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What is Wrong with the Single Market?

Europe’s Single Market is in many ways an illusion – it exists only nominally write Frederik Erixon and Rositsa Georgieva . There are substantial barriers to cross-border exchange and the Single Market is riddled with uncertainty. The EU has again set itself the target to advance the Single Market and it is thus important to consider what factors made Europe resistant to more Single Market reforms in the past, and what this resistance has entailed.

In the ECIPE paper (European Centre for Internal Political Economy) it explores what we mean by a Single Market, and what the possible reasons for its failure to meet its goals are. While the nature and profile of the Single Market, and its regulations, have changed over the years, they often have focused on the wrong issues, or on factors that would not change the nature of markets as such. The piecemeal approach to reform, followed until now, has created a complex web of regulations, administrative rules, national discretion, and partial freedoms. Fractional and incomplete liberalization have reduced the potential gains.

Although many problems are endogenous to the Single Market there are others that are a result of external structural shocks. The European economy has undergone profound structural changes, and as the economy has shifted profile, it has moved further into sectors and areas where there is very little of the Single market. The more Europe’s economy grows dependent on services and the digital sector, the less Single Market there will be in Europe. It is evident that the improvements that can be made in Europe’s integration is less about classic Single Market reforms and more about building adequate market institutions and advance structural reform.

What is wrong with Europe’s single market? In a way, there is a simple, short and pithy answer to that question: it does not really exist. The single market is in many ways an illusion. Many observers assume it exists because it is talked about to such a length and intensity that it simply appears implausible that it would not exist. The reality though is that the Single Market in Europe exists only nominally and that there are substantial barriers to cross-border exchange – more so in some sectors than others – that depress the capacity of the European economy to grow on the back of economic integration.

Today’s European Union is a good distance from its founding freedom – the freedom of goods, services, capital and people to cross borders. A recent study by the European Parliament’s Research Service puts the “cost of non-Europe”, or the potential benefits from advancing the Single Market, to 1.6 trillion euro. Obviously, such potential benefits would not exist in an economy that had eliminated most of the existing barriers to cross-border integration.

The obvious example of the incompleteness or the “un-singleness” of the Single Market is the services sector. Europe’s services sector is fragmented along national lines and there are far too many restrictions that hold it back. There is a direct cost to Europe from its failure to build a better framework for services integration, and it is represented in basic indicators about the health and competitiveness of the services sector. But the costs of a non-existing Single Market for services do not only affect the services sector; they spread widely through the economy and reduce the general pace of and benefits from structural market change. The European economy is embedded in a global economy, and periods of rapid structural change affect Europe, but the shape and profile of those changes are often determined by policies at home and what instructions they give for economic behavior.

Now that the EU again has set itself the target to advance the Single Market – partly through general programmes, partly though separate or sector initiatives like the Digital Single Market – it is important to consider what factors made Europe resistant to more Single Market reforms in the past, and what that resistance has entailed. Furthermore, it is critical for the success of new initiatives to understand what structural problems these new initiatives may entail – and how they can reinforce the political roadblocks that previously have prevented ambitions for a better Single Market to become real.

The paper discusses these issues on the basis of a couple of hypotheses.

1. Single Market reforms have become victims of the piecemeal approach to reform. Ever since the launch of the Single Market Programme in the 1980s, there have been so many new initiatives and efforts at reform that their history would make up a very thick volume. Some of these piecemeal reforms have opened up markets; others have not. What they have created, however, is such a complex web of regulations, administrative rules, national discretion, and partial freedoms to cross-border exchange that the Single Market itself is not possible to grasp and that it is riddled with uncertainty. Europe’s Single Market now has, to borrow a term from Jacques Pelkmans, a “non-design”.

Furthermore, that approach has reinforced the perception of Single Market reforms as a give-and-get haggling about trade opportunities between countries as if the Single Market were just a glorified version of a global trade agreement whose properties could be adjusted in regular or – as is the case in today’s trade policy – irregular rounds of negotiation. But building a market is different from constructing trade agreements, even if the two worlds obviously could borrow from each other. While the main subject of the latter is to exchange trade opportunities with each other, the former is about building institutions and, ideally, reducing market distortions.

2. Europe’s Single Market history of partial liberalisation has reduced the potential gains from its own reforms. While partial liberalisation of cross-border exchange was – and is – politically feasible, it is not an economic strategy with good payoffs in markets that are going through periods of structural change because of technology, globalisation, education and other important factors. In fact, relative degrees of openness may incentivize companies, capital and labour to employ their assets in a way that does not go with the flow of natural structural changes.

If the chances to cross-border commercialization in Europe are far better in traditional industry than in advanced services and digital services, there will be obstacles of re-deploying Europe’s economic assets to the latter sectors because the gains from cross-border commercialization are easier to capture in traditional industry. Most likely, the partial and selective nature of Europe’s Single Market has been one reason behind why Europe’s is a laggard in advanced services and digital services.

3. When the quest is about building markets, the Single Market has to step behind the borders and focus on structural reforms and building institutions that are compatible with a well-functioning market. While the nature and profile of the Single Market, and its regulations, have changed over the years, they often have focused on the wrong issues, or factors that will not change the nature of markets much. As we are stepping closer to Single Market reforms in services, this becomes even more obvious.

To build a Single Market reform in energy, for instance, requires a completely different focus than building a Single Market for transistor chips. The actual barriers to cross-border integration are different and, consequently, the reforms that could change the conditions for cross-border integration will also be different than a standard, off-the-rack Single Market project. Again, the quest is much more about building markets than building bridges across borders.

Fredrik Erixon is a Swedish economist and writer. He is the Director of the European Centre for International Political Economy (ECIPE). Rosiitsa Georgieva is a former research assistant at the ECIPE. This article was first published by the ECIPE and the Five Freedoms  party (www.fivefreedoms.eu). A link to the full paper is here – http://ecipe.org/publications/wrong-single-market/?mc_cid=dd2d493022&mc_eid=ebfb15c02e

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