Reforming the Regulation of Liberal Professions

Germany’s regulation of professional services needs an overhaul. The country has a wide variety of regulations governing the Freie Berufe, or “liberal professions”, an occupational category that includes lawyers, engineers, architects and doctors, among others. In many of these professions, service providers don’t set their own pay rates – rather, they are determined by the government, which issues legally binding fee rosters. Excessive regulation in this area has attracted numerous complaints from the EU and OECD; indeed, the second phase of a formal suit against Germany for breaching the EU's Services Directive was initiated at the end of February. The German government must now respond to the claim that its Fee Structure for Architects and Engineers (HOAI) violates EU law.

From an economic perspective, the need to regulate the "liberal professions" arises from the informational asymmetries that exist between suppliers and consumers. Expert knowledge is essential for providing services in these areas. However, consumers have difficulty assessing the quality of the services they receive. Economists use the term "credence goods" when the utility of a good is difficult or impossible for a consumer to ascertain. The aim of regulation in this area should be to assure quality while also preventing consumers from fraud or price gouging.

EU member states have highly divergent regulations for professional services. While German regulations are typically preventative in nature, and for instance seek to enforce minimum standards, in the UK a greater emphasis is placed on liability law as a hedge to professional malpractice.  The OECD gathers data on regulatory conditions in the area of "professional services" (i.e. the legal, accounting, engineering and architectural professions), measuring the intensity of regulation on a scale from 0 (no regulation) to 6 (strict regulation). Regulatory conditions in Germany have eased considerably in recent years, dropping from an index value of 4.28 in 1998 to 2.65 in 2013. Nevertheless, there is still room for improvement; the corresponding index value is approximately 1 in the Netherlands and UK.

Numerous studies have found evidence that a lower level of regulation has positive economic effects, not just on regulated professions, but also on sectors that procure their services. In a study that was carried out in cooperation with the Cologne Institute for Economic Policy, we determined that a 0.5 point drop in regulatory intensity is associated with a gross value added increase of 0.6 per cent in the manufacturing sector.

The regulations over liberal professions that are in place in Germany and elsewhere invariably have a specific historical and cultural backdrop. When assessing existing regulatory arrangements, we should ask whether proper weight is given to informational asymmetries that prevail in each specific occupational area. Smashing the existing regulatory edifice with a sledgehammer would likely cause more harm than good. Accordingly, we need to assess existing rules on a case-by-case basis. However, it is possible to determine general criteria that should inform reform efforts.

A number of factors argue in favor of more uniform regulations for occupations with similar fields of activity, such as tax advisors and accountants. Regulations might also be streamlined to eliminate legal divergence between Germany's states – for example, in the area of occupational insurance. In cases in which the German government has approved EU requirements, additional regulation seems to be dispensable to ensure quality. The government-determined Fee Structure for Architects and Engineers mentioned at the beginning of this piece, for example, is a German domestic regulation – it does not apply to architects with business location abroad who provide services to German customers.

In this case and many others, Brussels has been the source of proposals to make certain sectors of the economy more competitive. The German government would be well advised not to respond to EU initiatives in this area by digging trenches and going on the defensive. Rather, it should take advantage of this opportunity to rethink old rules and pass reforms that make the liberal professions sector more efficient.