Chapter 4 The Single Market The internal market

Chapter 4 The Single Market

The internal market • After the 1973 and 1979 oil crises the European economy experienced a prolonged recession with stagnating output, rising unemployment and declining world export shares. • During these years the terms ‘Eurosclerosis’ Eurosclerosis and ‘Europessimism’ were coined to describe the flagging process of integration. • The main energies of the Community appeared absorbed by budgetary squabbles and the annual marathons to fix ‘common’ agricultural prices.

The fragmentation of European markets • The EC member states were becoming increasingly concerned about the growing lag between their economic performance and that of countries such as Japan and the USA, especially in high technology sectors. • The Community was not only losing its world market share in industries such as automobiles market share and industrial machinery but also in rapidly growing sectors such as information technology and electronics.

The fragmentation of European markets • In searching for the explanation for this lack of competitiveness, European industrialists and policy makers laid the blame on the fragmentation of the EC market. • Krugman argued that the four large countries of the EC were comparable in size and population to EC the four great regions of the USA: the North-East USA (New England the mid-Atlantic), the Midwest (the north-central and western north-central states), the West and the South.

The fragmentation of European markets • Krugman, found that the level of specialisation in the US was higher than in the EC, even though the distances were greater. • The Midwest could be compared to Germany in that both were centres of heavy, traditional industry, while the South was similar to Italy with light, labour-intensive industry. • Krugman attributed the lower level of specialization in the EU to the continued existence of non-tariff barriers.

Industrial specialization (share of manufacturing employment) in Germany, Italy and the US, Krugman (1991)

Steps in introducing the Internal Market programme • In March 1985 Delors, presented his programme to the European Parliament. • The Cockfield White Paper of 1985, ‘Completing the Internal Market ’. • The Milan Summit decided on the intergovernmental conferences to prepare the necessary revision to the existing Treaties. • The Single European Act of 1987 set out the The Single European Act formal procedure necessary to implement the 1993 programme.

Background to the Single Market Programme • In 1985, when Jacques Delors became president 1985 of the Commission, the Single or Internal Market Programme was announced as a Programme strategy to raise EC competitiveness • The idea was to return to and complete the original objectives set out in the Treaty of Rome. • The removal of tariffs on intra-EC trade was The removal of tariffs on intra-EC trade considered a major factor contributing to the quadrupling of that trade in the first decade of the Community, with intra-EC trade growing twice as fast as world trade over that period.

Background to the Single Market Programme • The new approach, pioneered by the Delors Commission, combined positive and negative integration, relying upon minimum rather than exhaustive harmonisation. • Negative integration consists of prohibitions imposed on member states of discriminatory behaviour and other restrictive practices. • Positive integration consists in approximation of laws and standards.

According to the European Commission, the main non-tariff barriers to be eliminated were: • frontier controls; • differences in technical specifications and standards; • restrictions on competition for public purchases; • restrictions on providing certain services (in particular financial and transport services) in other EC countries; and • differences in national tax systems.

The Single Market • The Single Market is intended to be conducive to: • increased competition, • increased specialisation, • larger economies of scale. • It also allows goods and factors of production to move to the area where they are most valued, thus improving the efficiency of the allocation of resources.

The Single Market • The single market is all about bringing down barriers and simplifying existing rules to enable barriers everyone in the EU - individuals, consumers and businesses - to make the most of the opportunities offered to them by having direct access to 28 countries and over 500 million people. • The cornerstones of the single market are often said to be the ‘four freedoms’ - freedoms’ the free movement of people, people goods, goods services and capital. These freedoms capital are enshrined in the EC Treaty and form the basis of the single market framework.

