Efficiency or Obfuscation? Comment on
“Mutual Recognition” by Jacques Pelkmans
Manfred J. Holler*
September 17, 2010
Abstract:
In this comment on Jacques Pelkmans’s paper it is argued that the New Approach to European
Standardization (NAES), with its two very diverse components of mutual recognition (MR)
and security, health, environment and consumer protection (SHEC) can be explained by the
fact that the accountability for the corresponding policy is allocated to the national level. The
governments and the representing bureaucrats try not to be held responsible for measures that
are not popular (i.e. objected by a large number of voters). One solution to this problem is a
form of obfuscation as a result of delegating the decisions on regulations to the invisible hand
of a market. The other solution is harmonization when regulation (as motivated by SHEC) can
be justified by cause-effect reasoning based on scientific technological experience.
*
Institute of SocioEconomics, University of Hamburg, Von-Melle-Park 5, D-20146 Hamburg, Germany, and
Public Choice Research Centre (PCRC), Turku, Finland. holler@econ.uni-hamburg.de.
1
1. Obfuscation, the result of a success story?
The New Approach to European Standardization (NAES), laid out in the European
Commission’s Green Paper of October 1990, stipulates that, in general, standards will no
longer be decided upon by the European Commission in conjunction with the Council.
Instead, the Commission is meant to establish standards (a) with the help of European
standardization bodies, (b) via providing direct or indirect incentives to companies which
should apply standards and should contribute to the financing of the standardization process,
and (c) with the support of the national standardization bodies. The mutual recognition (MR)
of national regulations on product specifications and of decisions of the European Court of
Justice (ECJ) concerning the goods market can be considered as an implication of NAES.1
It could be argued that by renouncing the Old Approach that relied on detailed
harmonization, the Commission of the European Communities has shed its influence on
standardization in Europe to a large degree and has handed over its responsibilities to fairly
independent bodies such as the CEN (Comité Européen de Normalisation), CENELEC
(Comité
Européen
de
Normalisation
Electrotechnique)
and
ETSI
(European
Telecommunications Standards Institute). The introduction of MR is a further step in this
direction. In Goerke and Holler (1998), taking a public choice perspective, we asked why the
Commission should have engineered this deprivation of formal power in European standardization? Why does the Commission rely on the interaction of nominally independent
agents in organizing European standardization when it seems a relevant hypothesis to assume
that these agents act, at least predominantly, in their own interest or in the interest of those
who they are funded by? Is MR an adequate instrument to bring the internal goods market
closer to efficiency despite the self-interested agents in the standardization game? Does
regulatory competition work as competition on goods markets is supposed to work? Does it
enhance efficiency?
Or is NAES just an instrument of the EU authorities, the Commission and the Council,
to dispose of the responsibility for European standardization - and also to avoid explicit
conflicts due to vested interests? If so, then the introduction of MR can be viewed as a means
of obfuscation in this policy arena.2 Government politicians could be at a disadvantage in
popularity and voting on the national level if they are held responsible for the standardization
1
In his figure 2, Pelkmans (this volume) relates regulatory MR to NAES only. See also figure 1, in Pelkmans
(2007).
2
For the public choice approach to obfuscation, see Magee et al. (1989), Magee (1997) and the various
contributions in Breton et al. (2007).
2
policy of the Commission and the Council, especially if the resulting harmonization is felt
tremendously inflexible and biased in favour of some (interest-) groups in the population. The
Old Approach, based on detailed (technical) standardization, was not very popular, sometimes
even subject to satire and jokes, and it was rather costly. In comparison, it appears that MR
obfuscation policy works properly, and the EC does very little to lift the veil. On the one
hand, it seems to give back some regulatory power to national institutions, on the other, it
seems not only to favour the market of regulations but also support competition between the
regulators and even on the internal goods market. But these effects are far from obvious. 3 For
instance, in a recent publication, Kerber and van den Bergh (2008) argued that MR leads to a
number of inconsistencies: Instead of preserving decentralized regulatory powers and
supporting regulatory competition, MR is primarily a path to convergence and harmonization.
But Pelkmans (this volume) concludes: “Mutual recognition is a great invention of the EU.”
