The Jean Monnet Program

Professor J.H.H. Weiler
European Union Jean Monnet Chair

Jean Monnet Working Paper 9/01

Catherine Barnard and Simon Deakin

Market Access and Regulatory Competition

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The Jean Monnet Working Papers are published under the auspices of the
 Jean Monnet Program 
hosted at Harvard Law School from 1995 to 2001
and now based at New York University School of Law

ISSN 1087-2221
 Catherine Barnard and Simon Deakin
Market Access and Regulatory Competition

Catherine Barnard and Simon Deakin*

Abstract

In this paper we consider some of the free movement jurisprudence of the Court through the lens of a law and economics analysis, with a view to considering how far this case law discloses a coherent approach to the question of regulatory competition.  We take as a starting point the premise that the EC rules on freedom of movement for goods and persons show some signs of converging around a principle of “market access”.  We then examine the relationship between the proposed market access principle and the concept of regulatory competition.  We argue that a move to market access would be helpful in clarifying the issues at stake over regulatory competition but argue that there is a risk that an unqualified market access principle might not achieve the benefits which regulatory competition is meant to bring about.  We then examine the relationship between regulatory competition and other areas of EC policy making, including harmonisation Directives and other forms of policy intervention such as the open method of coordination (OMC).  

This paper was first delivered at a workshop on “The Legal Foundations of the Single Market: Unpacking the Premises” held in Cambridge on 27-28 April 2001 and sponsored by the British Academy and the Centre for European Legal Studies at Cambridge.  The proceedings of the workshop are to be published by Hart Publishing in 2002 in a book edited by C.Barnard and J.Scott.

1. Introduction

It seems that the EC rules on freedom of movement for goods and persons show some signs of converging around a principle of “market access”.  According to this principle, national legal measures which have the effect of either preventing or seriously hindering access to the home market (or a relevant part of it) from another Member State would either be per se illegal or would have to be justified by a version of the “rule of reason”.  It has been argued that by displacing the confused and fragmented case-law which has emerged when applying the non-discrimination principle, a market access test would not only introduce greater doctrinal coherence into a currently confused area of law; but it could also create a space for more effective regulatory competition within the EC.  
The purpose of this paper is to examine in more detail the relationship between the proposed market access principle and the concept of regulatory competition.  We argue that a move to market access would be helpful in clarifying the issues at stake over regulatory competition. At the same time we question whether an unqualified market access principle would achieve the benefits which regulatory competition is meant to bring about.  On the contrary, unless the emerging economic jurisprudence of the Court addresses legitimate concerns about the effects of the market access principle on Member State autonomy, the market access test will struggle to gain acceptance.  
Our focus on regulatory competition may need some justification.  The stated aim of the EC rules on free movement is not regulatory competition, but market integration.  In so far as they promote market access, the free movement rules also have the effect of protecting what can be seen as fundamental rights in the economic sphere.  The debate over regulatory competition, by contrast, is concerned with arrangements for rule-making and the division of powers between state-level bodies and transnational entities, an apparently separate set of issues.
On closer inspection, however, it becomes clear that market access and regulatory competition are two sides of the same coin.  Within a federal constitutional framework (or in a transnational entity such as the EC), mobility of economic resources is one of the first preconditions for the emergence of a market in legal rules.  When courts review laws of Member States against criteria of how far such laws obstruct, or promote, economic mobility, they are necessarily defining the scope and nature of regulatory competition.  Their approach to market access will therefore have profound implications for the nature of the law-making process and for the content of legal rules in a variety of substantive areas as well as for the division of powers, and the doctrines of preemption and subsidiarity.  Given the importance of the issues at stake, it would be preferable if these considerations were to be more clearly articulated by the courts as part of a market access test.  This would engender a more meaningful debate on the effects of free movement jurisprudence and its relationship to other areas of EC policy making, including harmonising Directives and other forms of policy intervention such as the open method of coordination (OMC).  As part of this debate, it should be possible to set more coherent limits to the market access principle than has hitherto been the case.
In developing this argument we outline in section 2 the theoretical foundation of regulatory competition, the so-called pure theory of decentralised law-making, and draw out its legal implications.  We then move on in section 3 to a closer examination of the predominant conception of regulatory competition in practice, which we refer to as the model of “competitive federalism”, and examine its implications for the market-access test. We find that decisions which make adequate sense when expressed in the customary doctrinal language of free movement and market integration often appear inconsistent when seen through the lens of competitive federalism. In section 4 we argue that much of the difficulty stems from problems with the idea of “competitive federalism”, and we consider alternative approaches, both in respect of legislation and judicial intervention, which acknowledge space for diversity in rule-making between the Member States.  Section 5 concludes.