The Single Market • But what do they mean in practice for everyone in the EU? • Individuals: the right to live, work, study or Individuals retire in another EU country • Consumers: increased competition leading to Consumers lower prices, a wider choice of things to buy and higher levels of protection • Businesses: much easier and cheaper to do Businesses business across borders

The Single European Act (SEA) • The Single European Act (SEA) revises the Treaties The Single European Act (SEA) of Rome in order to add new momentum to European integration and to complete the internal market. • It amends the rules governing the operation of the European institutions and expands Community powers, notably in the field of research and development, the environment and common foreign policy. • The SEA, signed in Luxembourg on February 1986 The SEA and entered into force on 1 July 1987. entered into force 1987

The Single European Act (SEA) • The SEA sets out the formal procedure necessary to implement the 1993 programme. • It also modified the EC decision-making process and called for a revived integration effort in other fields such as technology and in monetary, social, regional and external policies. • The SEA defined the Single European Market (SEM) as 'an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured'

The Single European Act (SEA) • The SEA represented the first major revision to the treaties, but at the time its importance was underestimated. • With the benefit of hindsight it can be argued that the SEA launched a new phase in the integration process, spilling over into renewed integration process efforts in political union, institutional reform, economic and monetary union, and reinforced EC social, regional and competition policies.

The Single European Act (SEA) • Title V of the Single European Act deals with 'economic and social cohesion' to ensure 'economic and social cohesion' harmonious development and the reduction of regional disparities. • The weaker regions, and in particular the periphery of the Community, feared that they would not be able to withstand the increased competition implied by the SEM and that there would be a worsening of regional and sectoral imbalances.

Implementation of the Single Market Programme • At the EC level rapid progress was made in passing the necessary measures for the Internal Market Programme. • The transposition of EC measures into national legislation was to prove a slightly more lengthy process. • The real difficulties arose in implementation of the measures and the granting of temporary derogations.

Measures to improve implementation of the Single market programme The 1997 Amsterdam European Council endorsed an Action Plan that entails the Commission drawing up a ‘Single Market Scoreboard’ every six months. The Scoreboards indicate whether member states meet the objectives of: • an average deficit of transposition into national law of less than 1. 5%, • Zero tolerance for legislation not transposed after 2 years or more, • Reducing the number of cases of infringement. Package meetings involve Commission experts and their counterparts in a member state who meet to examine a ‘package’ of infringement cases.

Measures to improve implementation of the Single market programme • The Internal Market Scoreboard examines how quickly and how well each of the Member States writes Single Market directives into national law. • It also highlights the number of infringements proceedings that are underway against Member States. • The Commission starts these proceedings when it considers that a Member State has not implemented an EU law correctly or indeed at all.

The Single Market governance cycle

Completing the Single Market • Despite its achievements so far, the single market is not yet complete. Indeed, creating a genuinely not yet complete integrated market is not a finite task, but rather an ongoing process, requiring constant effort and updating. • Indeed, technological and political developments mean that the environment in which the Single Market functions is changing all the time. Although many obstacles have been removed, other barriers have come to light and will go on doing so.

Completing the Single Market • Important gaps remain in the single market, particularly in services. Currently, different national services regulations make it difficult for service providers to establish operations in other Member States or provide their services across borders. • The member states are also working on a new framework in the area of financial services, which services will enable the EU financial sector to reach its full potential without having to negotiate unnecessary and costly barriers.

SOLVIT (the redress system for implementation of Internal Market rules) • In 2002 the SOLVIT redress system was 2002 introduced in order to improve implementation of Internal Market rules. • Previously victims of failure to apply rules (such as non-recognition of a valid diploma, or denied market access for a product) had to appeal to national courts or to the Commission. • Under the new system the victim can refer the case by to the SOLVIT office in their own member state, SOLVIT office and the office will raise the case with the country in which the misapplication has occurred.

SOLVIT (the redress system for implementation of Internal Market rules) • SOLVIT is an on-line problem solving network in which EU Member States work together to solve without legal proceedings problems caused by the misapplication of Single Market law by public authorities. • When citizens or businesses have a problem in getting their Single Market rights respected, they can go to the SOLVIT centre in their Member State. There is a SOLVIT centre in every European Union Member State (as well as in Norway, Iceland Liechtenstein).