Regulatory MR, “has been very successful over time…The combination of an even more
effective approach to existing barriers and an intrusive and targeted pre-emption policy for
future ones has effectively spared the single goods market from destructive erosion.” In
Pelkmans (2007, p.699), he even observes that MR “is rightly applauded as an ingenious
innovation by economists, lawyers and political scientists alike.” But in this paper, he also
talks of disillusions. Some sources of these disillusions are also being discussed in this
volume. Pelkmans (this volume, p.8 in ms) points out that “in actual practice, when shipments
arrive at a border or in harbours, civil servants or inspectors will typically focus on the
detailed specifics in their national laws, presumably that is even their routine instruction or
impulse.” This procedure may create substantial transaction costs and a high degree of
uncertainty.
Transaction costs and uncertainty also result from EU performance standards. It is not
always obvious how prescribed performance can be achieved by technical specification, and
what happens to the product if the performance standard changes? However, as Pelkmans
(this volume) observes, “a company is, even with the flexible performance standard, still free
to construct 'around' the standard (though it needs to acquire certification from a so-called
Notified Body, assigned to fulfil these tasks).”
Then, issuing regulations is also a risky and perhaps rather costly project for national
bodies. As described by Pelkmans (this volume), there is a notification procedure and the
working of the Notified Bodies adds to costs and uncertainty – and accommodates to the
In fact, even the notion of MR is unambiguously defined. “Reading the literature on mutual recognition…one
quickly gets the impression that mutual recognition is many things to many people” (Pelkmans, in his volume).
3
3
vested interests of bureaucracy.4 This system is “topped up by an intrusive and stringent
notification system (with tough sanctions in case of non-notification, emerging from firm
rulings by the ECJ), close monitoring by the Commission of failures to notify, detailed
scrutiny of draft laws of Member States by a special Committee chaired by the Commission,
and…automatic or semi-automatic suspension of the national legislative process for periods
varying from 3 months to as much as 18 months, dependent on the need for remedies and
their nature.”
Other problems, like the qualification of the equivalence of regulatory objectives, a
cornerstone of MR, are not discussed in detail, but one should wonder about how this can be
accomplished irrespective of the conditions given by a specific situation. As values change,
equivalence is subject to changes, too. Again there are information costs and costs of
uncertainty. It will be argued below that uncertainty results in substantial efficiency losses. Of
course, these losses are difficult (or impossible) to quantify, however, this does not mean that
they do not exist and they could be substantial. However, there should be uncertainties that
matter to the value of the good and some that do not, just as there are standards that have an
impact on the costs of production and use of the product, and some that do not, depending on
the composition of the good. However, what determines the composition of a good and the
value of its components? How is the value of a good affected by standardization?
2. Decentralisation and efficiency
The standard argument in favour of decentralisation (e.g., of federalism) is the diversity of
preferences. It cannot be gainsaid that in an abstract general equilibrium model utilitarian
welfare is likely to be larger if there are more than one alternative made available and
preferences are diverse. However, for instance, Pierre Salmon (1987) argues in favour of
decentralization even when differentiation in preferences does not matter; in fact, in his
theoretical analysis he explicitly abstracts from such a differentiation to “purify” his
argument. He discusses the constitutional reform of 1982-83 in France that introduced
“parliamentary” sub-central government on the level of regions and departments and
formalized the influence of the communes to overall political outcome, but his analysis also
“Early 2009 there were more than 2100 Notified Bodies whereas the sector estimates that somewhere between
500 and (max.) 1000 such Bodies can be viable given the workload in the market. This number must imply that
many Bodies would not pass a serious peer review for the quite numerous specialisations indicated, since the
high qualifications of specialized staff and the differentiated, often expensive equipment generate minimum cost
levels, in turn demanding sufficient scale, before being able to break even. Eventually, this led to incidents and
mistakes, undermining the confidence needed for MR of the certificates” as Pelkmans (this volume) observed.
This led to creation of an accreditation system for Notified Bodies, and additional transaction costs.
4
4
applies to multi-level regulatory competition including standardization policy.5 The driving
force of his argument is competition. The idea is that competition operates through local (or,
in the international context, domestic) political responsibility that expresses itself in votes and
incumbency and in mobility, i.e., “voice and exit” in terms of Albert Hirschman’s notorious
categories of participation in hierarchies.
