Ref. Ares(2017)829676 - 15/02/2017
EUROPEAN COMMISSION
DIRECTORATE GENERAL
ECONOMIC AND FINANCIAL AFFAIRS
Brussels, 15/2/2017
EASE OF DOING BUSINESS
THEMATIC DISCUSSIONS ON GROWTH AND JOBS
Note for the Eurogroup
1
The business regulation and quality of public administration is one of the main areas of
structural reforms through which countries can improve their economic outcomes.
Importantly, improving the "ease of doing business" or cutting "red tape" is – to a large extent
– accomplished through measures that imply no, or a limited, budgetary cost while they may
provide significant benefits. This is a priority of the Commission's work notably through the
better regulation agenda, the third pillar of the investment plan, and it is a prominent area in
the multilateral surveillance in the context of the European Semester. The Five Presidents'
Report has identified business environment as one of the priority areas to look at in the
second stage of EMU deepening. The subject has also received renewed attention recently at
the international level, not least as part of the G20's Enhanced Structural Reform Agenda.
"Promoting competition and an enabling environment" is one of the priority areas identified
under the Agenda. The Recommendation in the context of the 2017 European Semester on
the economic policy of the euro area explicitly refers to the issue and calls on euro area
Member States to “Prioritise reforms that increase productivity, improve the institutional and
business environment, remove bottlenecks to investment, and support job creation.”1 The
Commission has provided a systematic review of investment challenges at national level.2
While this agenda is important for all EU Member States, it is particularly relevant for the
euro area with a view to making progress on convergence and facilitating a smooth
functioning of monetary policy.
1.
The economic argument for improving business regulation and quality of public
administration
Improving the business regulation and quality of public administration is an important
part of policy strategies aimed at boosting growth and employment. The euro area faces
weak potential growth. The crisis lowered
Graph 1: Low productivity growth in the euro area
capital growth, through a steep fall in
investment, as well as labour supply, through
higher structural unemployment. But the
110
recession also casted a long shadow in the
105
EA19
euro area in terms of weak productivity
100
performance, with unfortunate consequences
EU28
in terms of living standards, competitiveness,
95
US
and sustainability of public and private debt.
In the period 2000 - 2015, total factor
productivity (TFP) in the US increased by
Source: European Commission
9.5% while in the euro area it increased by
only 3% (Graph 1). Policy measures to improve the business regulation and quality of public
Total Factor Productivity
(2000=100)
1
The July 2016 Eurogroup asked the EWG to work further on three key areas of relevance to investment (i.e.
the efficiency of public administration, the business environment and sector-specific regulatory bottlenecks)
with a view to the elaboration of common principles and subsequently on possible benchmarking. A discussion
on common principles for investment is foreseen for the April Eurogroup.
2
Note for the Eurogroup, Thematic discussion on investment in the euro area, 6 July 2016.
2
administration are part of the structural reform strategy necessary to revitalise the
convergence process and close the gap in TFP performance vis-à-vis the US.
The administrative and regulatory burden is one of the main barriers to investment.
Available quantitative studies, including by the Commission, show that a supportive business
environment is essential to boost investment. A review of case studies by the European
Investment Bank finds that regulation can affect investment both in terms of higher costs and
higher risks.3 Indeed, administrative burdens or other regulatory costs (e.g. adapting business
processes to meet requirements, payments for licensing fees, etc.) can raise investment costs.
Similarly, the cost of investing is higher when regulation is fragmented across geographical
or product markets. Changes over time in regulation, or in its enforcement, can generate
uncertainty increasing the risks of investing in a given economy.
The business regulation and quality of public administration also have an important
impact on firm entry, exit and growth as well as productivity and profitability.
Productive resources such as labour and capital are channelled towards their most efficient
use in competitive markets. Barriers to competition can prevent the reallocation of resources
(capital, labour), enabling inefficient firms to survive while hampering the growth of efficient
companies. They therefore undermine the so-called Schumpeterian process of creative
destruction which is at the root of innovation and productivity gains in modern economies.