The removal of frontier controls • A key aim of the removal of frontier controls is to facilitate free movement of people within the Community. In 1985 Benelux, Germany and France 1985 formed the Schengen Group with the aim of eliminating border controls between each other as rapidly as possible. Subsequently other countries joined the group, though the UK and Ireland opted out (though they participate in police co-operation), and Denmark has a partial opt-out, reserving its position on all questions except visas. • Iceland, Norway, Switzerland participate in Schengen from November 2008. • In 2014 Schengen was enlarged to include 26 member states.

Other aspects of the removal of frontier controls • Other aspects of the elimination of border controls required by the Internal Market include the abolition of customs formalities, veterinary and road safety checks at frontiers. • A series of measures was introduced to facilitate the right to work in other member states and to develop exchange programmes, including EU Programmes such as: • ERASMUS (university exchanges); • Leonardo da Vinci (training and vocational education); • LINGUA (promotion of language teaching and learning).

The removal of non-tariff barriers in trade between the member states 1) The old approach 2) Mutual Recognition 3) The ‘new approach’ from 1985

The old approach involved harmonising the national standards and technical regulations of member states. This was slow and inefficient, and ran the risk of the risk o excessive bureaucratic interference

Mutual Recognition was defined in the Cassis de Dijon case of 1979. All goods lawfully manufactured and marketed in one member state should be accepted also in other member countries. Some exceptions were allowed related to public health, the fairness of commercial transactions and the defence of the consumer.

The ‘new approach’ from 1985 Wherever harmonisation of rules at the EC level was deemed necessary, it was decided that this should be limited to essential objectives and requirements. The task of defining technical specifications was left to standardisation bodies such as the CEN (Centre Européen de Normalisation), the CENELEC (Centre Européen de Normalisation Electrotechnique) and the ETSI (European Telecommunications Standards Institute).

The ‘new approach’ from 1985 • A product manufactured according to EU standards can carry the mark 'CE' if it conforms 'CE' to the basic safety requirements laid out in the relevant directive. • Compliance is voluntary and manufacturers may choose not to observe Community standards, but the onus is on them to prove that their product is safe.

Protection of consumer rights 1 § Actions for the protection of consumer health and safety. These include rules on the testing and registration of pharmaceutical, medical and cosmetic products, measures to ensure the safety of toys, health controls, and labelling for food and agricultural products, and so on. § Protection of the economic interests of consumers by, for instance, measures against unfair contracts and misleading advertising.

Protection of consumer rights 2 § Actions to ensure that consumers have comparative information, through rules on packaging and labelling, and support for consumer organisations. § Measures to ensure the right of consumers to redress with simple clear procedures.

Fiscal harmonisation Differences in national tax systems represented a barrier to completion of the internal market in two ways: • Tax differences may cause price distortions and so undermine the competitive process. • Differences in national taxation have to be adjusted at the border, thereby necessitating controls at the frontier. Moreover, operating with different tax systems adds to the cost and complexity of doing business in other EU countries.

Fiscal harmonisation • The Community has made slow progress in introducing fiscal harmonization, partly because this is one of the areas where unanimity voting is required in the Council of Ministers since taxation raises sensitive issues. • The power to tax is central to the sovereignty of a country, and differences in tax systems a country frequently reflect underlying differences in culture and tradition.

VAT (value added tax) Value added tax is • a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services. • a consumption tax because it is borne ultimately by the final consumer. It is not a charge on businesses. • charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and distribution chain. • collected fractionally, via a system of partial payments whereby taxable persons (i. e. , VAT-registered businesses) deduct from the VAT they have collected the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved. • paid to the revenue authorities by the seller of the goods, who is the "taxable person", but it is actually paid by the buyer to the seller as part of the price. It is thus an indirect tax.