2. Regulatory competition: theoretical underpinnings

The term “regulatory competition” refers to a process whereby legal rules are selected (and de-selected) through competition between decentralised, rule-making entities (which could be nation states or other units such as regions or localities).  Three justifications are normally given for regulatory competition: firstly, it allows the content of rules to be matched more effectively to the preferences or wants of the consumers of laws (citizens and others affected); secondly, it promotes diversity and experimentation in the search for effective legal solutions; and thirdly, by providing mechanisms for preferences to be expressed and alternative solutions compared, it promotes the flow of information on effective law making. 
In Tiebout’s influential formalisation of this idea, the mechanism through which competition operates is mobility of persons and resources across jurisdictional boundaries.  In his “pure theory” of fiscal federalism, local authorities compete to attract residents by offering packages of services in return for levying taxes at differential rates.  Consumers with homogenous wants then “cluster” in particular localities.  The effect is to match local preferences to particular levels of service provision, thereby maximising the satisfaction of wants while maintaining diversity and promoting information flows between jurisdictions.
Tiebout’s model can be applied to laws since they, like public services, have the character of what economists refer to as indivisible public goods, that is to say, they cannot easily be priced individually because of issues of non-excludability. Hence collective consumption is more cost-efficient.  Laws, then, are seen as products which jurisdictions supply through their law-making activities, in response to the demands of consumers of the laws, that is, individuals, companies and other affected parties.  If supply and demand can be brought into equilibrium, then, in the terminology of welfare economics, static or allocative efficiency will be maximised.  This is another way of saying that the wants or preferences of the various parties will have been satisfied to the greatest possible extent. 
At the heart of this conception of regulatory competition is decentralisation.  The process cannot work unless effective rule-making authority is exercised by entities operating at a devolved or local level.  It is argued that a centralised or “monopoly” regulator would, by contrast, behave like any other monopoly; contrary to the normal laws of supply and demand, the price of the product goes up while the quantity supplied diminishes, so driving a wedge (a “social cost”) between an optimal economic outcome and what actually occurs.  To avoid this outcome implies conferring law-making powers on lower-level units, subject only to the principle that there must be some level below which further decentralisation becomes infeasible because of diseconomies of scale.  
Perhaps the best known case of regulatory competition is the so-called Delaware effect in US corporations law. Over 40% of New York stock-exchange-listed companies, and over 50% of Fortune 500 companies, are incorporated in Delaware.  Some commentators have argued that Delaware’s success in attracting such a high level of company incorporations has been achieved by lowering standards.  As Cary has famously argued, when coining the term “race to the bottom” about Delaware, the state has gained its pre-eminence in the corporate charter market due to its ability to attract incorporations favourable to managers at the expense of shareholders.  He claimed that corporate standards were deteriorating, particularly in respect of fiduciary duties, leading to the rights of shareholders vis-à-vis management being watered down to “a thin gruel”. As part of this process, Delaware, “a pygmy among the 50 states prescribes, interprets, and indeed denigrates national corporate policy as an incentive to encourage incorporation within its borders, thereby increasing its revenue”.  To counter this, Cary proposed the enactment of a Federal Corporate Uniformity Act, allowing companies to incorporate in the jurisdiction of their own choosing but removing much of the incentive to organise in Delaware or its rival states.  
Although some EC company lawyers have supported harmonisation precisely in order to avoid a Delaware style “race to the bottom”, the idea that Delaware law represents a lowest common denominator has been challenged by accounts which argue that any attempt by managers to downgrade shareholder interests would, over time, lead to a hostile response by the capital markets.  Managers therefore have an incentive to incorporate under the law of a state which favour shareholder interests since “[s]tates that enact laws that are harmful to investors will cause entrepreneurs to incorporate elsewhere”.  If this is the case, “Delaware attracts incorporations not because its laws are lax, but because they are efficient”.  Thus, some commentators argue that Delaware has so perfected the art of matching its laws to the demands of the users of those laws that it has won the race to the top.  In general, while the claim that Delaware company law is efficient remains much disputed, it is generally agreed that regulatory competition need not, necessarily, imply a degradation of standards.  
In terms of the legal framework required, the pure theory envisaged by Tiebout is clearly opposed to harmonising measures which aim to impose uniform laws on local jurisdictional entities.  These laws would simply obstruct the spontaneous movement to equilibrium of the forces of supply and demand.  However, it is less often noticed that the pure theory is ambivalent with regard to centralised judicial review of national-level regulation.  This is because, in a perfectly competitive market for legal rules, it would be enough for the courts formally to guarantee the right of free movement on the part of the consumers of laws.  In the somewhat unrealistic world imagined by the pure theory, the correct response to a legislature which, for example, banned the advertising of alcohol (as in GIP), or which insisted on applying its own minimum wage legislation to foreign workers on its territory (as in Rush Portuguesa), would be for the factors of production to decide whether or not to quit that state for one which provided a more appropriate regulatory regime.  Hence voters who were unhappy with a state’s alcohol advertising ban would exit to what they regarded as a more congenial legal regime, while labour-only subcontractors would shun a country which applied its labour standards in an over-rigid way.  
Taking the process back one stage, such laws could be avoided in the first place in so far as their negative effects imposed a potential cost on legislators in the jurisdictions adopting them.  If such laws reduced the wealth of the citizens of the country concerned, legislators would, it is presumed, have an incentive to avoid adopting them (this would be the case if the well-being of the legislators was linked to the well-being of the country in some way).  On the other hand, it might well be the case that citizens (and legislators acting on their behalf) prefer to pay the price for having high standards in areas of product safety and social policy.  They may prefer, in other words, to trade off a part of national wealth in return for social redistribution or environmental protection.  If this is the case, there is nothing in the pure theory to say that they should not have the right to do so.  A federal judicial body should no more prevent the exercise of local-level sovereignty by striking down such laws, than a federal legislature should seek to occupy the field at their expense.
As we have seen, in the world of the pure theory, freedom of movement is assumed for the purpose of setting up the formal economic model.  The model does not aim to explain the institutional underpinnings of mobility (such as the mechanics of the principle of non-discrimination, and the (federal) legislation to facilitate free movement).  Instead, the model is aimed at showing that, given an effective threat of exit, spontaneous forces would operate in such a way as to discipline states against enacting laws which set an inappropriately high (or low) level of regulation.  The model can, however, be used as a benchmark against which to judge institutional measures aimed at instituting regulatory competition.  Since, in the “real” world, mobility of persons and of non-human economic resources is self-evidently more limited than it is in the world of pure theory, two prerequisites for making exit effective may be identified: legal guarantees of freedom of movement for persons and resources, and application of the principle of mutual recognition.  In addition, it is accepted that some unwanted side effects of competition (“externalities” or spill-over effects of various kinds) may arise, thereby giving rise to an efficiency-related argument for some harmonisation, although there is in general a presumption against federal intervention and in favour of allowing rules to emerge through the competitive process.  Thus the task of analysis, in this approach, becomes that of identifying how far the “real world” departs from the pure theory, and using legal mechanisms to realign the two. This is the approach to regulatory competition which is generally characterised as competitive federalism.

