Mutual Recognition in Goods and Services: An Economic Perspective

Mutual recognition is a remarkable innovation facilitating economic intercourse across borders. In the EU's internal goods market it has been helpful in tackling or avoiding the remaining obstacles, namely, regulatory barriers between member states. However, there is a curious paradox. Despite the almost universal acclaim of the great merits of mutual recognition, the principle has, in and by itself, contributed only modestly to the actual realisation of free movement in the single market. It is also surprising that economists have not or hardly underpinned their widespread appreciation for the principle by providing rigorous analysis which could substantiate the case for mutual recognition for policy-makers. Business in Europe has shown a sense of disenchantment with the principle because of the many costs and uncertainties in its application in actual practice. The purpose of the present paper is to provide the economic and strategic arguments for employing mutual recognition much more systematically in the single market for goods and services. The strategic and the 'welfare' gains are analysed and a detailed exposition of the fairly high information, transaction and compliance costs is provided. The information costs derive from the fact that mutual recognition remains a distant abstraction for day-to-day business life. Understandably, verifying the 'equivalence' of objectives of health and safety between member states is perceived as difficult and uncertain. This sentiment is exacerbated by the complications of interpreting the equivalence of 'effects'. In actual practice, these abstractions are expected to override clear and specific national product or services rules, which local inspectors or traders may find problematic without guidance. The paper enumerates several other costs including, inter alia, the absence of sectoral rule books and the next-to-prohibitive costs of monitoring the application of the principle. The basic problems in applying mutual recognition in the entire array of services are inspected, showing why the principle can only be used in a limited number of services markets and even there it may contribute only modestly to genuine free movement and competitive exposure. A special section is devoted to a range of practical illustrations of the difficulties that business experiences when relying on mutual recognition. Finally, the corollary of mutual recognition - regulatory competition - is discussed in terms of a cost/benefits analysis compared to what is often said to be the alternative, that is 'harmonisation', in EU parlance the 'new approach' to approximation. The conclusion is that the manifold benefits of mutual recognition for Europe are too great to allow the present ambiguities to continue. The Union needs much more pro-active approaches to reduce the costs of mutual recognition as well as permanent monitoring structures for its application to services ( analogous to those already successfully functioning in goods markets). Above all, what is required is a 'mutual recognition culture' so that the EU can better enjoy the fruits of its own regulatory ingenuity.