Related to this, US firms are more likely to expand or contract, while European firms are
more likely to stay the same size.4
An enabling business climate is of particular importance in a monetary union as it
fosters resilience. Resilient economic structures imply that Member States have a low
vulnerability to shocks and/or a high degree of flexibility to adjust to economic shocks. In the
absence of the possibility of nominal exchange rate adjustment, a performant business
environment can foster the reallocation of capital and labour in response to asymmetric
shocks. In turn, structural rigidities can significantly slow down the speed of adjustment as
measured, for instance, by the change in the output gap. Differences in business environments
may result in different responses to symmetric shocks, which could make monetary policy
less effective, in particular if monetary policy is constrained by the zero lower bound.
A performant business environment can boost growth and resilience through different
channels. Many of these channels relate to the economy's capacity to reallocate capital and
labour resources across sectors and firms. Some tend to be more important for specific stages
of the firms' life-cycle while others are more generic (for instance, the quality of public
administration and tax authorities). Market flexibility facilitates the reallocation of resources
across firms and sectors in case of shocks and is therefore critical to ensure an effective
adjustment capacity. This is particularly important for euro area Member States, which do not
3
EIB (2016), "Breaking down investment barriers at ground level; Case studies and other evidence related to
investment barriers under the third pillar of the Investment Plan for Europe".
4
See A. Bravo-Biosca (2011), "A look at business growth and contraction in Europe", JRC, European
Commission.
3
have the shock absorption capacity of the nominal exchange rate in case of country-specific
shocks. Euro area countries with a more enabling business environment experienced a
stronger post-crisis recovery (Graph 2). A range of empirical studies confirm the positive
effect of the business environment on resilience.5 Furthermore, large heterogeneity in terms
of business regulation between euro area Member States hampers not only individual
Member State economies, but also the functioning of the Single Market and the overall
growth prospects of the euro area.
Graph 2: Business environment and resilience in the
euro area
SK
Recovery from pre-crisis peak (%)
20
15
LT
IE
LV
EE
10
5
ES
0
FR
SI
-5
DE
BE NL AT
PT
FI
IT CY
LU
-10
-15
-20 EL
-25
60
65
70
75
80
85
Ease of doing business in 2010
Source: European Commission, World Bank.
The expected gains of an improved
business environment are significant.
Commission calculations6 have shown
that improving the ease of doing business
contributes to GDP increase. For example,
if Member States were to reduce the costs
of entry and close half of the gap with the
three best EU performers, this could lead
to sizeable GDP gains. Moreover, the
combined impact of product market
reforms (higher competition in services
sector and lower entry costs) for the euro
area countries would be about 1.5% of
euro area GDP within a 10 year horizon.
Note: Recovery from pre-crisis peak stands for the % difference
from the maximum value in 2007-2008 to 2016 in real Gross
National Income per capita. MT is missing as the data on ease
of doing business are not available for 2010.
2.
How does the Euro Area perform: an indicator-based comparison
The euro area as a place to do business has been steadily improving. The Doing Business
indicator (provided by the World Bank) exhibits a clear upward trend, with many countries
improving over the period measured (see Graph 3 and Box 1). The biggest improvement was
made by Slovenia. The graph also shows the rapid catching up of those non-euro area
Member States that acceded since 2004 with, in particular, the Czech Republic, Croatia,
Poland and Romania showing large improvements. However, on average, the business
5
Cf. Ziemann, V. (2013), "Do structural policies affect macroeconomic stability?", OECD Economics
Department Working Paper, No. 1075.
6
See Varga and In 't Veld (2014), "The potential growth impact of structural reforms in the EU; A
benchmarking exercise", European Economy Economic Papers, No. 541. The authors investigate the potential
growth impact of a wide variety of structural reforms. In particular, they investigate the impact of entry costs
using Doing Business data and apply a distance-to-frontier approach by assuming that half of the gap vis-à-vis
the average of the three best EU performers is closed. Also see the Single market integration and
competitiveness report 2016 from the European Commission.
4
environment remains less supportive in the euro area than in the US, but also Singapore and
New Zealand.
