1

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

Ref. Ares(2017)829676 - 15/02/2017

2

95

100

105

110

Total Factor Productivity (2000=100)

EA19

EU28

US

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

capital growth, through a steep fall in

investment, as well as labour supply, through

higher structural unemployment. But the

recession also casted a long shadow in the

euro area in terms of weak productivity

performance, with unfortunate consequences

in terms of living standards, competitiveness,

and sustainability of public and private debt.

In the period 2000 - 2015, total factor

productivity (TFP) in the US increased by

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

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.

Source: European Commission

Graph 1: Low productivity growth in the euro area

3

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.

4

BE

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-25

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-5

0

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10

15

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60 65 70 75 80 85

Re

cove

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rom

pre

-cri

sis

pe

ak (

%)

Ease of doing business in 2010

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.

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.

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.

Source: European Commission, World Bank.

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.

Graph 2: Business environment and resilience in the euro area

5

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.

Source: World Bank (2017)

Note: A higher value of the distance to frontier

indicator means a better performance.

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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 sub-

national 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).

7

Table 1: Doing Business - Heat map (2015-2017)

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.

Starting a

business

Dealing with

construction

permits

Getting

electricity

Registering

property (2016

methodology)

Getting credit

Protecting

minority

investors

Paying taxes (Old

methodology)

Trading across

borders

Enforcing

contracts

Resolving

insolvency

Austria ↗ ↗ ↗ ↗ → → ↗ → → ↗

Belgium ↗ ↗ ↘ ↗ → → ↘ → ↘ ↗

Cyprus ↗ ↗ ↗ ↗ ↗ → ↗ → ↗ ↗

Estonia ↗ ↗ ↘ ↘ → → ↗ → → ↗

Finland ↗ ↘ ↗ ↗ → → ↗ → → ↗

France ↗ ↗ ↗ ↘ → → ↗ → → ↗

Germany ↗ ↗ ↗ ↗ → → ↘ → ↘ ↗

Greece ↘ ↘ ↘ ↗ → → ↘ → → ↗

Ireland ↗ ↗ ↗ ↗ → ↗ ↘ → → ↘

Italy ↗ ↗ ↗ ↗ → → ↗ → ↗ ↗

Latvia ↗ ↘ ↗ ↗ ↗ → ↗ → ↗ ↗

Lithuania ↗ ↗ ↗ ↗ → ↗ ↘ → → ↗

Luxembourg ↗ ↗ ↗ ↗ → → → → → ↘

Malta ↗ ↗ ↗ ↘ ↗ → ↘ → → ↗

Netherlands ↗ ↗ ↗ ↗ → → ↘ → ↗ ↗

Portugal ↗ ↗ ↗ ↗ → → ↗ → → ↗

Slovak Republic ↗ ↗ ↗ ↗ → → ↗ → → ↗

Slovenia ↗ ↗ ↗ ↗ → → ↘ → ↗ ↗

Spain ↗ ↗ ↗ ↗ → ↗ ↗ → ↗ ↗

Bulgaria ↗ ↗ ↗ ↗ → → ↘ ↘ → ↗

Croatia ↗ ↗ ↗ ↗ → ↗ ↘ → → ↗

Czech Republic ↗ ↗ ↗ ↗ → → ↗ → → ↗

Denmark ↗ ↗ ↗ ↗ → → → → → ↗

Hungary ↗ ↗ ↗ ↘ → → ↗ → ↗ ↗

Poland ↗ ↗ ↗ ↘ → → ↗ → → ↗

Romania ↘ ↘ ↘ ↘ → → ↗ → → ↗

Sweden ↗ ↗ ↗ ↗ → → ↘ → ↗ ↗

United Kingdom ↗ ↗ ↗ ↘ → → ↗ → ↘ →

EA C

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ntr

ies

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Graph 5: Survey results: Firms' perceptions on business environment

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 well-

captured 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.

0.2

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Obstacles related to quality of public administration

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MT

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SK IE CY

EL

ES IT SE

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UK

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PL

HR

Obstacles to starting a business

0.2

.4.6

.8

ob

sta

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EA Non EA

EE FI

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NL IE LT

MT

LV SI

AT

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PT IT ES

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Obstacles to the activities of the company

0.1

.2.3

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Obstacles related to quality of tax administration

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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

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.

.2.3

.4.5

ob

sta

cle

EA Non EA

large medium small micro large medium small micro

Obstacles related to quality of public administration

.4.5

.6.7

ob

sta

cle

EA Non EA

medium large small micro micro medium small large

Obstacles to starting a business

.4.5

.6.7

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large medium small micro small large medium micro

Obstacles to the activities of the company

.2.3

.4

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large medium small micro medium large micro small

Obstacles related to quality of tax administration

10

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.

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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?

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.

12

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).

13

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.

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.

Policy areas AT BE CY DE EE ES FI FR IE IT LT LU LV MT NL PT SI SK BG CZ DK HR HU PL RO SE UK

Access to finance

Competition & regulatory framework

Competition in services

Business environment

Insolvency framework

Public administration

Civil justice

Shadow economy & corruption

CSR

EA countries Non-EA countries