Regulating Europe

Giandomenico Majone

• Publisher: Routledge
• Year: 2002
• eBook ISBN: 9781134764570
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

Regulating Europe explains why economic and social regulation is rapidly becoming the new frontier of public policy and public administration in Europe, both at the national and EU levels. Statutory regulation, implemented by independent regulatory bodies, is replacing not only older forms of state intervention but also, to some extent, the redistributive policies of the welfare state. Thus Regulating Europe is an examiniation of the emergence of the regulatory state as the successor of the Keynesian welfare state of the past. Contributions emphasize the parallelism of policy developments at the national and European levels. Part one provides the necessary theoretical background, including a new model of demand and supply of Community regulation. The second part presents a series of case studies of particular regulatory policies and institutions in the UK, Germany, France, Spain and the EU. Part three evaluates current policy and institutional developments, pointing out how the lack of a tradition of statutory regulation in Europe affects the design of the new institutions. Special attention is devoted to the issue of the democratic accountability of expert, politically independent agencies - a problem which, contrary to widespread opinion, is as severe at the national level as it is in Brussels. It is suggested that the requirements of democratic accountability, and of subsidiarity, cannot be met by re-nationalizing European policies, much less by increasing the current level of centralization. A more promising solution is the development of regulatory networks closely integrating national and supranational regulators.

Part I
The political economy
of regulation

1 Regulation and its modes

Giandomenico Majone

INTRODUCTION

Regulation, in the sense of rules issued for the purpose of controlling the manner in which private and public enterprises conduct their operations, is of course as old as government. Moreover, the normative justification of regulation—the correction of what are today called ‘market failures’, for example, monopoly power—is hardly new: Machlup’s chronology of antimonopoly regulation, for example, includes an edict of the Roman Emperor Zeno from AD 483, prohibiting all monopolies, combinations and price agreements; the decision of an English court in 1603 (Darcy v. Allin) declaring a monopoly in playing cards void as against common law because it results in higher prices and lower employment; and the decree of the Massachusetts Colonial Legislature in 1641 that ‘there shall be no monopolies granted or allowed among us but of such new inventions as are profitable to the country, and that for a short time’ (Machlup 1952:152–7).

What have changed in time are less the functions than the modes of regulation. When one speaks of regulation today, in America and increasingly also in Europe, one usually refers to sustained and focused control exercised by a public agency, on the basis of a legislative mandate, over activities that are generally regarded as desirable to society (Selznick 1985:363–4).

In this definition the reference to socially desirable activities excludes, for example, most of what goes on in the criminal justice system; it also suggests that market activities are ‘regulated’ only in societies that consider such activities worthwhile in themselves and hence in need of protection as well as control.

The reference to sustained and focused control by an agency, on the basis of a legal mandate, implies that regulation is not achieved simply by passing a law, but requires detailed knowledge of, and intimate involvement with, the regulated activity. One of the most distinguished students and practitioners of regulation in the New Deal era put it as follows:

[t]he art of regulating an industry requires knowledge of details of its operations, ability to shift requirements as the condition of the industry may dictate, the pursuit of energetic measures upon the appearance of an emergency, and the power through enforcement to realize conclusions as to policy.

(Landis 1966 [1938]:25–6)

Statutory regulation by independent boards or commissions has a long tradition in the United States—at the federal level it goes back to the 1887 Interstate Commerce Act regulating the railways and setting up the corresponding regulatory body, the Interstate Commerce Commission—but is a fairly recent phenomenon in Europe. Ideology is not the sole, but certainly an important, factor in this difference. American-style regulation, which leaves ownership of industry in private hands, expresses a widely held belief that the market works well under normal circumstances and should be interfered with only in specific cases of market failure.

In Europe, on the other hand, the market system, and the structure of property rights which such a system entails, have been accepted by a large majority of voters only recently. For most of the period between the great depression of 1873–96 and the Second World War, large segments of public opinion were openly hostile to the market economy, and sceptical about the capacity of the system to survive its recurrent crises. Hence in industry after industry, the response of most European governments to perceived cases of market failure was a very intrusive form of control, that is, nationalizations rather than American-style regulation.

The European response to market failures has also been shaped by a long tradition of state dirigisme and bureaucratic centralization. Even where regulatory instruments such as price control or licensing, rather than public ownership, have been used, there has been a general reluctance to rely on specialized, independent agencies. Instead, regulatory functions have been assigned with a few exceptions, such as the one discussed in the chapter by Everson, to ministries or inter-ministerial committees, or to semi-public corporatist bodies. The absence of independent single-purpose agencies, the confusion of operation and regulation, the preponderance of informal procedures for rule-making, and the opaque quality of corporatist self-regulatory arrangements, are all factors that explain the low visibility of regulatory policy-making in Europe in the past, and the consequent lack of sustained scholarly attention.