There are significant differences between EU Member States, and the best performers
are non-euro area countries (graph 4). The best performing EU country is Denmark, which
is third on the list worldwide behind New Zealand and Singapore. The United Kingdom and
Sweden are on respectively the seventh and ninth place. The best performing euro area
country is Estonia on the twelfth place.
Graph 3: Doing Business - The EU is closing the
gap towards the best performance
Graph 4: Doing Business - There are significant
differences between Member States (situation in
2017)
Source: World Bank (2017) released at the end of 2016.
Note: A higher value of the distance to frontier indicator
means a better performance. Country group scores are
simple, non-weighted averages.
5
Source: World Bank (2017)
Note: A higher value of the distance to frontier
indicator means a better performance.
Box 1: Measuring business regulation and quality of public administration
Indicators can help identify best practices and potential areas for improvement but
caveats apply. There is a wide variety of indicators that provide an indication of how well
countries perform in terms of their institutional and business environment. All such indicators
are however subject to important caveats and in-depth country-specific analysis is necessary
before drawing policy conclusions.
The World Bank's Doing Business indicators are amongst the best known and most
used.1 The World Bank provides comparable measures of several elements of business
regulation: starting a business, dealing with construction permits, getting electricity, registering
property, getting credit, protecting minority investors, paying taxes, trading across borders,
enforcing contracts and resolving insolvency. The indicators are available for 189 countries
and are updated on an annual basis. The latter is a key advantage compared to, for example,
the OECD's Product Market Regulation indicators, which are updated only every five years.
The crucial caveat is that most Doing Business indicators refer to a case study scenario of a
domestic SME operating in the largest business city of the country and may therefore not be
fully representative of the situation on the ground. Indeed, in many Member States subnational actors have an important impact on shaping the ease of doing business, which can
complicate the reading of nation-wide indicators.2 Also, because of its visibility among
investors and international community in general, some Member States have been tempted to
include as a (policy) target to improve the position in the Doing Business ranking.
1. Next to the World Bank's Doing Business and OECD's Product Market Regulation project, other sources are available such as
Global Competitiveness Report from World Economic Forum and the Economic Freedom project from Fraser Institute.
2. The Commission (in cooperation with the World Bank) will perform an analysis on the ease of doing business at the
subnational level in 7 countries in 2017-2019: Bulgaria, Czech Republic, Hungary, Portugal, Romania, Slovakia and Croatia. The
results for Bulgaria, Hungary and Romania are to be ready in June 2017. Reports for Slovakia, Czech Republic and Portugal are
planned in 2018 and for Croatia in 2019.
In general, countries doing well on one dimension also tend to do well on other aspects
of business regulation and quality of public administration. However, there are
exceptions and even for the well-performing countries there is scope for further improvement
on specific items (Table 1). This is shown by the Member States' relative performance on
each of the dimensions on 1 June 2016 (marked by the colour), as well as the direction in
which its relative performance has developed over the period 2015-2017 (marked by the
arrow).
Most room for improvement in the euro area can be found in the categories getting
credit, protecting minority investors and enforcing contracts. These dimensions have an
impact on possibilities to start and expand a business, provide security for investors and
reduce the cost of market transactions. Improving these policy areas would contribute to a
well-functioning financial system and a predictable and accessible judicial system (see annex
I).
6
Starting a
business
Dealing with
construction
permits
Getting
electricity
EA Countries
Austria
Belgium
Cyprus
Estonia
Finland
France
Germany
Greece
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Portugal
Slovak Republic
Slovenia
Spain
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Non EA Countries
Table 1: Doing Business - Heat map (2015-2017)
Bulgaria
Croatia
Czech Republic
Denmark
Hungary
Poland
Romania
Sweden
United Kingdom
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Getting credit
Protecting
minority
investors
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Registering
property (2016
methodol ogy)
methodol ogy)
Trading across
borders
Enforcing
contracts
Resolving
insolvency
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Paying taxes (Ol d
Source: European Commission staff calculations based on World Bank Doing Business indicators.
Note: The frontier is attributed a score of 100 to which other countries' performance is compared. A higher
value hence indicates a better performance. The colours refer to the values on 1 June 2016: Orange refers to a
value below 71, yellow to a value between 71 and 79 and green to a value above 79. The arrows show the
evolution between 1 June 2014 and 1 June 2016.