3.	Competitive Federalism and Market Access in the EU

3.1	  The Logic of Competitive Federalism in the EU

The logic of competitive federalism appears to lend support to a strong, substantive version of market access and to a wide principle of mutual recognition. Legal guarantees of mobility for persons and resources would maximise the disciplinary effects of exit.  Hence, a strong version of market access should in principle apply to the right of free movement of persons and to the right of freedom of establishment and to supply services.  However, this alone is not sufficient.  Even with strong legal guarantees of free movement, linguistic, cultural and other practical “barriers” to movement on the part of people and organisations could be expected to persist, at least in the context of the EU (by comparison to the culturally more homogenous USA). Nevertheless, migration may still have a powerful effect.  It may be sufficient for a few, “marginal” consumers to make (or be prepared to make) the move in order for a disciplinary effect to arise.  Another possibility is “selective regulatory migration”. This occurs where persons are free to adopt the laws of a particular Member States for selected purposes.  In essence the Delaware effect is an illustration of this – an enterprise can choose to be bound by just one aspect of Delaware law (its corporations law) while remaining subject to the laws of other member states in relation, for example, to employment law or product liability.   
In practice, regulatory competition within the EC does not rest on migration alone.  Given the practical barriers to free movement within the EC, in general, it is easier (or, less costly) for goods to move to persons rather than the other way round: therefore, free movement of goods acts as a proxy for free movement of persons.  Thus the Cassis principle, by requiring the receiving or “host state” to open its markets to goods legitimately produced in any other Member State (the “home state”), provides a vital additional mechanism for subjecting laws to the forces of regulatory competition.  This is the essence of “mutual recognition”.  Consumers in the host state now have a choice of goods produced under different regulatory regimes.  Competition between goods produced under different legal systems means, in effect, that the laws of those systems are thrown into competition with each other too.  
Nevertheless, if applied without any qualification, there is the danger that mutual recognition would lead to a race to the bottom, and to a deregulation of standards. If State A, with high standards, is obliged to admit goods from State B with low standards, State A could well be forced to lower its standards to enable its national industries to compete with imported goods on its own domestic market and also on foreign markets.  Proponents of deregulation might argue that this result is desirable, since it represents a spontaneous outcome driven by the operation of a market for legal rules.  However, in a situation where the process was triggered by judicial intervention, the argument for spontaneity is a weak one.  Furthermore, such a race risks leading ultimately to uniformity at the bottom.  Thus, as we shall see, a strong market access test undermines the possibility for diversity at national level which is considered one of the strengths of competitive federalism.
The danger of a race to the bottom is acknowledged within EC law on free movement.  One restraint on race to the bottom is the principle of reverse discrimination.  State A can insist that its own manufacturers produce goods to the higher standards for the domestic market while being obliged to admit State B’s goods made to a lower standard.  Consumers then have the choice to purchase the cheaper, inferior quality goods or the more expensive, superior quality goods. 
	Stronger protection against a race to the bottom is derived from the presence of justifying factors for state-level laws, such as the derogations provided for in the Treaty and the “mandatory requirements” discussed in Cassis and the subsequent case-law.  The mandatory requirements idea, and its equivalents in the cases of freedom of movement of workers and services and freedom of establishment, allow Member States themselves to set a “floor” to the competitive process, subject, however, to the need to satisfy a “rule of reason” test combined with the concept of proportionality.  The mandatory requirements principle allows a degree of autonomy in national law-making to be preserved and sets some ground rules for regulatory competition, without the need to resort to centralised standard-setting through harmonisation.  However, the success of this approach depends on how, in practice, the principle is interpreted and applied.  If it is applied too strongly, Member States will use mandatory requirements as a cover for laws protecting local interests against competition.  If it is interpreted too loosely, a court-induced race to the bottom may still ensue.
How far, then, do the current EC rules on free movement match up to the logic of competitive federalism?  In practice, two issues must be resolved.  The first relates to the notion of “access to the market”.  Is access to be understood in a formal sense or a substantive sense?  The second issue concerns justifications and derogations.  We ask how far will the Court allow a Member State to take advantage of a justifying factor, and how stringently it will review the national measure in question by reference to the proportionality test.  We now turn to a more detailed examination of these questions, beginning with the concept of access.

3.2		Formal v. substantive access to the market

Tests for determining access to the market can be either formal or substantive.  By formal market access, we mean a test which asks whether the formal conditions of entry and exit are met.  If any such formal barriers exist they must be removed.  Thus, according to the formal market access approach it is sufficient that the goods be allowed onto the foreign market, irrespective of how difficult it is in practice for those goods actually to be sold once they have gained access to that market.  By contrast, the substantive sense of the notion of market access focuses on these very practical difficulties experienced once the goods have penetrated the market, and requires that these be eliminated.  To give an example, the formal approach to market access would require a German rule banning the importation of French Cassis into Germany to be struck down.  The substantive approach would require not only formal access of French cassis to the market (the removal of the import ban) but also, potentially, the elimination of any quality requirements that the French cassis would have to comply with.  
	We suggest that it is possible to detect in the Court of Justice’s jurisprudence, albeit not clearly articulated, a spectrum of possibilities between these two senses of the test.  

Category 1: substantive access required, discrimination irrelevant

At one end of the spectrum there are cases in which the Court favours a strong version of market access, according to which all goods and persons should have substantive, and not simply formal, access to the markets in other Member States.   Any national regulation which impedes market access is contrary to the Treaty.  This version of market access does not depend on showing any form of discrimination.  As Advocate General Jacobs said in Leclerc: 
a test of discrimination  … seems inappropriate.  The central concern of the Treaty provisions on the free movement of goods is to prevent unjustified obstacles to trade between Member States.  If an obstacle to inter-state trade exists, it cannot cease to exist simply because an identical obstacle affects domestic trade. 
With this substantive approach, the emphasis is on direct and substantial hindrance to market access.
	This approach can be seen particularly clearly in the cases of Bosman and Alpine Investments.  When considering the rules concerning transfer fees in Bosman, the Court said:
	It is sufficient to note that, although the rules in issue in the main proceedings apply also to transfers between clubs belonging to different national associations within the same Member State and are similar to those governing transfers between clubs belonging to the same national association, they still directly affect players’ access to the employment market in other Member States and are thus capable of impeding freedom of movement for workers. (emphasis added).
In Alpine, a case concerning a ban on cold calling in the financial services industry, the Court, having noted that the measure was non-discriminatory, said the national measure “directly affects access to the markets in services in the other Member States and is thus capable of hindering intra-Community trade in services”.  Similarly, in Schindler the Court ruled that while a ban on holding national lotteries was non-discriminatory, foreign service providers were denied access to a new market from which they could gain new customers.  In all three cases, the burden of demonstrating the existence of a justifying factor then passed to the defendant, usually the Member State.  
Centroscan also be understood as a case in which the Court struck down a rule on the grounds that it substantively impeded market access.  Here, a Danish company registrar refused to register a branch of Centros Ltd., a company incorporated in the UK, so as to enable it to carry on business in Denmark.  At first sight, this looks like a clear case of formal access being denied, the access being that of Centros Ltd. to the Danish market.  What was really at stake, though, was the access of Mr. and Mrs. Bryde, the founders of Centros Ltd., to incorporation procedures of UK company law.  The Brydes incorporated Centros Ltd. in England  for the purpose of avoiding the Danish law relating to minimum capital requirements for privately-held companies.  Apparently they never intended that Centros Ltd. would trade in the UK.  This was the reason given by the company registrar for his decision; to allow Centros Ltd. to trade in Denmark would be to condone an abuse of Danish company legislation.  
In finding that the registrar’s decision contravened the principle of freedom of establishment under Article 43 (subject to the possibility of justification), the Court assumed that a substantive barrier to the exercise by Mr. and Mrs. Bryde of the right to incorporate their business in the UK was sufficient for it to be intervene.  Thus, this was not a case of a formal barrier to access.  The Brydes were not formally prevented from incorporating Centros Ltd. in the UK.  It was simply that the decision to deny them the right to trade through Centros Ltd. in Denmark removed the (substantive) benefit of doing so.  Nor was Centros a case in which a test of non-discrimination was applied.  Centros, then, is not the equivalent for freedom of establishment of the Cassis test of mutual recognition in respect of free movement of goods; it goes beyond Cassis by adopting a test of market access which is at the category one, extreme end of the approaches adopted by the Court.
The substantive approach to market access guarantees maximum exit, or at least the threat of exit, which provides one of the conditions for the operation of competitive federalism.  At the same time, the substantive approach is potentially the most damaging for maintaining national diversity (and the processes of national, democratic law-making) since it requires the removal of the national measure which impedes market access.  Perhaps for this reason, it is often coupled with a generous approach to the definition of justifying factors, as we shall see in more detail below. 