Things have changed considerably over the last two decades as shown not only by the proliferation of regulatory bodies at both the national and European levels, but also by a growing body of specialized literature of European origin on regulation as a distinct type of policy-making. Traditional ways of thinking and patterns of behaviour are not easily changed, however, and if one wants to understand the limits of current policy and institutional innovations one must be aware of the legacy of older approaches. For this reason the present chapter compares statutory regulation—with which the remainder of the book is concerned—with two other modes of regulation which have been historically important in Europe: nationalization and self-regulation. The comparison leads to the conclusion that, in spite of some defects that have been extensively discussed in the academic literature and in the deregulation debate, statutory regulation by expert and independent agencies represents a definite improvement over previous practices.

REGULATION THROUGH PUBLIC OWNERSHIP

Historically, public ownership has been the main mode of economic regulation in Europe. Although public enterprise can be traced back to the seventeenth century, and in some parts of Europe to even earlier periods, its use became widespread only in the nineteenth century with the development of gas, electricity, the water industry, the railways, the telegraph and, later, the telephone services. These industries, or parts of them, exhibit the characteristics of natural monopolies: situations where, because of the economies-of-scale phenomenon, it is more efficient for production to be carried out by one firm, rather than by several or many. Public ownership of such industries was supposed to give the state the power to impose a planned structure on the economy and to protect the public interest against powerful private interests.

It is important to keep in mind that the nationalization of key industries in the nineteenth and twentieth century has been advocated on a variety of grounds: not only to eliminate the political power and economic inefficiency of private monopolies, but also to stimulate economic development, to favour particular regions or social groups, to protect consumers and foster democratic accountability, to ensure national security and even to punish (Renault, Charbonnages du Nord and other French enterprises were nationalized after the Second World War because their owners had collaborated with the Germans). Moreover, the ideological roots are quite varied. It would be wrong to assume that nationalizations always reflected collectivist values and goals— Bismarck, Mussolini, Franco and De Gaulle have been among the most energetic nationalizers of European history.

Regardless of the multiplicity of objectives and ideological justifications, the central assumption was always that public ownership would increase government’s ability to regulate the economy and protect the public interest. Public enterprises would shape economic structure directly through their production decisions and indirectly through their pricing decisions. In the early days of nationalization it seemed axiomatic that the imposition of prices and quality standards in the public interest could be achieved more effectively by the flexible decision-making inherent in the public ownership framework—considerable managerial discretion, subject only, in theory, to political accountability—than by formalized legal controls imposed by an external agency (Ogus 1994:267–8).

Subsequent experience, however, demonstrated that public ownership and public control cannot be assumed to be the same thing. Indeed, the problem of imposing effective public control over nationalized enterprises proved so intractable that the main objective for which they had been created—namely, the regulation of the economy in the public interest—was almost forgotten.

After the Second World War, the legislation in France, the United Kingdom, and other European countries which brought many large enterprises into public ownership tended to stipulate objectives of a general nature and saw the role of managers of public enterprises as that of trustees of the public interest. The managers were supposed to decide at arm’s length from government, although government was accorded certain powers over them, notably power for the sponsoring minister to appoint board members and chairman, to issue general directions, and to approve investment programmes.

However, the idea of an unproblematic notion of public interest proved to be a will-o’-the-wisp (Prosser 1989:136). Perceptive economists, such as W. Arthur Lewis (1951) soon recognized the dangers of an institutional arrangement in which objectives were ill defined and in which it was very difficult to determine ex post whether or not they had in fact been achieved. The incentives built into such an arrangement might lead public sector managers to maximize the scale of operations, subject to external financing constraints, or to seek a quiet life untroubled by changes in working practices or difficulties in labour relations, rather than to pursue a rather vague notion of public interest (Kay, Mayer and Thompson 1986:9).

As early as 1951, Lewis had pointed out that:

[t]he appointing of public directors to manage an undertaking is not sufficient public control…. Parliament is handicapped in controlling corporations by its lack of time…. Neither have Members of Parliament the competence to supervise these great industries…. Parliament is further handicapped by paucity of information…for example, less information is now published about the railways than was available before they were nationalized.