3.
Firms' perception of business regulation and quality of public administration in
Europe7
Further insights into the business environment can be derived by directly asking firms
about their experiences. In 2015, the European Commission carried out a large-scale survey
that asked firms a wide variety of questions on their perception of obstacles related to the
business environment in their country of operation. Four themes can be identified, related to
(1) quality of public administration, (2) starting a business, (3) obstacles to the activity of the
company, and (4) quality of the tax administration. Graph 5 shows the fraction of respondents
per country perceiving obstacles.
7
This section is based on the large-scale Flash Eurobarometer survey (number 417) on the business environment
and quality of public administration among firms in the 28 EU Member States, conducted by TNS Political &
Social. The field work was carried out in Spring 2015. The survey covers 10,603 firms, including companies
from different size classes (SMEs as well as large firms) and age categories, and operating in various sectors.
Firms' views are asked on many different aspects of the business environment and public administration.
7
Graph 5: Survey results: Firms' perceptions on business environment
Obstacles to starting a business
.4
obstacle
UK
SE
DK
CZ
BG
HU
HR
RO
PL
EE
FI
LV
NL
SI
LU
DE
LT
AT
PT
MT
BE
FR
SK
IE
CY
EL
ES
IT
SE
DK
BG
CZ
UK
RO
HU
PL
HR
0
EE
MT
LU
LT
IE
FI
LV
AT
NL
PT
SI
BE
DE
CY
FR
ES
IT
SK
EL
0
.2
.2
obstacle
.4
.6
.8
.6
Obstacles related to quality of public administration
EA
Non EA
EA
Non EA
Obstacles related to quality of tax administration
SE
DK
UK
BG
PL
CZ
RO
HU
HR
Non EA
FI
EE
IE
MT
NL
LT
LU
PT
LV
AT
SI
CY
IT
EL
DE
FR
SK
ES
BE
SE
DK
UK
CZ
HU
BG
RO
HR
PL
EA
0
EE
FI
LU
NL
IE
LT
MT
LV
SI
AT
DE
BE
FR
SK
CY
PT
IT
ES
EL
0
.1
.2
.2
.3
obstacle
.4
obstacle
.6
.4
.5
.8
Obstacles to the activities of the company
EA
Non EA
Source: ECFIN calculations based on Flash Eurobarometer 417.
Note: A lower value indicates a better performance. The indicator is the fraction of respondents reporting an
obstacle (so for example a value of 0.2 means with 20%).
The cross-country differences are substantial. For example, regarding the quality of public
administration, about 20% of respondents from Estonia and Luxembourg were dissatisfied as
against about 60% of respondents from Greece. This implies that there are substantial
improvements to be achieved from the exchange of good practices. Whereas countries doing
well on one indicator also tend to do well on other aspects, there are exceptions and even for
the well-performing countries there is scope for further improvement on specific items.8
SMEs have the perception to face barriers, in particular in the euro area (graph 6). This
is not surprising as larger companies will often have more capacity to deal with “red tape”.
Moreover, the cost (in terms of time and finances) of regulatory compliance is – to a certain
extent – fixed and thus represents a relatively heavier burden on smaller companies. Also, it
8
The survey data sometimes yields different results than the data from the World Bank Doing Business project.
For example, Luxembourg is not performing very well according to the World Bank Doing Business, whereas
the picture emerging from the Eurobarometer survey is much more positive. There are various potential reasons
for the discrepancy, including the different focus and sampling strategies, and implementation lags not wellcaptured by the Doing Business methodology. In addition the scope of the survey does not include access to
finance while this is covered by the World Bank Doing Business. This underlines, all the more, the need to
interpret the indicators with caution and the need for in-depth country-specific analysis (such as for example in
the Small Business Act factsheets) before drawing policy conclusions.
8
has been found that the efficiency of public administration has an impact on the growth of
firms, both in terms of employment and the share of high-growth firms.9
Finally, young firms are somewhat more positive on the business environment than
older firms. Except in tax administration, young firms have a positive perception of the
quality administration and starting a business. This could reflect the fruits of recent reforms.