Category 2: substantive access and a discrimination test, with a presumption of hindrance to market access

One step down from category 1 are cases where the Court applies the discrimination test and assumes that if there has been discrimination (direct or indirect) then there has been a hindrance of market access which needs to be justified.  This category covers the majority of (older) cases decided on free movement of goods and persons.  In the context of goods, the requirement of market access underpins the Dassonville formula which defines measures having equivalent effect.  The Court said:
	All trading rules enacted by Member States which are capable of hindering, directly or indirectly, actually or potentially, intra-Community trade are to be considered as measures having an effect equivalent to quantitative restrictions. 
The point is reinforced in Rau. Once the Court had identified that the national restriction (in casu that margarine should be packed in cubed-shaped containers) was an indistinctly applicable measure having equivalent effect, it said:
	Although the requirement that a particular form of packaging must also be used for imported products is not an absolute barrier to the importation into the Member State concerned of products originating in other Member States, nevertheless it is of such a nature as to render the marketing of those products more difficult or more expensive either by barring them from certain channels of distribution or owing to the additional costs brought about by the necessity to package the products in question in special packs which comply with the requirements in force on the market of their destination.
It then considered whether the restriction could be justified.  
Thus, these cases concern measures which are per se illegal: there is a presumption that the national measure constitutes a barrier to market access. Underpinning these cases is a strong sense of mutual recognition: that goods (qualifications, services) produced in one Member State are capable of being sold in another Member State.  While beneficial for encouraging regulatory competition, these cases again can have negative implications for national autonomy and for the preservation of state-level regulations, threatening a race to the bottom.  Moreover, where discrimination is present, unlike in category 1 (above), the Court tends to take a stricter line on justification, particularly in the fields of goods, workers and establishment.  

Category 3: a discrimination test, but no presumption of hindrance to market access

A further step down are cases in which the Court presumes that there is no hindrance to market access unless discrimination can be shown. This approach can be seen in respect of discriminatory selling arrangements.  In De Agostini the Court considered a Swedish ban on television advertising directed at children under 12 and a ban on misleading commercials for skincare products. It said that “it cannot be excluded that an outright ban, applying in one Member State, of a type of promotion for a product which is lawfully sold there might have a greater impact on products from other Member States” (paragraph 42).  It continued that while the efficacy of various types of promotion is a question of fact to be determined by the national court, “it is to be noted that in its observations De Agostini stated that television advertising was the only effective form of sales promotion enabling it to penetrate the Swedish market since it had no other advertising methods for reaching children and their parents”.  The Court continued that if such an unequal burden in law or fact was found then the national restriction was caught by Article 28 and the burden shifted to the Member State to justify it under principles similar to those in Cassis.  
Again, in GIP, the Court said that a ban on advertising (this time of alcoholic drinks) was “liable to impede access to the market by products from other Member States more than it impedes access to domestic products, with which consumers are instantly more familiar”.  It was therefore caught by Article 28.  It was for the national court to decide whether the public health derogation contained in Article 30 could be “ensured by measures having less effect on intra-Community trade”.
De Agostini and GIP suggest that in the case of discriminatory selling arrangements there is a presumption that there is no hindrance of access to the market and the national regulation should be allowed to stand (a per se legal approach).  The trader will then need to work hard to rebut this presumption, possibly by producing actual statistical or other evidence (as in De Agostini), to show that there has been an impact on his access to the market.
Thus, according to this (category three) approach, in order to preserve national diversity of regulatory standards, the market access test should mean that only discriminatory restrictions, namely directly or indirectly discriminatory measures (those having a different burden in law and fact or the same burden in law and different burden in fact), should be prohibited unless saved by a derogation or a mandatory requirement.  Non-discriminatory measures (those having an equal burden in law and in fact) which do not hinder access to the market (see category 4 below), by contrast, should not be subject to the review of the Court.  
One drawback of this approach is that litigants will increasingly argue for a broad construction of the concept of indirect discrimination to ensure that the contested national measure is in principle caught by the Treaty and subject to review by the Court.  This had already begun to happen in the pre-Keck Sunday trading cases where B&Q argued that the ban on Sunday trading had a greater impact in fact on foreign goods since more foreign goods than domestic goods were sold on Sundays.

