to use the Yellow Card Procedure more frequently.

References

[1] Centre for Economic Policy Research, Estimating the Economic Impact on the UK of a Transatlantic Trade and Investment Partnership (TTIP) Agreement between the European Union and the United States, March 2013

[2] Department for Business, Innovation & Skills, The economic consequences for the UK and the EU of completing the Single Market, February 2011

[3] Senior French official, Élysée

[4] European Commission, Towards a better functioning Single Market for services – building on the results of the mutual evaluation process of the Services Directive, 27 January 2011, available at:

[5] Open Europe, Kick-starting growth: How to reignite the EU’s services sector, April 2013, available at:

[6] European Commission, Towards a better functioning Single Market for services – building on the results of the mutual evaluation process of the Services Directive, 27 January 2011, available at:

[7] Open Europe, Kick-starting growth: How to reignite the EU’s services sector, April 2013, available at:

[8] EU Regulatory Fitness (REFIT) Communication, 12 December 2012, available at:

[9] Mario Monti, A New Strategy for the Single Market, Report to the President of the European Commission, 9 May 2010, available at:

[10] European Commission, A “Small Business Act” for Europe, June 2008, available at:

[11]Senior German official in a Policy Network report for the CBI, The Single Market and Britains future in the EU: where our partners stand, September 2013

[12] Wolfgang Schmidt, State Secretary at Free and Hanseatic City of Hamburg, member of the German Parliament (Bundesrat, SPD) in a Policy Network report for the CBI, The Single Market and Britain’s future in the EU: where our partners stand, September 2013

[13] Many of these are mentioned in a 10 Point Plan for EU Smart Regulation drawn up by employment ministers in 13 EU member states, available at:

[14] Netherlands Foreign Ministry, NL ‘subsidiarity review’ – explanatory note, June 2013

[15] Senior French official, Élysée

[16] Press release for the June 2013 Netherlands’ Subsidiarity Review, available at:

[17] Senior German official, Chancellery, in a Policy Network report for the CBI, The Single Market and Britain’s future in the EU: where our partners stand, September 2013

[18] Dave Keating, ‘EU summit: current Commission size extended to 2019’, European Voice, 22 May 2013,

[19] House of Commons Foreign Affairs Select Committee, ‘The UK staff presence in the EU institutions’, 2013.