Graph 6: Survey results, by firm size class
.6
.4
.5
obstacle
.2
.3
obstacle
.4
.7
Obstacles to starting a business
.5
Obstacles related to quality of public administration
large medium small
micro
large medium small
EA
micro
medium large
Non EA
small
micro
EA
large
Non EA
.3
obstacle
.2
.4
.5
obstacle
.6
.4
Obstacles related to quality of tax administration
.7
Obstacles to the activities of the company
micro medium small
large medium small
micro
EA
small
large medium micro
large medium small
Non EA
EA
micro
medium large
micro
small
Non EA
Source: ECFIN calculations based on Flash Eurobarometer 417.
Note: A lower value indicates a better performance. Micro-enterprises have up to 10 employees; small
enterprises have up to 50 employees; medium-sized enterprises have up to 250 employees; and large firms have
more than 250 employees. The indicator is the fraction of respondents reporting an obstacle (so for example a
value of 0.2 means with 20%).
4.
Policy implications
Differences in business environment among euro area countries may have a substantial
impact on growth and resilience to shocks. Such differences undermine the cohesion of the
common currency area and its resilience to shocks, notably making monetary policy less
effective.
9
See European Competitiveness Report 2014, Commission Staff Working Document SWD(2014)277 final,
European Commission.
9
Despite continuous improvement in the euro area Member States, there remains
substantial scope for further progress through mutual learning and an exchange of
good practices, while taking into account the importance of country-specific conditions.
It is particularly notable that several non-euro area EU Member States as well as the United
States, on average, tend to score better on comparative indicators than euro area countries do.
Efforts to improve the business environment should generally be comprehensive to be
effective. In general, Member States with a less supportive business environment tend to
perform poorly on many of its dimensions. In addition to the importance of obstacles to
starting a business and scaling up, the business environment is also shaped by the quality of
public administration and tax authorities. Furthermore, benefits from reforming the business
environment also depend on whether labour and financial markets can effectively support the
gains in activity resulting from a better business environment.
Special attention to specific groups of firms (e.g. young firms, fast growing firms, SMEs)
in reform design can be effective, as long as negative side-effects (such as growth traps)
are avoided. The survey has shown that the reporting of obstacles at least partly depends on
firm characteristics (age, size). Indeed, scaling up of firms is often mentioned as one of the
weak points in EU.
Action is needed both at Member State and EU level. Examples of EU action include the
work on the completion of the Single Market (including the Digital Single Market), and the
Start-up and Scale-up initiative. The European Semester and country-specific
recommendations can help Member States in their reform activities to further strengthen the
business environment (see annex 2).
Despite action taken in recent years by some Member States, in particular by euro area
countries heavily hit by the crisis, it is noticeable that the policy areas of business
regulation and quality of public administration are generating a high number of
country specific recommendations in the context of the Semester, but they are also
among the areas with the lowest rate of policy responses. This is all the more a source of
concern because inefficiencies in public administration and an unfavourable business
environment are also the most frequent barriers to investment. In order to address the
implementation gap in this area it is therefore important for Member States to accelerate the
pace of structural reforms, adopt comprehensive packages of measures and put in place
existing best practices from their peers when relevant. The European Commission is also
taking actions to enhance technical assistance to support Member States in the
implementation of reforms.
10
Box 2: Good practices from member states
Estonia
An active reform agenda by the Estonian government has contributed to the creation
of a business friendly environment, which is also confirmed by the positive opinion
of firms reported in the overall WB Doing business indicator and Eurobarometer
survey. Estonia made starting a business simpler by allowing minimum capital to be
deposited at the time of company registration (2016). Getting credit was improved
by amending the Code of Enforcement Procedure and allowing out-of-court
enforcement of collateral by secured creditors (2011). Amendments to Estonia’s
insolvency law increased the chances that viable businesses would survive
insolvency by improving procedures and changing the qualification requirements
for insolvency administrators. The new government is proceeding with major
changes which are currently discussed and are expected to be soon adopted. Many
of these changes are to favour enterprises, such as: the zero bureaucracy programme
(although already ongoing); and the bureaucracy-free form of entrepreneurship for
small businesses.