Category 4: formal access test

At the other end of the spectrum are cases in which the Court applied a weak form of the market access test – what we term formal market access - without even getting to the stage of considering justifying factors. Keck and Graf provide examples of this approach.  In Keck the Court ruled that non-discriminatory restrictions on “certain selling arrangements” did not breach Article 28 provided the conditions laid down in paragraph 16 were satisfied.  The Court said, in paragraph 17, that such measures were not “by nature such as to prevent their [foreign goods’] access to the market or to impede access any more than it impedes the access of domestic products”.  A major difficulty with this ruling is both the extreme formalism involved in singling out the special category of “selling arrangements” and the assertion in paragraph 17 that certain selling arrangements did not prevent access to the market: certain non-discriminatory selling arrangements, such as a total ban on the sale of a particular product such as cigarettes, pornography, alcohol or illegal drugs, can be viewed as preventing access to the market.  Nevertheless, the Court has applied the ruling with enthusiasm.
	Graf concerned a German national who had worked for his Austrian employer for four years when he terminated his contract in order to take up employment in Germany.  Under Austrian law, a worker who had worked for the same employer for more than three years was entitled to compensation when his employment came to an end, subject to a proviso to the effect that the right would be forfeited if the employment was terminated on the worker’s own initiative (ie if the worker resigned, as opposed to being dismissed). Graf argued that the proviso contravened Article 39 because it constituted an obstacle to the free movement of workers. The Court disagreed. It said that the Austrian law was genuinely non-discriminatory and that:
	... it was not such as to preclude or deter a worker from ending his contract of employment in order to take a job with another employer, because the entitlement to compensation on termination of employment is not dependent on the worker’s choosing whether or not to stay with his current employer but on a future and hypothetical event, namely the subsequent termination of his contract without such termination being at his own initiative or attributable to him.

Such an event is too uncertain and indirect a possibility for legislation to be capable of being regarded as liable to hinder free movement for workers where it does not attach to termination of a contract of employment by the worker himself the same consequence as it attaches to termination which was not at his initiative or is not attributable to him…  
From these cases it can be seen that the goods in Keck had formal access to the French market; and the worker in Graf had formal access both to the German and Austrian labour markets.  What the individuals were complaining about was more substantive impediments to their market access.  In both cases such complaints fell on deaf ears. Hence in neither case could the applicants challenge the substance of the national legislation in question.  
In Graf, the distinction between formal and substantive notions of access is made particularly clear in the Opinion of Advocate General Fennelly.  He noted that, in Bosman, the Court had applied a test of whether “provisions… preclude or deter a national of a Member State from leaving his country of origin in order to exercise his right to freedom of movement”, and that in Gebhard the Court had talked of “national measures liable to hinder or make less attractive the exercise of fundamental freedoms guaranteed by the Treaty”. He, nevertheless, argued that these tests related “solely to the sorts of formal conditions of access to the employment market which were at issue in those…cases”.   He favoured a test under which “neutral national rules could only be deemed to constitute material barriers to market access, if it were established that they had actual effects on market actors akin to exclusion from the market. As in the case of rules regarding selling arrangements in the case of goods, there can be no presumption that neutral national commercial regulations, or those governing pay scales, social protection and other matters of concern to workers, have this effect.” 
As we have seen, the Court in Graf, relying on a number of pre-Keck cases, identified certain effects which were “too uncertain and indirect” to hinder free movement of persons.  Thus, the national employment legislation in question did not fall under the scrutiny of EC law and national diversity was maintained.  One aspect of Graf is that the rule in question was regarded as applying in a non-discriminatory manner.  In Keck, also, the Court identified non-discriminatory certain selling arrangements as another area which would never be subject to review.  As Advocate General Tesauro noted in Hünermund, the purpose of the Community rules in respect of the free movement of goods was to liberalise inter-state trade or and not to encourage the unhindered pursuit of commerce in the individual Member States. In these cases, then, the Court accepted that provided formal access to the market was permitted, it would not review other measures which might (more substantively) hinder market access. 
What marks out Graf and Keck as cases in which a test of formal market access was appropriate?  We have already noted the unsatisfactory aspects of the “selling arrangements” concept used in Keck.  In Graf, as we have seen, the Court concluded that any negative effect of the rule being challenged was too “uncertain and indirect”, a formula which itself does little to dispel uncertainty.  The Court argued that since it was uncertain that Graf would have received compensation upon the termination of employment in any event, for him to lose it by resigning his job to take up an employment in another Member State could not be said to be a sufficient deterrent to freedom of movement.  This prompts the question of what the Court would have decided had it been clearer that Graf would otherwise have qualified for compensation.  A rule which was discriminatory or which was non-discriminatory but substantially hindered access to the market would have been subjected to closer scrutiny.  
However, what more clearly sets Graf aside from decisions such as Centros is that Graf was claiming, in effect, for a kind of levelling up of labour standards.  The logic of his claim was that the standards of employment protection operating under the Austrian law on termination of employment should be raised in such a way as to make it easier for workers to exercise rights of entry and exit.  If this principle had been accepted, an inverted form of mutual recognition would have been established, under which Member States would have been required to come up to the standards of the most protective jurisdiction in relation to the treatment of migrant workers.  It is not surprising that the Court, faced with the invitation to initiate a forced “race to the top”, declined to do so, stressing instead the autonomy of Member States in the labour law field.  However, the resulting stress on formal access as the relevant test stands in stark contrast to the emphasis, in Centros, on ensuring that the substantive freedom of movement was protected.  
In comparing Centros and Graf, it is difficult to avoid the conclusion that the Court was content to accept a test of substantive market access when it came to striking down national level regulation, only to revert to a test of formal access when it would have had the effect of requiring Member States to level up to a higher degree of social protection.  Hence the difficulty with an open-ended, substantive market access test is that, in the words of Advocate General Fennelly, it will be “exploited as a means of challenging any national rules whose effect is simply to limit commercial freedom”.  By contrast, a more restrictive, formal access test has the merit of protecting national legislative autonomy: goods have access to the French market but they cannot be resold at a loss and workers can work in Austria and Germany but they cannot challenge the validity of national employment legislation under EC law.
To sum up the argument so far: the crucial determinants of a market access test are whether access is defined formally or substantively, and whether discrimination between nationals of the host state and those of other Member States is required for the Court’s intervention to be triggered.  Across the range of free movement cases, we find surprisingly little consistency in the approach of the Court; its decisions range all the way from those in which a substantive access test is coupled with the absence of a discrimination requirement, to those in which a formal access test is adopted.  These cases may be explained in part by historical accident and their place in the development of a complex jurisprudence by the Court of Justice.  Nevertheless, such explanations do not help with clarity.  This uncertainty is compounded when we look more closely at the Court’s approach to the application of justifying factors.

