In these missives I often write about policy that, among other things, improve economic growth or productivity. But we must not forget that all this policy is based on one crucial basis that is the condition for all economic activities: the rule of law. We all know that companies cannot operate in an environment where there is no rule of law or where the rule of law is determined by whether someone is on the right side of the local dictator or not. But even in stable democracies one can find out the importance of the legal foundations in cases where legal uncertainty increases.
Legal uncertainty can arise for various reasons, one of which is the complexity of the law itself. If laws are written in a way that confuses people or that makes them difficult to read, legal uncertainty increases and lifelines come to the fore. As a layman in the law, I am always stunned when I have to read a new law to find out what it contains. An example, here is the first bit of the latest budget account in the US.
The opening section of the latest American budget
Source: Ons Congress
And from there it continues with another 330 pages. To be honest, it is impossible to make a rhyme or reason, unless you are a professional lawyer with years of training. And I don’t choose the US. I have to go into the British and European legislation from time to time, and it is just as bad.
Tommaso Giommoni and his colleagues have succeeded in quantifying the costs of such illegible and ambiguous legal texts in the Italian case. They could do that because the Italian legal system was reformed in 2012.
Just like in other countries, if a company wants to dispute a law, it must go through a court, then a court of appeal and possibly the Supreme Court of the country. And just like in many countries, the courts are competent for different regions of the country, while the Supreme Court is competent throughout the country.
In 2012, the number of courts and the courts of appeal was reduced, which meant that some parts of the country suddenly had to deal with more legal uncertainty because they were now subject to another Court of Appeal.
In Italy, that the Court of Appeal is responsible for a region -because, unlike in the US, where the Supreme Court can interpret the law itself and can decide how an existing law is interpreted, the Supreme Court in Italy cannot. The highest court in Italy only has the right to revise decisions of the Court of Appeal.
If the Supreme Court agrees with the decision of the Court of Appeal, the interpretation is. If the Supreme Court does not agree, it can only return to the Court of Appeal for re -investigation. This is not as great as readers in Anglo-Saxon countries may think because italy, like very continental Europe, has a civil law system, not a common law system, which means that courts generally do not make legislation through their statements, but only interpret the laws. The concept of precedents and earlier judgments that judges bind in comparable cases in the future is weaker in societies of civil law than in Common Law associations, such as the US or the UK.
But there is still room for interpretation and various professional courts have different prejudices. Suppose a company is in a region in Italy that switched to a new Court of Appeal in 2012. In that case this means that legal uncertainty has increased its legal uncertainty – at least until the company becomes known with the prejudices and practices of the New Court of Appeal.
And this seemingly harmless change in legal uncertainty is already causing an important economic reaction. They believe that, during the five years from 2012 to 2017, they have an increase in the legal uncertainty of the affected companies of a standard of the affected companies results in a reduction in business growth of 1.2 percentage points compared to non-tasted companies. Most of these are driven by a decrease in investment activity of 1.3% and an increase in cash by 5.6% to protect against increased legal uncertainty.
Imagine how much we could stimulate the economy if lawyers and legislators would write everywhere in such a way that they are unambiguously and understandable for people outside their caste of high priests. And then consider how many lawyers we could eliminate if we did. Oh, I think I know why laws are written as they are …
The economic impact of increased legal uncertainty in Italy
Source: Giommoni et al. (2025)
#economic #costs #legal #uncertainty