Economic crisis: Will the single market do the trick?

A bit, at least? The EU has launched Single Market Week.

Questions:

1. How important is the internal market for the future of the EU, is the better functioning internal market also somehow a medicine for the crisis?

2. Is it possible to say who are the winners or who are the losers of the internal market conception? I mean if it is possible to identify that if it is better for big companies, some nations or employees etc…

Answers:

Marie-José Rinaldi-Larribe, Professor of Economics and European Affairs, International University of Monaco

1. The origin: Jacques Delors, President of the European Commission, launched the internal market with the Single European Act, signed in 1986, put into application in 1992. The aim was to make this market more efficient and more competitive, through the realization of the four freedoms mentioned in the Treaty of Rome (1957) but really implemented in 1992 with the Single Market: freedom of movement of goods, services, workers and capital. The goal was to create “an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured”.

In particular, important reforms were launched, and objectives were set, to be met by 1992:

• Removal of internal barriers for goods and services, labour and capital.

• Harmonization of standards across countries.

• Introduction of a social dimension.

• Mutual recognition of national norms and regulation.

• Extension of Qualified Majority Voting

• Increase in the European Parliament’s role.

• Removal of all capital controls, for a deeper capital market integration.

• Principle of non-discrimination on grounds of nationality.

• Mutual recognition of diplomas

• Common competition rules with a greater role of the Court of Justice.

• Art. 81 of the European community Treaty = anti-cartel instrument: no collusion authorized (price-fixing and market-sharing).

• Art. 82 = anti-monopoly instrument: no dominant position allowed.

• State aid limitation

• Public procurement open to all European firms

The Single Market was supposed to enable countries and firms to reach higher economies of scale through a bigger competition between companies; this would also lead to higher specialization and productivity, a better allocation of resources, induced investment and accelerated growth.

Is it working efficiently today, as we are celebrating the twentieth anniversary of the Single Market? Yes in terms of free circulation of goods, harmonization of norms, recognition of diplomas, etc. Capital circulates freely too. But in terms of free movement of services, we have not reached the goal yet, and workers are not moving much from one country to another, since virtual barriers remains. Some professions are still rather closed and professional qualifications not always recognized as they should be.

It is a fact that the single market can be improved and that it can be seen as a source of additional economic growth, since it represents 500 million consumers; we know that an increase in trade can bring about new opportunities for firms, which in turn will bring higher growth and more jobs as well as lower prices for consumers. An improvement of the digital economy (sales through internet across borders) will itself bring many benefits to firms and consumers; but it must be encouraged because people are still reluctant to buy their products on-line from another EU country. There is a strong potential to develop here. Payment systems need to be harmonized too, in order to encourage this type of cross-border trade. Harmonisation of fiscal systems would be relevant too, in particular concerning VAT rates, but also corporate tax rates.

2. I don’t think that there are the winners on one side and the losers on the other side; everyone can benefit from the single market: producers and consumers, workers and retirees. Of course competition tends to be more intense when there are no frontiers and no barriers to trade, but in the end it is proven that economic benefits are bigger for the society as a whole. Competition leads to innovation, which in turn creates a competitive advantage and can be the source of new jobs and of foreign direct investment inflows. In the globalised world, at a time when emerging countries are growing fast, it is important for the European Union, which experiences one of the worst crises of its existence, to reinforce the Single Market.

Simon Sweeney, Lecturer, International Political Economy and International Business, University of York

1. The SEM is not yet complete. While it is robust for most goods, it exists only in a limited form in the services sector and it hardly exists at all in the defence sector. There is still a lot of protectionism. It’s quite likely for example that protectionism has underpinned the failure to secure the merger between EADS and BAE last week. This is surprising, given that Germany looks like being the major blocking party and Germany has tended to be a reliable supporter of SEM initiatives. Of course the internal market and the EADS-BAE merger are different issues, but both need to be understood from a strategic perspective. What kind of Europe do we want? How do we intend to support the Single Market and our major industries in ways that enable Europe to play a key competitive role in the 21st Century? New powers have emerged across the world and we have a completely different environment to the 1980s when the Single European Act set up the Single European Market. Europe must respond to this.

As regards a medicine for the current crisis, it is fundamental that the Single European Market is part of the solution, although it’s really a matter of politics more than economics. We should secure a fully operational internal market, but instead there is a danger that we go backwards when we need to go forwards. Above all we need a strategic approach that is not yet evident. It is entirely regrettable that after six decades of integration, states are still more interested in defending their own short term local interests than in raising their vision to look at where they and Europe need to be in future years. In the long term not even Germany can manage without the European Union and a strengthened internal market.

2. There are many winners from the Single Market process, consumers, employees, states, companies large and small, and the wider environment. Obviously competition has brought better quality products and lower prices, better living standards. You only have to consider telephony services and transportation to see areas of enormous benefit, but right across Europe companies have benefited from the removal of tariffs, from access to new markets, from a growing consumer base. The single market has also been underpinned by the strictest environmental protection in the world and we should never relax as regards environmental protection. This is fundamental.

Nevertheless I think it’s clear that large corporations have benefited more than have small and medium sized enterprises. Going forward the EU must shift its focus towards protecting the SME sector because this needs support to grow and to secure innovation and employment in future years. The EU must focus on this sector the way Germany has done so for most of the past 50 years. In relation to this I say somenthig about tax below.

As regards the internal market, there’s much more to achieve. Have some states have benefited more than others? This is complicated because states have benefited differently – so for example infrastructural improvements and trading access has boosted all the Central and East European 2004 entrants, and also Bulgaria and Romania. They’ve benefited from net transfers from Brussels and access to new markets which in time have begun to bear fruit. Also there’s been a lot of new investment, especially in Poland, Slovakia, Slovenia, but also in other countries too.The four freedoms enshrined in the internal market have brought great benefits and must be protected.

The German question is an interesting one. It’s true that German exporters and German industry have benefited from cheap credit available to weaker members of the eurozone so there has been demand for Gerrman goods, but consumers across the eurozone have had too much access to cheap credit. It’s not Germany’s fault if the credit was made available too easily, in Spain for example. There hasn’t been a fiscal union – something Helmut Kohl would have welcomed when EMU was set up – but of course no-one wanted it. Now there’s criticism of Germany but this is not fair. Germany has managed its affairs correctly. If there’s going to be a continued rescue of the fiscally reckless states then Germany and the ECB has the right to insist on certain guarantees.

If the European Union is to survive there has to be a fiscal union and a much stronger political union. Without that there is a real danger that the Union will settle around a hard core of states able to accept the discipline that others do not accept. That’s not a good solution, but it may be what happens in the end.

If I may make some final comments. Not only must the EU resolve its current crisis by strenghening its fiscal union, it must allow the ECB to function like a proper central bank and provide loan guarantees. But obviously in exchange there has to be total fiscal transparency and proper political control in a federal union. Sovereignty that is not pooled is not worth a fig. Look at North Korea, the only sovereign independent state in the world.

The collection of taxes is fundamental to this. Tax evasion, tax havens, these are an anathema to a properly functioning Single Market. There should be an international consensus on this and the EU should lead the effort in this direction, and use the G20 as a platform. It has done so on other issues such as the campaign against the death penalty and for better environmental standards. Tax is a moral issue. There should also be a financial transaction tax, everyone knows this, but the lack of political will is because of the greed of those who see personal benefits from resisting such an obvious scheme.

Finally, once this current crisis is on the road to repair – and it is not yet on that road – the EU should get serious about admitting Turkey. This is vital to the EU’s future.

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