3.3		Justifying factors

As we have seen, if a substantive market access test is adopted (categories one to three), the focus shifts to justification.  In effect, while there is a presumption in favour of market access, this can be rebutted by the Member State demonstrating an overriding national or pubic interest.  This was of course the essence of the decision in Cassis de Dijon.  Having established the principle of mutual recognition, the Court said:
	Obstacles to movement in the Community resulting from disparities between the national laws relating to the marketing of the products in question must be accepted in so far as those provisions may be recognised as being necessary in order to satisfy mandatory requirements relating in particular to the effectiveness of fiscal supervision, the protection of public health, the fairness of commercial transactions and the defence of the consumer.
	In the context of services, the Court has adopted a similar approach.  In Gouda the Court said that national restrictions come “within the scope of [Article 49] if the application of the national legislation to foreign persons providing services is not justified by overriding reasons relating to the public interest or if the requirements embodied in that legislation are already satisfied by the rules imposed on those persons in the Member States in which they are established”.  The Court has recognised a much longer and fuller list of justifications in the context of workers and services than in goods and is more lenient in their application in respect of the more sensitive types of services.  For example, in Schindler the Court had to consider the UK’s justifications on a ban on holding national lotteries.  The UK pointed to its concerns about preventing crime and avoiding stimulating the gambling sector with damaging social consequences – all this at a time when the National Lotteries Act 1993 had been passed, a fact the Court had noted.  Nevertheless, the Court accepted these arguments at face value.  It said:
	Those particular factors justify national authorities having a sufficient degree of latitude to determine what is required to protect the players and, more generally, in the light of the specific social and cultural features of each Member State, to maintain order in society, as regards the manner in which lotteries are operated, the size of the stakes, and the allocation of the profits they yield. In those circumstances, it is for them to assess not only whether it is necessary to restrict the activities of lotteries but also whether they should be prohibited, provided that those restrictions are not discriminatory. 
	In goods, by contrast, the Court usually gives short shrift to arguments based on the national need to ensure consumer protection or public health.  It either finds that there is no such interest or, despite the fact that the case involves a preliminary reference, that the interest can be protected in a more proportionate manner.  Thus, in Heimdienst the Court considered national legislation under which bakers, butchers and grocers could “make sales on rounds in a given administrative district, such as an Austrian Verwaltungsbezirk, only if they also trade from a permanent establishment in that administrative district or an adjacent municipality where they offer for sale the same goods as they do on rounds”.  Having noted that the measure concerned a certain selling arrangement, it said that the national rule “in fact impedes access to the market of the Member State of importation for products from other Member States more than it impedes access for domestic products” and thus breached Article 28.  It then considered whether the national legislation could be justified under Cassis-type mandatory requirements such as the need “to avoid deterioration in the conditions under which goods are supplied at short distance in relatively isolated areas of a Member State”.  On the facts it found that the objective could be obtained by measures that had effects less restrictive of intra-Community trade such as by rules on refrigerating equipment in the vehicles used.  
	In respect of workers, the Court has also taken a restrictive approach to justification.  For example, in Bosman the Court recognised that non-discriminatory measures could be objectively justified but adopted a rigorous approach to the various justifications put forward by the football associations. For example, the football associations argued that in view of the considerable social importance of sporting activities, particularly football, in the Community, the aims of maintaining a balance between the clubs by preserving a certain degree of equality and uncertainty as to results and of encouraging the recruitment and training of young players had to be accepted as legitimate. However, the Court, while recognizing that some form of regulation was legitimate, supported Bosman’s contention that the application of the transfer rules was not an adequate means of maintaining financial and competitive balance in the world of football. Those rules neither precluded the richest clubs from securing the services of the best players nor prevented the availability of financial resources from being a decisive factor in competitive sport, thus considerably altering the balance between clubs.
The Court is also rigorous in its approach to justification in respect of establishment.  In Centros, the Court, having found that the case fell within the freedom of establishment principle, then went on to consider whether the Danish government could show that the refusal to register the branch was justifiable in the circumstances. The Danish government argued that the registrar’s action was intended to maintain Danish law’s minimum capital requirement for the formation of private companies.  The purpose of this law was:
first, to reinforce the financial soundness of those companies in order to protect public creditors against the risk of seeing the public debts owing to them become irrecoverable since, unlike private creditors, they cannot secure these debts by means of guarantees and, second, and more generally, to protect all creditors, public and private, by anticipating the risk of fraudulent bankruptcy due to the insolvency of companies whose initial capitalisation was inadequate.
The Court ruled that the justification offered was inadequate since, in the first place, “the practice in question is not such as to attain the objective of protecting creditors which it purports to pursue since, if the company concerned had conducted business in the United Kingdom, its branch would have been registered in Denmark, even though Danish creditors might have been equally exposed to risk”.  In other words, the registrar’s decision failed the proportionality test since it was inconsistent – the vital factor in his refusal was, it seems, the failure of the company to trade in the UK, but this was immaterial to the protection of creditors since they would have been no better off if the company had previously traded and, as a result, had been able to get its branch registered in Denmark.
There is a paradox in the Court’s approach to justifications.  The theory of competitive federalism places emphasis on the need for persons to gain unrestricted access to other national markets to ensure that competition between legal systems functions effectively.  According to the model, this would suggest a substantive approach to market access combined with restricted use of the justifications by the Member States.  As we have seen, however, this might produce the most damaging effects on the diversity of national laws.  Given the low numbers of people taking advantage of the free movement rules, for the reasons outlined above, this might be a price worth paying to ensure the successful functioning of regulatory competition.  The approach adopted by the Court in the context of free movement of workers and establishment could be justified by this kind of logic.  By contrast, since goods are more mobile than persons, there is less of a need for a substantive approach to market access in relation to free movement of goods and greater scope for a more lenient approach to the use of justifications by the Member States to preserve national regulatory diversity.  However, as we have seen, the Court’s case law tends towards the opposite result: it adopts a restrictive approach to the use of the justifications by the Member States in the context of goods, while allowing the Member States considerable latitude in raising public interest requirements in the context of services.  This difference in approach might be explained on political rather than economic grounds.  It is often difficult for the receiving state to control the activities of a temporary service provider. On the other hand, in the case of non-discriminatory certain selling arrangements the Court has identified an area in which national regulatory autonomy is preserved and protected entirely from judicial review. Although the precise reasoning used to do this in the Keck case has been much criticised, the approach taken by the Court makes sense according to the logic of regulatory competition which we have just outlined.
	Nevertheless, when a substantive test of market access is coupled with a restrictive reading of justifying factors, as in Centros, Heimdienst or Bosman, the likely result is a strong push from the Court in the direction of deregulation.  While it is possible to construct an argument for deregulation within the EU, it is also possible to put the opposite point of view, in favour of the maintenance of high regulatory standards; either way, the case should be argued on its merits and not dressed up in the language of market integration.  This is one difficulty with the model of competitive federalism, but it is not the only one.  Competitive federalism threatens to induce not so much a race to the top or to the bottom, but a race to uniformity which will undermine the benefits, in terms of diversity and experimentation, which regulatory competition is intended to capture, without guaranteeing that the result will necessarily be efficient.  
	This, above all, is the lesson of Delaware.  It is extremely difficult to judge whether or not the substance of Delaware law is more or less efficient than feasible alternatives.  What is clear, however, is that the success of Delaware has spawned numerous imitators, and that a high degree of uniformity in the law of the individual states has resulted from the state competition to attract incorporations.  This is in contrast to the diversity which continues to characterise European company law systems.  The paradox of competitive federalism, at least in its stronger forms, it that it undermines the possibility for diversity and hence for experimentation which is said to be one of the advantages of a market for legal rules over a system based on harmonisation of standards.  It may be that, if diversity is to be preserved, limits must be placed on the market access principle.  But this need not imply the end of regulatory competition, as the next section shows.

