Europe: the bumpy road to a single market

Oktoberfest in Munich © Johannes Simon/Getty Images
Economic integration, at the risk of befuddling Germans, must continue

The aim of converting the European nations into a unified economic zone remains an ideal to achieve for the EU. Completing the task should be a primary goal, says Simon Wilson.

What is the single market?

It’s the internal market, or single economic zone, encompassing all 28 current member states of the EU, and covering 500 million consumers. It’s a “single” market in the sense that it seeks to guarantee the free movement of goods, services, capital and labour (“the four freedoms”) throughout the bloc via common regulations, standards and laws. In addition, the four members of the European Free Trade Association (Norway, Iceland, Switzerland and Liechtenstein) participate in the single market, to differing degrees.

The creation of a common market was one of the motivating forces behind the establishment of the European Economic Community (EEC) by the six signatory nations to the Treaty of Rome in 1957. Indeed, the EEC was for many years widely known, in English, as simply “the Common Market”. But as with so much to do with the European project, the road to a single market was long and bumpy. Even now it’s a work in progress, or an ideal to aspire to, rather than a mission accomplished.

How did it come about?

Free movement of goods was established as an aspiration in principle under the customs union agreed by the six founding members. Inevitably, however, the nascent EEC struggled to forge a genuine single market – and remove the intangible barriers thrown up by differing sets of regulations and standards – due to enduring protectionist attitudes and the lack of a strong political dimension to the project.

However, a major legal landmark in the establishment of the single market was the Cassis de Dijon case of 1979. This delicious blackcurrant liqueur, much loved in France, was banned from sale in Germany due to a handy regulation – handy for German producers, that is – which stipulated all drinks sold as fruit liqueurs in Germany must have an alcohol content of at least 25%. The French cassis was only 15%-20%, hence the ban.

What happened?

The Germans tried to justify this on the grounds of public health, bizarrely arguing that German consumers risked getting drunk because they wouldn’t know how potent the French liqueur was. But the European court chucked out the ban. In the EU jargon, this process is known as “negative integration” – ie, getting rid of any and all regulatory barriers to free movement, such as the de-facto protectionism of the German liqueur rules.

A few years later, the next big shove towards integration came from the Brits. In the mid-1980s, Margaret Thatcher sent a former trade minister, Lord Arthur Cockfield, to Brussels, with a mission to overhaul the single market. He set out 300 measures needed to complete a single market, which formed the basis of the Single European Act of 1986. This was the first major revision of the Treaty of Rome, and set a deadline of 31 December 1992 for the completion of a single market that would ease trade, help businesses achieve economies of scale, spur innovation and pep up productivity.

Has it proved a success?

Broadly speaking, yes. Putting a number on it is hard to do with confidence, since it’s impossible to know how Europe’s economy would have developed in recent decades without the single market. But most studies suggest that it’s had a positive impact on output. A 2016 analysis by the Institute for Fiscal Studies (IFS) concluded tentatively that “a figure in the region of a 5% increase to EU GDP, relative to a situation where a single market was not pursued, would not seem implausible”. The IFS noted that the single market had benefited different countries to varying extents and estimated that for the UK membership of the single market was probably worth around 4% of GDP.

But it’s still incomplete?

“In parts it is incomplete and in others actively going backwards,” reckons The Economist. With Britain leaving the bloc (or trying to) and trade wars looming, that’s a big worry; the “health of the single market is vital to Europe’s economy” and the signs are that progress is stalling. The main stumbling block is services, as abolishing barriers to trade in services is much harder – it was only in 2006 that a serious effort was begun.

Implementation has been patchy and, by the EU’s estimate, there are still 5,000 national regulations protecting the delivery of different types of services in the member states.

That’s a big problem because services – everything from banking and cloud computing to childcare and hairdressing – now make up nearly three-quarters of EU GDP. As a result, the importance of the single market is fading, and its capacity to boost Europe’s economy is diminishing. Notwithstanding grand talk of a “digital single market”, for example, about 40% of European websites don’t sell to customers in other member states and 77% of online sales are domestic.

What could turn things round?

Over the past couple of decades Europe has been too consumed by the birth pangs of the euro – and then shaken by the eurozone debt crisis – to focus on the single market. Banks have retreated to their home markets and firms have focused more on expansion outside the EU.

In terms of future progress, there’s a suspicion that Germany – so dominant in manufacturing – is content with the status quo. Like France, it favours a more dirigiste industrial policy to protect favoured sectors than a strengthened single market.

But the single market is worth revitalising and there are three main ways to do it, says The Economist. First, ensure that all its statutes are fully implemented,and step up enforcement measures against governments who flout the rules.

Second, make the euro, which is in some ways an extension of the single market, more robust – for example, by creating a central fund insuring bank deposits.

Third, continue the process of harmonisation, for example of VAT, bankruptcy laws and capital markets. Europe has few “obvious levers to pull to boost its economy. Time to tug on this one”.