Mobility of firms could matter when it comes to regulatory competition over
standards, and as consequence the political agents could be afraid of a poorer economic record
for their constituency. But, in the end, it is the voice that is said to control the agents in the
political agenda (if voice cannot be constrained by a dictatorial environment). In a democratic
political arena all voices (the press, rallies, “orator corners,” interest-group support, etc.) boil
down to voting. The competition about votes is seen as the final institution that sanctions past
performance and decides on future personnel, and thus motivates the incumbent to take care
of the preferences of the voters and the voters’ rating of the incumbent’s performance, of
course, evaluated with reference to these preferences. Even if the preferences of the voters are
single-peaked and the most preferred positions of the voters can be arranged in a onedimensional space so that the median-voter theorem applies, the political equilibrium is in
general not welfare maximizing if welfare is measured by utilitarian social welfare function
and the vote distribution is not symmetric. (This is the case if mean of the vote distribution
differs from the median.) Moreover, the median-voter theorem presupposes the competition of
two alternatives only. If there are more than two alternatives or if there are more than one
dimension, or if preferences are not single-peaked, then an equilibrium may not exist and the
selected outcome (e.g., the regulation) will be path dependent and in many cases
unpredictable. The potential of strategic voting might add to the complexity of the situation,
but successful strategic voting requires forecasting alternative outcomes – which might not be
possible in the case that an equilibrium does not exist or there is a multitude of equilibria.
If the median-voter theorem does not apply, then the incumbent agency runs the risk to
get defeated in voting by whatever platform it proposes. Not to be identified with any
platform (i.e., obfuscation) is a possibly successful strategy in this case. Preferences on
standards show intransitivity and cyclical patterns and proposed regulations are not likely to
be evaluated by single-peaked preferences in a one-dimensional space. Moreover, failure in
standardization can be salient and thus have an impact on the performance rating of an
institution that can be made responsible, while a smooth working of standardization will
hardly augment the rating of this institution. A policy that gets the invisible hand of regulatory
See Trachtman (2000) for a reference to Salmon’s model, discussing the mechanisms of jurisdictional
competition in the context of regulatory policy.
5
5
competition involved, and thus limits the incumbents’ accountability, looks like an elegant
way to overcome this asymmetry. Yet who are the agents in this competition and who
determines the rules and what are they? Pelkmans’s contribution to this volume demonstrates
that regulatory competition still misses the invisible hand story that we like to tell for goods
markets.
3. Uncertainty and inefficiency
The above suggests that a first-best approach to regulatory competition does not deliver
arguments to support its introduction. While the public choice analysis supports its
implementation, there still might be welfare arguments in favour of it. More specifically, MR
can be interpreted in Coasean terms: MR is meant to reduce transaction costs as no detailed
standardization is necessary if SHEC is not involved. European regulation can fall back on
national regulations and the equivalence of their performance. And it is the equivalence rule
that allocates the “property rights” of the national regulatory agents and the importing and
exporting firms, perhaps to the disadvantage of domestic suppliers, as Kerber and van den
Bergh (2008) argued. However, the Coasean reasoning is about efficiency, and not about
distribution, and it seems quite an achievement that rights and obligations are assigned.
Moreover, one could argue that a disadvantage that a domestic supplier has on his homemarket is balanced by the advantage it experiences on the external markets. Moreover, the
asymmetry supports the argument that MR “constitutes a powerful instrument to enhance the
contestability of markets” (Cervone, 2005, p.433). But contestability is not an issue in
Pelkmans’s contribution to this volume.
The message of Coase theorem is: Given (property) rights are well defined and
transaction costs are zero, then contracts can be signed between the parties involved so that
even in the case of externalities an efficient allocation prevails. We already argued that MR
implies a shift of standardization costs but not necessarily a minimization. The total costs of
national regulations can be substantial. Less obvious are the effects of an increase of
uncertainty that goes along with NAES and MR, as pointed out above. In can be easily shown
that in the case of uncertainty the Coase theorem does not work.6 Indeed, Medema and Zerbe
(2000) claim that uncertainty in a contract arrangement is a form of transaction costs. The
obfuscation policy may reduce political costs and MR may be neutral with respect to the sum
For a simple toy example that demonstrates the “failure” of the Coase theorem in case of uncertainty, see Illing
(1992).