4.	Reflexive harmonisation and experimentalism: a means to balance market integration and national diversity in the EU?

The model of competitive federalism is one in which efficient rules are “selected” through the mechanism of competition between states to attract and retain the factors of production.  As we have seen, the conditions under which this market can be said to work perfectly are extremely exacting, and legal intervention is needed to bring about “second-best” solutions.  But while promoting market access, these legal interventions do, in their turn, threaten to undermine one of the other essential conditions for a market in legal rules, namely the possibility of diversity at state level.  It is in this context that rules limiting market access may be desirable, at least in the sense of restricting the scope allowed to concepts of substantive market access.  Thus, there is a role for the courts in ensuring that there is a space in which experminentation can occur.  We consider this below.  Equally important are regulatory or other legislative mechanisms which aim to preserve spaces for experimentation in rule-making, and which promote regulatory learning through the exchange of information between different jurisdictional levels.  This approach, which elsewhere we have termed “reflexive harmonisation”, can be seen operating in several contexts within the EU, most notably in the debate over the harmonisation of labour and company law and in the recent emergence of the “open method of coordination” (OMC) as a technique of regulation in economic and social policy.  We will briefly examine the way reflexive harmonisation works.
A number of economic justifications may be offered for harmonising legislation in the fields of labour and company law.  A case can be made for company legislation to establish a core of uniform rules which, because of network externality effects, may save on the transaction costs of company formation and thereby promote cross-border capital mobility.  In respect of employment protection, justifications range from the defensive goal of avoiding “social dumping” to the more proactive goal of promoting the efficient use of labour by ruling out low-productivity strategies of firms engaged in regulatory arbitrage between systems.  Directives of this kind have a complex relationship to regulatory competition.  They mostly set basic or minimum standards as a “floor of rights” which Member States must not derogate from, but upon which they may improve by setting superior standards.  These interventions, then, can be thought of as implicitly encouraging a “race to the top”, while ruling out less socially desirable forms of competitive federalism.  They encourage a process by which rules are selected not on the basis of the threat of exit by the factors of production, but through mutual learning by states: legislators may observe and emulate practices in jurisdictions to which they are closely related by trade and by institutional connections.  
In this context, it is not inaccurate to speak of “reflexive harmonisation” by analogy to the idea of reflexive law.  The essence of reflexive law is the acknowledgement that regulatory interventions are most likely to be successful when they seek to achieve their ends not by direct prescription, but by inducing “second-order effects” on the part of social actors.  In other words, this approach aims to “couple” external regulation with self-regulatory processes.  Reflexive law therefore has a procedural orientation.  What this means, in the context of economic regulation, is that the preferred mode of intervention is for the law to underpin and encourage autonomous processes of adjustment, in particular by supporting mechanisms of group representation and participation, rather than to intervene by imposing particular distributive outcomes.  This type of approach finds a concrete manifestation in legislation which seeks, in various ways, to devolve or confer rule-making powers to self-regulatory processes.  Examples are laws which allow collective bargaining by trade unions and employers to make qualified exceptions to limits on working time or similar labour standards, or which confer statutory authority on the rules drawn up by professional associations for the conduct of financial transactions.
A procedural orientation also implies an important difference in the way in which the law responds to market failures or externalities from the way in which it is normally represented in the law and economics literature.  Reflexive regulation does not seek to “perfect” the market, in the sense of reproducing the outcome which parties would have arrived at in the absence of transaction costs (the so-called “hypothetical bargaining” standard).  This is partly because it is understood that information problems facing courts and legislatures make the process of identifying an “optimal” bargaining solution extremely hazardous.  It is also because of a perception that the essence of competition is that it is a process of discovery or adaptation, rather than the achievement of optimal states or distributions.  
In the context we are considering here, this implies a particular role for the transnational harmonisation of laws.  The purpose of harmonisation would not be to substitute for state-level regulation; hence, the transnational standard would not operate to “occupy the field” in the manner of a “monopoly regulator”, but instead to promote diverse, local-level approaches to regulatory problems by creating a space for autonomous solutions to emerge when, because of market failures, they would not otherwise do so.  This may involve what some regard as a restriction of competition, in the sense of ruling out certain options which could be associated with a “race to the bottom”, while leaving others open.  As we have seen, this is a familiar technique in labour law, where directives mostly set basic labour standards as a “floor of rights”, allowing member states to improve on these provisions but, on the whole, preventing “downwards” derogations.  Reflexive harmonisation operates to induce individual states to enter into a “race to the top” when they would have otherwise have an incentive do nothing (the “reverse free rider” effect) or to compete on the basis of the withdrawal of protective standards (the “race to the bottom”).  This is done by giving states a number of options for implementation as well as by allowing for the possibility that existing, self-regulatory mechanisms can be used to comply with EU-wide standards.  In these ways, far from suppressing regulatory innovation, harmonisation aims to stimulate it.
Another form of reflexive harmonisation can be seen in the use of OMC.  OMC involves “fixing guidelines for the Union, establishing quantitative and qualitative indicators and benchmarks as a means of comparing best practice, translating these European guidelines into national and regional policies by setting specific targets, and periodic monitoring, evaluation and peer review organised as “mutual learning processes”.  Thus, the OMC process is explicitly about experimentation and learning.  OMC has already been tried and tested in the policies supporting EMU and then spilled over in to the Luxembourg employment strategy where guidelines are set which are then reflected in national action plans.  OMC now peppers the Lisbon strategy.  For example, in the context of modernising the European social model, targets are set (raising the employment rate from an average of 61% today to as close as possible to 70% by 2010), benchmarking is used (on giving higher priority to lifelong learning and improved childcare provision), and comparing best practice is encouraged (Member States are to exchange experiences and best practices on improving social protection and to gain a better understanding of social exclusion).  
In the context of free movement of goods and persons the Commission’s communication on immigration provides an illustration as to how OMC might function in the internal market.  The Commission suggests that OMC might complement the Community legislation by providing a framework for reviewing the Member States’ implementation.  The Communication provides the example of admission of migrants.  It suggests that national measures will be adopted taking account of the criteria laid down in the Directive, including the number of migrants to be admitted and the duration of residence permits.  The Commission believes that it would then be helpful to discuss such national implementation to “evaluate their efficacity and identify practice which might be useful in other national situations”.   
	So far we have discussed different types of regulation which may assist in the process of decentralised learning and experimentation in a federal or quasi federal structure.  Where does this leave the Court of Justice?  Dorf and Sabel, writing primarily in the context of the US constitutional law, suggest that “the courts are the institutions in which existing conceptions of constitutional democracy appear to flow seamlessly into experimentalism.  …  Experimentalist courts, like the traditional courts of constitutional democracy, function by a form of direct deliberation: Citizens, as individuals or groups, speaking with the authority of their own experience, can demand that the government give reasons for its actions”.  Thus, “by insisting that actors respect the central experimentalist condition of declaring goals and measuring results, the courts can declare and defend inchoate rights without pretending to anticipate the manifold consequences of the finding”.  In practical terms this means, according to Dorf and Sabel, that the court judges the parties’ abilities to gather, summarise, and use information by their ability to learn from their mistakes while drawing on the efforts of others in their situation to do likewise.  For the European Court of Justice and the national courts hearing a free movement of goods and persons case this might mean working on the presumption of access to the market (of at least the category one or two type) but being prepared to acknowledge the existence of mandatory requirements.  The Court would then give the defendant Member State the chance to explain why that access should be restricted, based not only on its own local experience, but also by reference to alternatives practised in other Member States.  It would also have to explain why the national restriction was particularly suited to the conditions prevailing in that Member State.  The individual complainant, on the other hand, would seek to enlarge the circle of comparisons to include responses from other Member States which would help favour the complainant’s cause.  The defendants would then present reasons based in their own experience for disallowing those comparisons.  As Dorf and Sabel point out, “to be convincing they [the defendants] will have to show that these reasons are consistent not only with the other reasons they give for their actions, but also with those actions (and responses to the reactions they provoke) themselves”.  Dorf and Sabel conclude:
	In this to and fro, it is the primary actors that define the range of alternatives to be considered in an evaluation of the appropriateness of ends to means, further publicizing the variety of possibilities in the process; and in deciding whether due consideration has been given to these alternatives, the court refers to standards of care and attentiveness – the ability to learn and learn to learn – that emerge from the practice of the relevant parties themselves.
	Some of this dialogue already occurs in developing mandatory requirements and in assessing the proportionality of the Member States’ action in respect of these mandatory requirements.  However, as we have seen, this review can vary considerably in its intensity.  The experimentalist approach places far greater emphasis on comparison and learning from the actions of others.  In this way, the court acts in part as a coordinator of information and, when adjudicating, precipitates primary social actors to devise solutions.  Dorf and Sabel cite the example of Bosman where the Court, having recognized that the football associations could legitimately impose some form of regulation, left it up to the associations themselves to determine precisely what regulation, merely laying down the benchmark that revenue sharing could achieve the objective of competitiveness.  A similar approach can be found in Heimdienst where the Court left it up to the Member State to find a way of ensuring the hygiene of foodstuffs being delivered to isolated areas of the state, while suggesting that rules on refrigerating equipment might be appropriate.  This method of adjudication, which is particularly appropriate in the context of Article 234 rulings characterised by a division of functions between the European Court of Justice and the national courts, seeks to maintain national diversity while at the same time perturbing the national systems which is the precondition for effective regulatory learning.