Finland
The results of WB Doing Business and the Eurobarometer survey reflect the already
relatively good business environment which the government has further improved.
The Finnish government has implemented several measures to increase
entrepreneurship and support start-ups. To promote the growth of innovative firms,
the government has considerably increased the availability of loan and export
guarantee resources for the SMEs. In order to ensure that regulatory burdens on
business will not grow, a one-in, one-out rule for the new and revised legislation
was introduced in the beginning of 2017. The government has set up an impact
assessment board to review legislative proposals and the impact assessments which
accompany them. Also, in order to improve competition and reduce regulation in
retail, the shop opening hours were liberalised as of 2016.
Questions for discussion
1. Which areas for reform of the business environment do Members States consider most
important, especially in the context of adjustment to shocks in the monetary union?
Do members recognize the priorities identified in the note?
2. Which area(s) of business regulation and quality of public administration would be
most suitable for the development of common principles in a future discussion?
3. Do Member States agree that efforts to improve different dimensions of the business
environment are complementary to reforms in other fields such as labour and financial
markets? What are Member States' experiences with comprehensive reforms?
11
ANNEX 1: A CLOSER LOOK INTO SELECT SUB-AREAS OF EASE OF DOING BUSINESS
The getting credit indicator measures the legal rights of borrowers and lenders with respect
to secured transactions (strength of legal rights index) and the reporting of credit information
(depth of credit information index). It measures whether certain features that facilitate
lending exist within the applicable collateral and bankruptcy laws. New Zealand and the
United States are the world's best performers on the indicator and they are closely followed
by Latvia (7th place). By contrast, in other Euro area countries, performance is much weaker.
For example, Belgium, Luxembourg, Malta, Portugal and Slovenia are not included in the top
100.
The protecting minority investors indicator measures the protection of minority investors
from conflicts of interest, and shareholders’ rights in corporate governance. New Zealand and
Singapore are the world's best performers on the indicator closely followed by Slovenia and
Ireland (9th and 13th place). Here again, performance is much weaker for many other euro
area countries such as Luxembourg, the Netherlands, Portugal and the Slovak Republic and
Finland.
The enforcing contracts indicator measures the time and cost for resolving a commercial
dispute through a local first-instance court and the quality of judicial processes, evaluating
whether each economy has adopted a series of good practices that promote quality and
efficiency in the court system. South Korea and Singapore are the world's best performers on
the indicator while in the euro area Lithuania is the best performer with an 6th place
worldwide. On the other hand of the spectrum of the euro area, Cyprus, Greece and Slovenia
fall outside the top 100.
This ranking may provide some useful insights, however, more analysis would be necessary
before any conclusions can be drawn.10
10
For example, the relatively low value of Luxembourg on the getting credit indicator originates i.a. in the fact
that Luxembourg has no credit agencies (which is one of the criteria applied by the World Bank).
12
ANNEX 2: COUNTRY-SPECIFIC RECOMMENDATIONS FOR 2016-2017
The table below summarises the Country-Specific Recommendations (CSRs) as identified by
the 2016 European Commission Communication on the European Semester, Country-specific
recommendations.
Policy areas
Access to finance
Competition & regulatory framework
Competition in services
Business environment
Insolvency framework
Public administration
Civil justice
Shadow economy & corruption
AT
BE
CY
DE
EE
ES
FI
FR
EA countries
IE
IT
LT
LU
LV
MT
NL
PT
SI
SK
BG
CZ
DK
Non-EA countries
HR HU PL RO
SE
UK
CSR
Source: European Commission (2016), "Communication from the Commission to the European Parliament, the
European Council, the Council, the European Central Bank, the European Economic and Social Committee, the
Committee of the Regions and the European Investment Bank – 2016 European Semester: Country-specific
recommendations", Brussels, 18.5.2016 COM(2016) 321 final.
Note: the table does not include Greece which is subject to a macro-economic assistance programme.
13