6
6
of direct costs of standardization, although we argued differently above, the corresponding
uncertainty and coordination problems could increase inefficiency substantially.
To illustrate the coordination, we will discuss a simple strategic choice situation in the
form of a game that tries to mimic the effects of uncertainty on MR and standardization. In
fact, the game has the form of a stag-hunt game. Let’s assume there are two national
regulatory agencies, 1 and 2, and each of them can choose between the two pure strategies
“voluntary harmonization” (VH) and “national regulation” (NR). Of course, mixed strategies
of the form (p, q) are also possible. Here, p and q represent the probabilities that agencies 1
and 2, respectively, choose their first strategies, i.e., VH. The payoffs that result for each pair
of strategy choices are given in matrix 1. Note that agency i (i = 1, 2) can guarantee itself a
value of 3 by choosing NR (within the MR framework) if the conditions of SHEC and
equivalence of regulatory objectives are satisfied. If agency j  i fails to deliver regulatory
objectives that are equivalent, as j goes for VH, and agency i chooses NR that satisfies the
European rules relevant for MR, then j will achieve a rather poor outcome.
Agency
“voluntary harmonization” (VH)
“national regulation” (NR)
VH
(5,5)
(0,3)
NR
(3,0)
(3,3)
2
1
Matrix 1: A stag-hunt regulation game
Obviously, the game in matrix 1 has two Nash equilibria in mixed strategies whereby the
equilibrium (VH, VH) strictly Pareto dominates the equilibrium (NR, NR). A result that finds
both agencies choose VH, i.e. “voluntary harmonization,” should be the deal. However, under
the umbrella of obfuscation and accompanying uncertainty (NR, NR) cannot be rejected as a
possible outcome. Imagine that the veil of ignorance is very thick and the agents take refuge
in the principle of insufficient reason that proposes equal probabilities for VH and RH, then
the expected utilities of choosing VH and NR are 2.5 and 3, respectively. Given this, NR is
the utility maximizing choice.
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If the veil of ignorance is less thick and agency 1 expects that agency 2 will choose
VH with a probability q > 1/2, then 1 will choose VH if q > q*. Hereby q* is the probability
such that the expected utilities of choosing VH and NR are equal. In the numerical example of
matrix 1, we get q* = 3/5. Similarly we can calculate p* = 3/5 such that agency 2 chooses VH
if it expects that 1 chooses VH with probability p > p*.7 Therefore we can expect an efficient
result (VH, VH) if both p > p* and q > q* apply. In addition to efficiency, (VH, VH)
represents a (strict) Nash equilibrium and therefore none of the agencies has an incentive to
choose otherwise, given the strategy choice of the other one.
This example illustrates that the more obfuscation and uncertainty the less likely an
efficient outcome will result if the game in matrix 1 describes essential features of a
regulatory market as assumed here.
4. Conclusion
In the above I have argued that NAES with its two very diverse components of MR and
SHEC can be explained by the fact that the accountability for the corresponding policy is at
the national level. The governments and the representing bureaucrats try not to be held
responsible for measures that are not popular (i.e. objected by a large number of voters). One
solution to this problem is a form of obfuscation induced by delegating the decisions on
regulations to the invisible hand of a market. The other solution is harmonization when
regulation can be justified by cause-effect reasoning based on scientific technological
experience. SHEC standardization is in the quiver of latter perspective. I am not sure that this
conclusion concurs with the “rationale, logic and application in the EU internal goods market”
that Jacques Pelkmans promises in the subtitle of his paper. However, it could contribute to
solve what Pelkmans called a “curious paradox.” He notes: “It has turned out to be difficult to
get MR accepted with all its consequences, despite the almost universal acclaim of its great
merits. The widespread recognition on its own has neither led to a sweeping liberalisation of
the internal market, whether in goods or services, nor to much of a deeper analytical economic
understanding” (Pelkmans, 2003, p.1).
References (as yet not standardized)
7
As a consequence (p*, q*) describes the mixed strategy (Nash) equilibrium of the game in matrix 1.
8
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