5.	Conclusions

In this chapter we have reviewed part of the free movement jurisprudence of the Court through the lens of a law and economics analysis, with a view to considering how far it discloses a coherent approach to the question of regulatory competition.  Viewing the Court’s rulings through an ex post set of analytical classifications might strike some as unusual.  The justification for doing so is two fold.  Firstly, while regulatory competition may not be the aim of the Court’s interventions, it is certainly one of its most significant effects.  Secondly, law and economics analysis of this kind is widely used to understand the workings of market integration rules in other federal or transnational jurisdictions, in particular the United States, where argument has raged over the benefits of the market for legal rules in areas such as corporations law.  When these techniques are applied to the free movement case law of the Court, we see a surprising lack of consistency.  The Court veers between an approach, in cases such as Centros, which combines a strong substantive market access test, to one, in cases such as Keck, which would limit the Court’s intervention to situations in which formal access is barred or there is clear evidence of discrimination against non home-state nationals.  From the point of view of regulatory competition, it is beside the point to argue that one case arises under the law governing establishment and the other is concerned with goods, since the effects are largely the same in both cases.  At the very least, we would expect the Court to offer some explanation of the divergence in approach in this and other cases, but none has been forthcoming.
	In addition to inconsistency, the Court’s approach risks the worst of both worlds: a race to uniformity, which is also a race to the bottom in the sense of leading to the degradation of standards of market regulation.  Because the market access principle is not clearly articulated as such, the importance of this process for the debate over the substance of economic and social policy in the EC is being obscured.  The case for a more explicit consideration of these questions is further reinforced by the emergence of clear alternatives to court-led deregulation, in the form of reflexive harmonisation and novel regulatory techniques such as the open method of coordination and, as far as the Court itself is concerned, experimentalism.  The need for all parties, including the Court, to articulate more clearly what they are doing and why can only serve to strengthen regulatory competition while at the same time going some way to preserving national autonomy.