VAT (value added tax) • VAT is paid at each stage in the productive process (including marketing) on the value added at that stage. • VAT accounts for some 10 -20 per cent of the total tax revenue of the member states. revenue • Although the EC members agreed on a uniform method for calculating VAT in 1979, its application differs greatly from country to country. • Differences in VAT between member states relate to tax coverage (i. e. which products are liable to tax), the number of VAT rates and their levels.

VAT (value added tax) • The compromise under the Single Market Programme entailed a standard minimum rate of VAT of 15 per cent and a list of products (food, 15 per cent pharmaceuticals, energy, water, hotels, passenger transport etc. ) on which a reduced rate of 5 per cent could be applied. 5 per cent • Subsequently a band of 15 -25 per cent was 15 -25 per cent introduced for the standard rate. Existing zero rates could be continued but not extended.

Excise duty • Excise duties are indirect taxes on the consumption or the use of certain products. In contrast to Value Added Tax (VAT), they are mainly specific taxes, i. e. expressed as a monetary amount per quantity of the product. • The most commonly applied excise duties are those on • alcoholic beverages, • manufactured tobacco products and • energy products (motor fuels and heating fuels, such as petrol and gasoline, electricity, natural gas, coal and coke).

Excise duty • Excise duty accounts for about 6 -12 per cent of the total tax revenue of the member states. the total tax revenue • There are considerable differences in the level and coverage of excise duties (on petrol, alcohol, cigarettes, wine, beer etc. ) in the various EC countries. • These reflect differences in social customs, public health considerations, the revenue requirements of governments of the member states, and in some cases the existence of state monopolies.

Excise duty • The 1993 programme simply entailed minimum rates of duty for alcohol, tobacco, cigarettes and mineral oil, and an imprecise commitment to harmonisation in the medium term. • Duty-free sales have no place in an internal market, but their abolition entailed a serious loss of revenue for airports and ferry companies. It was eventually decided to allow sales of duty-free on intra-EU trips to continue until 1999 when, despite protests by certain member states (the UK, France and Germany), they were abolished.

Tax competition • The fear of ‘tax competition’ again came to the ‘tax competition’ fore from the late 1990 s. • It was argued that removal of the barriers, with capital and labour becoming more mobile, would lead workers and investment to move to low-tax destinations

Tax competition • Ireland, for example, was accused of setting its taxes on profits low, which helped to contribute to high levels of inward foreign direct investment. • New member states were warned that if they attempted to emulate the successful Irish model, they would not be permitted to introduce what were considered as unfair tax concessions

The liberalisation of public procurement • According to the European Commission, public orders accounted for about 16 per cent of EU GDP in 2006. Only part of public purchases (public procurement) is subject to tender or formal contract (7– 10 per cent of GDP). • According to the Cecchini Report, only one public procurement contract out of 50 was granted to a firm from another country, and the Report maintained that governments were overspending by the equivalent of 22 billion euro, often paying 25 per cent more than their private counterparts. • The aim was to introduce common rules and greater transparency in tenders. transparency

The liberalisation of public procurement • In practice public procurement has proved one of the most difficult markets to open • According to European Commission, in 2006 cross-border procurement accounted for only 3 per cent of the total number of bids, though indirect public procurement made by the local subsidiaries of foreign firms amounts to 30 per cent. • Some sectors such as defence are subject to special rules.

Liberalisation of the service industries Restrictions on trade in services are said to be necessary to protect consumers, for example: • to ensure safety (air travel), • minimum standards (medical services), • and financial solidarity (the banking system), • or for cultural reasons (audiovisual services).

Liberalisation of the service industries Alternatively, restrictions are said to be justified to protect national industries, for instance: • for strategic or prestige reasons (air transport), • to control key technologies (information science or telecommunications), • for regional, social or environmental reasons (rail transport), • or for cultural reasons (audiovisual services).