(Lewis 1951, cited in Machlup 1952:50)

In Britain dissatisfaction with the performance of nationalized industries led to repeated attempts by government to prescribe more specific objectives. A theme common to Treasury White Papers in 1961, 1967 and 1978 was greater emphasis on commercial rather than public interest considerations, and on external financial controls. Despite the intentions of the authors of such papers, detailed scrutiny by government of the day-to-day activities of nationalized enterprises had tended to increase rather than the reverse, and the autonomy of the latter in decisions regarding investment, planning and industrial relations had been steadily eroded (Kay, Mayer and Thompson 1986:9–10). Thus, ministerial interference was frequent and pervasive, albeit of an informal nature. Moreover, the ministerial power to issue general directions, though little used for its true purpose, was often invoked as a means of avoiding responsibility for unpopular decisions (Wade 1988:161).

The French nationalizations of 1982/3 gave rise to essentially the same problems as earlier waves of nationalization: the objectives were not clearly defined either before or after the 1981 presidential elections; and the degree of government influence over the nationalized industries became a bone of contention. In May 1983, Mitterand asserted that ‘the nationalized industries should have total autonomy of decision and action’ (Le Monde, 28 May 1983, cited in Hall 1986:204). Of course, comments Hall, the newly nationalized enterprises would never operate totally autonomously, but it was equally hard for the state to acquire effective control over them. In fact, these enterprises had the worst of both worlds—they lacked adequate direction from the state to guide long-term strategy, and at the same time they were subject to sporadic government intervention in their daily operations. And because the nationalized enterprises faced more intense political pressures to avoid lay-offs than did private firms, the capacity of the state to restructure French industry might have been reduced, rather than strengthened, by nationalizations (Hall 1986:205).

Nationalization has failed not only with respect to its objective of economic regulation and control, but also with respect to the socio-political objectives of consumer protection and public accountability. For example, the British nationalized enterprises tried harder than the public corporations of other countries to create mechanisms for the protection of consumers. The 1940s witnessed the creation of consumer councils or consultative committees which handled complaints and commented on price increases and other policy proposals, and some of the most active councils even attempted to undertake consumer audits. Their powers were modest, however, because of the official view of managers of public enterprises as the trustees of the public interest.

Indeed, the record of these consumer councils has generally been dismal. They rarely used records of complaints to argue for general policy changes, and, although in some cases there was a statutory requirement that they be consulted before price increases and on the boards’ general plans, such consultation has been late and cursory. Underlying these and other problems has been the fundamental difficulty in obtaining information from the enterprises (Prosser 1989:137–8).

Detailed ministerial interventions in the decisions of public managers, particularly in pricing and personnel decisions, had perverse effects in terms of public accountability. Because such interventions were usually exercised through informal and even secret processes, rather than by official directions, accountability was reduced to vanishing point. In fact, how could accountability be enforced if it was not clear where responsibility for decisions lay—with the public managers or with the government? The very multiplicity of objectives assigned to nationalized companies made it impossible to define clear criteria of evaluation. Company executives could always argue that the poor performance of their companies was due not to poor management but to the political constraints imposed on their personnel, investment and pricing decisions.

At any rate, accountability to parliament was always more of a myth than a reality since, as Arthur Lewis noted, parliaments have neither the time nor the expertise and information necessary to supervise great industrial enterprises. Governments, on the other hand, generally resisted proposals that public corporations should be treated in the same way as private monopolies. This has meant generous exemptions from antitrust legislation—see, for example, the chapters by Baake and Perschau, and by Cases, in this volume—but also, given the traditional reluctance of European judges to regard matters of economic and social policy as justiceable, from judicial review of the decisions of public managers. Thus, the European consumer was less well protected vis-à-vis public corporations than the American consumer was vis-à-vis private monopolies subject to legal controls imposed by an independent regulatory body.

In the privatization debate, attention has tended to focus exclusively on the relative efficiency of public and private enterprises. Rigorous tests of the common assumption that private firms are more efficient then publicly owned ones are often difficult because of comparability problems: government-run enterprises may differ systematically from those that are privately run. Where comparisons are meaningful, several empirical studies suggest that public enterprises are not necessarily less efficient than private ones, as long as they operate in a competitive environment. A Canadian study, for example, found that there was no significant difference in the efficiency of Canada’s two main railway systems, the privately owned Canadian Pacific and the publicly owned Canadian National (Daves and Christensen 1990). Similarly, a study carried out in Australia, comparing the public Trans-Australia Airlines and the private Ansett Airlines of Australia, found very little difference in the perfor...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• TABLES AND FIGURES
• NOTES ON CONTRIBUTORS
• SERIES EDITOR’S PREFACE
• PREFACE
• ACKNOWLEDGEMENTS
• INTRODUCTION
• PART I: THE POLITICAL ECONOMY OF REGULATION
• PART II: REGULATIONS IN PRACTICE
• PART III: PROBLEMS OF THE REGULATORY STATE