It’s the Legal System

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February 2, 2022
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As previously noted, my previous role was at a large, French, company and to say the least I was not encouraged to say anything good about Brexit, so as a result I said remarkably little other than to suggest that investing on the basis of the economic disaster confidently predicted by so many in the Remain camp was even more foolish than investing on the basis of their regular economic forecasts. However, now that the UK has finally left and the emotions are hopefully starting to die down, there is one very important observation (imho) to share, and it is this; the primary difference between the UK and most of continental Europe and the root cause of the friction while the UK was in the EU can be traced back to a single institutional factor, the different legal systems.

Put at its simplest, the UK system of common law basically says, “these things are forbidden, everything else is allowed. Knock yourself out, give it a go”. By contrast the Justinian or Napoleonic system takes the opposite approach and says “These things are allowed, everything else is forbidden. You can only do something new and different if you are given permission to do so”. It doesn’t take a genius to work out which system is likely to be more innovative and creative, not least because the person a European will be asking permission from to do something different and innovative is likely to be some kind of lawyer, who usually has no upside from the decision, only downside. Although George W Bush never actually said “The French don’t have a word for Entrepreneur” the point remains that start ups and innovation in Europe are harder because of the legal system and the need to get permission at every stage.

Not surprising then that the more entrepreneurial individuals in Europe are attracted to the UK – and London in particular. We know it’s not the weather! Equally the antipathy of many in the UK to the EU can be seen as a reaction to the difference in approach as bureaucracy (home grown just as much as European) sought to impose an ever increasing list of things that were forbidden while accumulating unto itself the power to direct people’s lives and behaviours. Continental Europeans are used to ignoring rules they don’t agree with or finding judges to over-rule them, the British are not, not least because many European countries were at some time or other part of a foreign empire. In Greece for example it was considered almost a patriotic duty not to pay tax when Greece was part of the Ottoman Empire and given the estimated current size of the black economy in Greece (>25% of GDP) it doesn’t look like much has changed in a century. The British by contrast have an equally long tradition of obeying the rule of (common) law. Instead of ignoring or trying to bypass the system, they respect the system, while simultaneously resenting it.

Ultimately this difference of legal systems sets the limits for the size of the state. The real point of this is to say that this key institutional difference is not going to change from either side after Brexit and if anything it is likely that the difference will become even more stark, if, as is hoped, the tide of regulation is halted and then reversed in the UK. For those interested in long term growth prospects this is far more important than any short term trade deals.

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