Services in the Treaty of Rome The Treaty called for two types of freedom in this context: • • to provide services (Article 49): any company of a member state can provide services in other member states without having to set up an office there, and to set up an establishment (Article 43): companies (or persons) from one member state may set up an establishment in another member state on the same conditions as nationals of the other member state (the principle of national treatment).

The service directive • Progress in liberalising the EU service sector in the Community has been slow. By 2006 services slow accounted for 60 -70 per cent of economic activity in the EU (25), but only 20 per cent of intra EU crossborder trade. • The Lisbon Summit of 2000 called for a strategy to remove cross-border barriers to service provision. • In 2002 the Commission published ‘State of the Internal Market for Services’ setting out the legal, administrative and practical obstacles to the movement of services in the EU. • In January 2004 then Internal Market Commissioner, Frits Bolkenstein, proposed a directive to create an effective Single Market for services.

The initial proposed service directive • The directive aimed at removing a large number of barriers that prevent or discourage crossborder trade in services. • Inter alia the initial proposed directive envisaged applying the country of origin principle, which would mean that if a service operator were operating legally in one member state (i. e. following home-state legislation), it could offer following home-state legislation its services freely in others.

The service directive • There widespread protests that the directive would lead to unfair competition (the ‘Polish plumber’ was considered the personification of the fear that there would be a huge influx of low-paid workers from Central-East Europe). workers from Central-East Europe • April 2006 Revised proposal of the Commission • 12. 2006 Directive was adopted by the European Parliament and the Council of Ministers • The Directive will have to be transposed into national legislation by 2009.

The revised service directive Under the new Directive; • It will be easier for businesses to establish anywhere in the EU and to provide services across borders, but country of origin principle removed • Businesses would be able to complete all formalities online with a single point of contact. • However, member states would be able to apply restrictions that are non-discriminatory, necessary and proportionate if this is required to protect public safety, social security, health, and the environment.

The revised service directive • Member states would be obliged to remove unnecessary obstacles (such as the need to open a national office or register with the local authorities). • Service providers were to be supervised by ‘mutual assistance’ i. e. under enhanced provisions for coassistance operation between national authorities, backed up by an electronic information system allowing authorities to exchange information. • There is to be limited harmonisation of rules including rights for recipients of services (consumers and other businesses), and information requirements.

Who would be covered by the new service directive? • Business services such as management consultancy, advertising, certification and testing, facilities management including office maintenance, and the services of commercial agents. • Services provided to businesses and consumers such as real estate services, estate agents and letting services, construction architects, distributive trades and the organisation of trade fairs • Consumer services such as tourism, amusement parks, plumbers and electricians.

The revised service directive: Exceptions • Financial services, telecommunications, transport services, broadcasting, and recognition of professional qualifications were already covered by specific legislation so were excluded from the Directive. • In line with the EP’s amendments the revised proposal does not affect labour law (such as collective agreements and domestic legislation on working hours and minimum wages), posted workers (for which there is separate legislation), healthcare, social services relating to social housing, childcare, support of families and persons in need, activities related to the exercise of official authority, temporary work agencies, private security services, gambling and audiovisual services.

Liberalisation of financial services • By the 1980 s there was growing world-wide support for deregulation and liberalization of capital movements. • The 1985 White Paper identified the main barriers in this sector as controls on capital movements, and different regulatory frameworks for banks and other financial institutions. • In 1988 a Directive called for complete elimination of controls on capital movements both between EC member states and with third countries. This was achieved from July 1990, with the later deadlines of 1992 for Ireland Spain, and 1994 for Greece and Portugal.

Liberalisation of the banking sector • In 1989 three Directives were passed which formed the basis for liberalisation of the banking sector. • The Second Banking Directive established a single banking license. Any bank, which has received authorisation by the appropriate authority in any EC state, can provide services over the border, and can open branches in any other EC state without the need for further authorisation. • The home country has main responsibility for control of the bank's activities, while the host country shares responsibility for supervision of the liquidity of branches in their own territory.

