1) European institutions have been unable to adapt to the needs of an innovation-based economy, while member state institutions are also ill-equipped for this task. 2) For economies to progress, institutions must facilitate specialization and exchange through enforcement of contracts and complex economic interactions. However, European institutions lack clear mandates and member states have failed to modernize legal systems. 3) Institutions that were once growth-enabling, like public utilities, can later become barriers to innovation and crossing technological frontiers if not reformed. European member states must reduce transaction costs through reforms like bankruptcy law.

1. European Institutions, Innovation and Growth
Sophie Vermeille
Founder and President, Droit & Croissance / Rules for Growth
Researcher in Law at the University of Paris (Panthéon - Assas)
Corporate & Restructuring Lawyer
Harvard Law School
October 25, 2017

2. Introduction:
• Nobel Prize winning economist Douglass North:
" institutions " are the set of laws, written rules and
informal constraints, as well as the instruments to enforce
the application and to sanction the violation of such laws,
rules and constraints.
• Inability of the institutions of most of the Member States in
Europe to adapt and address the changing needs of an
innovation-based economy – no clear mandate given to the
European institutions to fully take the lead.
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3. • The law can have a significant impact, not only on the ability
and incentives of firms or entrepreneurs to innovate, but also
on the protection of rent seekers profiting from past
innovations and on the rate of diffusion of innovations in an
economy.
• Example: data protection regulations in Europe versus the US.
Introduction:
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4. Introduction:
• It is not a battle between civil law jurisdictions versus
common law jurisdictions.
• Members States in Western Europe, especially France,
Spain, Italy and Germany have repeatedly missed the
opportunity to embrace the paradigmatic changes in legal
reasoning that have accompanied the intellectual
movement of legal realism.
• Lack of multidisciplinary research has tremendous
consequences.
• In Eastern Europe, property rights are not sufficiently
respected, judicial system poses even greater issues.
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5. • Many Member States in Europe have reached a technological
frontier which they are unable to cross at this moment in
time.
• It is urgent for these countries to promote the emergence of
radical innovations on their territory and to enable their
economic agents to transform the opportunities and the
value that is created by such radical innovations.
First observation:
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6. • Joseph Schumpeter: “ the dynamism of an economy is based
primarily on its dynamism in terms of innovation. ”
• Companies as being in a perpetual competition for the
domination of their markets. In a free market, this domination
imposes itself to companies which must regularly face the risk
of competitors innovating and capturing new market shares,
irrespective of the fact whether such competitors are existing
players or new entrants on a given market.
• New challenges posed by artificial intelligence.
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7. • Having reached the threshold of the technological frontier,
Europe needs to change its institutions in order to enter into a
new phase of economic development that is more conducive
to radical and repeated innovations, and that will allow an
innovation-based economy to flourish.
Second observation:
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8. • Economic progress is the consequence of the fact that people
specialize, as much in terms of knowledge, as in the
application that they chose to make of this knowledge.
• For this reason, the number of exchanges between parties
has significantly increased > they no longer hesitate to
contract outside of their close business circles.
• This increases the importance of the State to ensure that
contracts are respected or, where applicable, that laws and
regulations are enforced, while the importance of other
modes of social organization, such as the family, decreases.
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9. • The heightened judicial control of increasingly specialized
economic interactions also requires a specialization of judges
whose mission is to adjudicate the increasingly complex
economic issues raised by these specialized economic
interactions.
• Whereas the European Union has achieved great projects: for
instance the Banking Union, and tomorrow the Capital Market
Union.
• There are lots of difficulties arising from the absence of clear
mandate of the European institutions: for instance no ability
to modernize judicial court systems which is a critical issue.
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10. • In an innovation-based economy, institutions must not limit
themselves to encouraging the accumulation of capital, they
must also play the role of a facilitator for the economy.
• Growth economists have coined the term “appropriate
institutions” to describe the idea that institutions will meet
different objectives depending on whether a country is still in
a phase of catch-up growth, has crossed the technological
frontier or has reached a phase of radical innovations.
Third observation:
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11. • Certain institutions which may at a certain point in time be
critical to growth, namely public utility infrastructure enjoying
a monopoly, may, subsequently, become a barrier to growth
and ultimately the crossing of the technological frontier.
• Respect for property rights is the essential precondition for
investment in physical and human capital, which ultimately
encourages the adoption of more efficient technologies.
• However, Member States in Europe must go beyond and find
a way to reduce transaction costs: ex. bankruptcy law is the
hot topic at the moment in the EU.
• However, significant differences between Eastern Europe and
Western Europe.
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12. • By refusing to embrace the paradigmatic changes
introduced in legal reasoning by legal realism, the
discipline of law in Continental Europe has remained
relatively self centered and is less well armed today
compared to other countries in order to serve the
European economy as a true facilitator.
• Significant differences between the US and Europe in
the area of legal research.
Fourth observation:
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13. • The difficulty of the laws in France, Italy, Spain and even in
Germany to be a facilitator for their economy is not so much
due to their civil law tradition.
• Inability of the various legal systems to adapt to the current
state of development of their economy as a whole.
• Legal scholars failed to embrace the paradigmatic changes
that have accompanied the movement of “legal realism” > no
major Law & Economics movement in Continental Europe.
• Unintended consequences of the Brexit for the legal research
in Europe, influence of Oxford, Cambridge and the LSE at the
EU level.
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14. • The consequences of these missed opportunities for
the laws of various State Members are numerous.
• They have led to a greater complexity of their legal
system making it more difficult, from a technical
point of view, to introduce fundamental reforms
while making it easier for rent seekers to oppose
changes to the status quo.
Fifth observation:
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15. • Modernize the training of the bureaucrats, legal
scholars and lawyers in general.
• Encourage an interdisciplinary approach to legal
studies in law schools and create incentives for
interdisciplinary research in order to overcome the
tendency of law schools to isolate themselves from
other university departments and consequently
academic disciplines.
Recommendations:
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16. • Increase the quality of the economic analysis that is
included in the impact studies that have to
accompany new legislative proposals.
• Make use of techniques derived from cognitive
sciences.
Recommendations:
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Contact
Sophie VERMEILLE
Founder and president
Droit & Croissance
Rules for Growth
+ 33 (0) 6 73 04 89 90
svermeille@droitetcroissance.fr
www.droitetcroissance.fr
http://fr.linkedin.com/in/sophievermeille