The future of the single market
By Katinka Barysch

The EU puts out a lot of reports, studies, evaluations and announcements. So far this month, the Commission has released around 80 major documents. Many of them are too specialised, too long or simply too dull to attract wider interest.

One recent publication stands out. On February 21st, the economics team of the Commission’s ‘bureau of European policy advisors’ – now headed by Roger Liddle, previously an advisor to Tony Blair and Peter Mandelson – released a report on the future of the single market. Granted, advisors can speak more freely than bureaucrats. But the way this report is written shows how the EU should communicate.

* Accessible. The subject is complex, yet the document is easily understandable for non-economists. The authors steer clear of euro-speak and jargon. Moreover, while many EU documents are abstract, this one is full of examples. No waffle about “reaping the full benefits of the single market”. Instead, a list of examples: the single market allows you to go to hospital in other EU countries; it gives you the right to sue any company that sells faulty products; it has brought you low-cost air travel; it has reduced your mobile phone bill.

* Focus. This paper is about the single market. Period. It is not about social policy, the environment or the future of Europe. Absent is the EU’s unfortunate tendency to placate interest groups by lumping together too many issues. What the report does do is to look at how the context of European economic integration has changed, through globalisation, eastward enlargement and technological change.

* Realism. People tend to be cynical about official information and analysis. Achievements are overplayed, failures omitted. Liddle and his colleagues are honest. “The single market brought real benefits”, they say “but it has not led to a transformation of European economic performance.” Price convergence has stagnated, so has the share of intra-EU trade in total exports and imports. Only if problems are clearly identified can the search for solutions begin in earnest.

* Critical analysis. The intentions of the EU are usually good, but this does not guarantee optimal results. Yet the EU is notoriously bad at abolishing defunct laws and institutions. This report shows that single market legislation often embodies the interests of big companies. It risks becoming an impediment to innovation and competition from smaller rivals.

* Fresh thinking. Politicians and EU officials regularly call for the “completion of the single market”. Wrong, say Liddle and his colleagues. “The single market is an on-going process rather than an event.” It can never be “complete”. The initial rationale was to tear down trade and regulatory barriers to allow European manufacturing companies to reap economies of scale in a larger market. But future EU growth will not come from mass manufacturing. It will be driven by services, high-tech companies and start-ups. For them, removing remaining barriers or harmonising regulations won’t do. Instead, the single market needs to encourage innovation and research, facilitate venture capital and ensure competition.

* To-do list. Here, the bureau of European policy advisors does exactly what its name implies: it advises on policy. If the single market is to deliver benefits in the future, the EU and its governments need to: 1) prioritise and give up the notion that all barriers for doing business are equally important; 2) rely less on detailed directives and more on framework regulations that work in a fast-changing environment and take account of the administrative weaknesses of many new member-states; 3) adopt a sectoral approach that differentiates between the needs of say, the energy sector and healthcare; and 4) properly co-ordinate single market initiatives with policies on competition, trade, environment and so on.

The nature of this report should remind the entire Commission of one of its key roles: to provide independent, fresh and forward-looking analysis and policy ideas. But the European Commission’s own take on the future of the single market – published the same day as the bureau’s report – succumbs to some of the old failings of EU communication. Maybe it should be the advisors’ report rather than the Commission document that goes to EU leaders at their forthcoming spring summit and that forms the basis of the EU’s comprehensive single market review that comes out in the autumn of 2007.

The two reports in the future of the single market can be found on

http://ec.europa.eu/dgs/policy_advisers/publications/
docs/single_market_yesterday_and_tmorrow_en.pdf

http://ec.europa.eu/internal_market/strategy/
docs/com_2007_0060_en.pdf

Katinka Barysch is chief economist at the Centre for European Reform.

by Simon Tilford

There has been a lot of anguished talk about how the EU’s single market is under threat. Much of this alarm has focused on government support for struggling car firms and public bail-outs of crisis-ridden banks. An erosion of the EU’s competition rules would be every bit as debilitating as the impact of the financial crisis and the resulting recession. But how serious is the risk to the single market?

On the face of it, there is plenty to worry those who see the single market as key to Europe’s future prosperity. First, any hope that the impact of the financial crisis on the ‘real economy’ would be limited has ended. In the face of huge falls in industrial output this year and the prospect of several years of very weak economic growth, many European industrial firms will go bankrupt. Wage subsidies and short-time working, and all the other strategies currently being employed to cope with the collapse of demand, can only be sustained for so long. Many of the firms that go bust will be fundamentally competitive, or at least appear so. EU governments will be under huge pressure to intervene to protect such companies. The way in which they intervene will be crucial. The Commission will have a real fight on its hands to ensure that competition is not distorted. It should be strong enough to enforce the rules. But much will depend on whether member-state governments support the Commission and on who is appointed to be the next EU commissioners for competition and the internal market.

Second, the landscape of European banking has changed fundamentally over the past year and competition policy in this sector has effectively been suspended. A number of the biggest EU banks have been nationalised in all but name and governments have moved to provide public guarantees for bank loans. The shot gun marriage of Britain’s Lloyds TSB with another high street British bank, Halifax Bank of Scotland (HBOS), has left the combined group controlling around a third of the entire UK market for consumer banking services. The German, Dutch and Belgian governments have bailed out financial institutions, while governments across the EU have recapitalised banks.

The dramatic increase in government influence over the lending process will need to be reversed if potentially serious distortions are to be avoided. There is a risk that pressure will be put on banks to maintain funding for national champions and to avoid lending to companies based in other EU states. Such politicised lending would undermine the efficient allocation of capital throughout the EU by protecting inefficient companies and reducing available funds for more competitive firms. Once the financial sector has stabilised and normal levels of financial intermediation have been restored, the Commission will have to get serious about ensuring that the EU does not retreat into such ‘capital protectionism’.

Third, a further deepening of the single market can be ruled out. Crucially, faster action to liberalise and integrate service sectors across the EU now looks out of the question. It was hard enough to gain consensus in favour of radical moves to dismantle obstacles to the integration of service sectors before the crisis, but it will be impossible in the face of the backlash against liberalisation. This is bad news. Service sectors account for around two-thirds of economic activity across the EU. Service sector productivity has been extremely weak for a number of years now, holding back economic growth. More competition at both national and European level would do much to change this, and boost economic growth.

The lack of service sector integration will be particularly damaging for the eurozone. Countries that decide to forego exchange rate flexibility as a tool of economic adjustment need to ensure that their economies can be flexible in other ways. If countries such as Spain and Italy are to recover their competitiveness within the currency union, they will have to boost their productivity. This, in turn, requires more competition in service industries. The alternative route to greater competitiveness – wage cuts – would condemn their economies to stagnation. And such wage deflation might not be possible in any case, as Germany is heading for deflation. It will be extremely difficult to cut costs relative to Germany, if German costs are falling.

The legal underpinnings of the single market appear robust. But there are real reasons for concern. The steady progress in reducing state-aid has been halted and is likely to be put into reverse. The partial renationalisation of bank lending is inimical to the emergence of a single capital market. And progress towards deepening the single market in services has ground to a halt. All this bodes ill for Europe’s growth prospects and the stability of the eurozone. All EU governments profess to be committed to upholding the single market. The next couple of years will determine the strength of that commitment. If member-states do not respect the Commission’s right to enforce those rules, the single market could indeed come under threat.

Simon Tilford is chief economist at the Centre for European Reform.