The Financial Services Action Plan (FSAP) The FSAP of 1999 set out 42 measures, to: • create a single EU-wide financial market • ensure state-of-the-art prudential rules and supervision. • eliminate tax obstacles to financial market integration In 2005 the legislative phase of the Action Plan was completed.

The ten-point plan of 2003 to improve the working of the Internal Market 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) enforcing the rules, integrating service markets, improving the free movement of goods, meeting the demographic challenge, better essential services, improving conditions for business, simplifying the regulatory environment, reducing tax obstacles, more open public procurement markets, providing better information

Estimates of the effects of the Single Market Programme According to the Cecchini Report, in the case of passive macroeconomic policies, the overall impact (after an estimated 5 -6 years) of the Single Market Programme could be a 4. 5 per cent increase in GDP, a 6 per cent reduction in the price level, and the creation of about 2 million jobs. With a more active macroeconomic policy (reflecting the improved economic performance), there would be a 7 per cent increase in GDP, a 4. 5 per cent reduction in inflation and the creation of 5 million jobs.

Estimates of the effects of the Single Market Programme: 10 years later According to a study carried out by the EC Commission 10 years after the January 1 st 1993 deadline, the Internal Market added 1. 8 per cent (or € 164. 5 billion) to the EU GDP in 2002. The cumulative extra prosperity due to the Single Market was estimated at € 877 billion and, according to the Commission, 2. 5 million jobs had been created since 1992. A later study by the Commission found that the estimated gains to the single market amounted to 2. 2% of GDP (or € 223 billion) in 2006 and 1. 45 of total employment or 2. 75 million jobs.

Slowing effect of the SEM • The ratio of intra-EU trade to GDP increased in the second half of the 90 s but stabilised in 2000. • Foreign direct investment (FDI; mainly by EU firms) grew rapidly in the 1990 s, but has fallen as a share of EU GDP since 2001. • Rapid convergence of prices in the EU(25), but price divergence has remained stable in the EU(15) in recent years. • 5000 cross-border mergers in the EU in 2005. • The largest EU firms earnt 2/3 of revenue outside their home country in 2005 (1/2 in 1997), but the average consumer spend 86% of income on goods made or provided at home. • Introduction of the euro appears to have boosted trade, FDI and cross-border mergers but not price convergence in the euro area.

Economic benefits of the Single Market • Over the last 15 years the Single Market has increased the EU's prosperity by 2. 15% of GDP. • 2. 75 million extra jobs have been created over the period 1992 -2006 as a result of the Single Market. • The Single Market has enhanced the ability of EU firms to compete in global markets. • EU exports to third countries have increased from 6. 9% of EU GDP in 1992 to 11. 2% in 2001. • The Single Market has made Europe a much more attractive location foreign investors. New inflows of foreign direct investment into the European Union have more than doubled as a percentage of GDP.

Benefits for citizens/consumers • EU citizens can travel across most of the EU without carrying a passport and without being stopped for checks at the borders. • Less bureaucracy for people wishing to study, work or retire in another EU country. • Wider choice for consumers: the range of products and services on sale across the EU is wider than ever and in most cases prices are easily compared thanks to the euro. • More advantageous prices: manufacturers and service providers have to keep prices down because they are selling into a single competitive market of 500 million people. • Phone calls, internet access and air travel have all become cheaper. • More competition in public procurement means better value and higher quality services for the taxpayer.

Benefits for business • Trade within the EU has risen by 30% since 1992. The absence of border bureaucracy has cut delivery times and reduced costs. • The mutual recognition principle means that in most cases companies can do business across the EU by complying with the rules in their home Member State. • In many cases, Single Market rules often replace a large number of complex and different national laws with a single framework, reducing compliance costs for businesses. • New export markets have been opened up to small and mediumsized enterprises (SMEs) who previously would have been prevented from exporting by the costs and difficulties involved. • Any business in the EU can benefit from the huge potential market that is the European Union: 28 countries with over 500 million potential customers.