Economy

Completing the European Single Market – The Key to Europe’s Future?

When you hear that President Macron of France has vetoed accession negotiations with Albania and North Macedonia until further reforms happen in the EU, you may ask which reforms he may mean. What reforms are most needed, if any are needed at all? What about the single market? 

Veto, Deposits and the Single Market

One apparent issue with the Union, in its current form, is the veto power itself. Even bearing in mind that it is rarely used and that it is an option only for certain types of votes, it still can be an issue. It prevents any EU foreign policy from being applied consistently and would be a huge impediment to the working of a common defense force. Sovereign states cherish it though, particularly in the case of enlargement, war and peace, or other vital matters.

Among other reforms frequently mentioned, there is the financial sector. A deposit guarantee scheme is one important idea. The scheme would be meant to encourage savings, and provide protection to weaker financial institutions, as well as the public. Aligned to the financial sector, another essential reform would be the further development of the single market, especially for services. It is one of three priorities of the new President of the European Commission, Ursula von der Leyen outlined in her introduction of the new Commissioner Vladis Dombrovskis of Latvia:

We have a unique social market economy. It is the source of our prosperity and social fairness. This is all the more important when we face a twin transition: climate and digital. Valdis Dombrovskis will lead our work to bring together the social and the market in our economy.”

Executive Vice President for an Economy that Works for People
Executive Vice President for an Economy that Works for People. @Wiki Commons

Recently Macron and Merkel informally put forward the idea for a two-year Conference on the Future of Europe. Although it is not clear what the main focus of the conference would be, it could still be a good place to answer questions about these reforms, particularly about fast tracked reforms, something that it is perhaps reserved for countries willing to further federalize.

What is the European Single Market?

You can think of the European single market through your own experience of working and consuming as an EU citizen. We have largely achieved the single market for goods, but price convergence has lagged. You can buy pretty much the same goods throughout the Union though at different prices – and states do occasionally create impediments, usually to benefit their producers.

The single market for services remains largely incomplete. As a doctor, lawyer, engineer, pharmacist, accountant, architect, or even real-estate agent or taxi driver, you can be subject to differing regulations and unable to use your license or skills in another EU country. Schengen may have made it possible for EU citizens to move freely, but not necessarily work freely.

The European Single Market
The European SIngle market. The countries shaded in light blue are non-member states in the single market. @Wiki Commons

A series of EU Directives and landmark rulings of the European Court of Justice (ECJ) have called for mutual recognition of regulatory restraints on providing services except as necessary to satisfy “mandatory requirements relating in particular to the effectiveness of fiscal supervision, the protection of public health, the fairness of commercial transactions and the defense of the consumer”. In practice though, mutual recognition has been far from fully implemented and the obstacles have not all been removed. Often, re-assessment of market authorisations are required in EU countries for the provision of services, even in cases where it should not technically be possible to derogate from the rule of mutual recognition.

Although less common, a similar situation can arise with harmonised standards for goods, where local state enforcement can sometimes be used to circumvent EU regulations. The only way to prevent such problems may be true federalism where the EU can enforce its own regulations. Until then, states will have a tendency to make things difficult for non-national individuals or products. A survey of EU services  firms cited regulatory restrictions as the primary impediment to expanding their operations in other EU countries. For this reason fast-tracked reforms for member states willing to federalize might prove fundamental in advancing the single market for services.

What are the Advantages of the Single Market?

As an European citizen you may have traveled by train throughout Europe, visiting the beautiful continent. You will have sung goodbye’s at train stations to your friends, chanting “Bella Ciao”. You will not have needed a passport or a visa, and after 1999 you haven’t needed to exchange your money to local currency, in most cases. Though certain rail lines in Eastern Europe and the Balkans may have required changing trains at the border, rail harmonization too is a product of the single market.

Beyond free movement and the Euro, the single market has radically changed European life in other ways. In the 1970s you would have done your grocery shopping in local stores while walking home from work, or in your own neighborhood after driving home or using mass transit. Small local shops were the main source, and in many cases the only source, of retail trade. They were often family-run, open long hours, and economically very inefficient, requiring as they did frequent dedicated deliveries of small quantities of goods. One of the major effects of the single market was to rationalise retail trade on much of the continent.

Consequences of the Single Market
Rationalisation of the retail sector: discount supermarket chain Lidl. @Wiki Commons

With the single market, supermarkets and hypermarkets began to appear on the outskirts of cities and large towns, forcing the small shops to close and often leaving the city centers empty and boarded up. They brought goods to consumers in huge variety and at much lower prices, extended the season for fresh purchases with imported produce, and offered a variety of tropical and exotic products. They could afford to do this because their cost of capital was lower, purchasing and deliveries could be done in bulk, and labor needs per unit of sales were considerably lower.

The economic upsides of the rationalisation of the retail sector go beyond the immediate benefits experienced by consumers. Smaller shops by closing down free up labour for other economic activities, contributing to economic growth. Capital is also freed up per unit of production, as the distribution networks become more efficient.

Further Rationalisation of the Services Sector

If we achieve further rationalisation of the service sector in Europe, young professionals wishing to work abroad stand to benefit the most. If you are looking for a change, enhance your language and professional skills, or have a foreign partner, you will no longer be hindered by complex licensing requirements. The costs of services would also decline. The economic benefits of this would be great. But so would the downsides. Rationalisation of the service sector could easily bring a new period of economic growth. But growth also means disruption.

Ultimately, Europe has two options: remain a more traditional economy, with strong worker protections and a minimum of change and disruption; or compete fully in the global economy by rationalising, reaping all the benefits and paying all the costs. Finding a middle way will be very difficult, especially considering the pressure from China and the US, which have already made a clear choice: efficiency and competition at whatever the social costs.

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