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The EU single market – a success story that has stood the test of time

Since the beginning of European integration, the chances of more economic growth have been one major motivation for countries to join the European Union. Since the European sovereign debt crisis there is a growing number of critical voices asking whether this promise has been fulfilled or not. Based on the results of a recent study by the Bertelsmann Stiftung the answer is a resounding yes! writes Thieß Petersen.

Economists are not necessarily known for agreeing with each other. If you ask two economists the same question, quite often you get two different answers – and sometimes even three. The stock of objectively verifiable knowledge is limited in economics. Nevertheless, there are at least some basic mechanisms with which all economists can agree.

One of these mechanisms goes back to Adam Smith, the father of economics. One of his main arguments reads as follows: The enlargement of a certain market has positive growth effects which are particularly beneficial for the consumers.

There are several reasons for this:

First of all, producing for a larger market reduces costs of production thanks to the advantages of mass production. Second, in an enlarged market competitive pressure increases and leads to lower costs of production and lower prices. Furthermore, if you open the domestic market for other countries by removing tariffs and non-tariff trade barriers, prices for imported goods and services decline. Thus, consumers can buy more goods and services with their disposable income. Finally, in a common market with free movement of capital and labour, society can produce a larger amount of goods and services with a given number of workers and a given amount of capital.

All in all, the enlargement of a market is beneficial for consumers, because they can consume a larger amount of goods and services at a lower price. The creation of the EU single market is certainly an exceptional example of a market enlargement. And it has kept the growth promise its designers gave.

European integration between 1992 and 2012 has increased economic growth in the participating economies. When we look at the cumulative gains in real Gross Domestic Product (GDP) per capita, all 14 economies included in the study mentioned above realised income gains from the growing integration of the EU. Denmark and Germany have the largest gains per capita. Thanks to growing integration, the annual real GDP per capita is about Euro 500 higher in Denmark than without the progress in EU integration. In Germany, the income gain is Euro 450 per person and year. Even the crisis-ridden southern European countries were able to achieve integration-induced income gains. Due to limited improvements in EU integration and due to the economic distortions after 2008/2009, their gains are however smaller than in Denmark or Germany. In Italy, integration-induced income gains amount to Euro 80 per person and year, in Spain and Greece to Euro 70 and in Portugal to Euro 10.

The creation of the EU single market was by no doubt a major push for the European integration. Therefore, most of the identified growth effects of EU integration are directly or indirectly related to the establishment of the EU single market.

What are the implications of these findings? In my eyes, there are three important conclusions.

  1. EU member states should do everything possible to complete the EU single market. The common market already functions very well in view of goods and capital. But there is still room for improvement in the areas of services and cross-border labour mobility. Improving integration in these areas will stimulate further growth for all members of the EU single market.
  2. Due to the economic crisis in southern Europe, the integration levels of these countries are relatively low by now. However, in positive terms this means that there is an opportunity for these countries to increase their integration into the EU and thus enjoy growth spurts caused by a deeper integration. Viewed in this light, the single market could be a central element for economic recovery of these countries.
  3. Those who are critical of the EU due to the costs of integration should not only talk about the visible payments to the EU, but also about the less visible benefits in terms of economic growth. Hence, even if a country is a net contributor to the EU, EU membership is profitable thanks to integration-induced growth effects.

In summary, I am convinced that the watchword for future economic growth in Europe is more and not less Europe.

Dr. Thieß Petersen is an economist and Senior Expert at Bertelsmann Stiftung foundation, Gütersloh.

Comments
  1. The study suggests that the integration benefit to the UK is Euro 10 per capita. This is very low particularly given the apocalyptic way that Brexit is sometimes discussed – “outside the EU the UK 3 million jobs will be lost. etc etc”. But I have not seen a good explanation for the low figure.

    Comment by A Londoner on August 6, 2014 at 12:28 pm
  2. The low average annual gain of 10 EUR in real GDP per capita is partly due to the fact that the UK quit the European Monetary System in 1992. This lead to a asynchrone course of the economy compared with the other member states and had a negative impact on one of the three indices (symmetry of the business cycle) that were used in the study.

    Comment by Jürgen Noack on August 7, 2014 at 8:32 am
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