The European single market is often described as one of the EU’s crowning achievements and the motor behind the continent’s economic prosperity. But, according to a new report by Enrico Letta, president of the Jacques Delors Institute, it has been sorely neglected in recent years.
Established at the start of 1993, the single market guarantees the free movement of goods, services, people, and capital in the EU – but few reforms, if any, have been implemented since its inception.
After having attended over 400 meetings in over 60 European cities, Letta outlined his vision for the future of the single market in a report entitled Much More than a Market on 18 April. The former Italian prime minister argues the single market needs to be adapted to meet current political challenges – including the development of a common market for security and defence.
Letta has joined a growing chorus of economists who have called for streamlining the single market, while limiting cumbersome national regulations. “This is definitely having negative impacts on the ability of the financial sector to help to drive economic growth in Europe,” says Fredrik Erixon, an economist and director of the European Centre for International Political Economy (ECIPE).
More broadly, the EU’s economy has been on the decline relative to the US, Erixon notes. “If the EU now was a state in the United States, there would only be two American states that were poorer than us –and that would be Idaho and Mississippi,” he says.
In an interview with The Parliament, Erixon explains how the single market has developed over the past three decades and why it's still incomplete, particularly when it comes to the services economy.
Since its establishment in 1993, how has the single market evolved?
Quite substantially. And it's evolved in different ways. If we look at the contribution of the single market to the overall macroeconomic performance of Europe, we can point to especially two specific phases. The first phase is coming very early after the reform wave starts [under Jacques Delors in the early 1990s], and you will find that there is a significant contribution to cross-border trade [and] cross-investment, strong contributions to better productivity, and strong contributions to economic growth.
The second phase starts a bit into the 2000s. And it's basically when you can see that there's a strong moderation in the contribution that the single market gives to Europe's macroeconomic performance. And it's partly an effect that reforms aren’t coming anymore. You have already seen that the economic effects of the single market are there. And they, of course, continue to deliver better prosperity over time. But there is not a big push. The profile of Europe's economy is changing from goods to services. And the more we move from goods to services, the less significant the single market is going to be, because the single market remains predominantly a goods-oriented arrangement.
What are the successes of the single market – and what are its shortcomings?
We are still in a situation where the single market is of significant value for the entire goods sector when we trade in goods in Europe – when businesses make arrangements about where they are to go to establish new points of sales, where are they going to invest. There are strong contributions from the single market. It makes life a lot easier. It drives up competition and helps to reduce costs and prices for European consumers.
In the services sector, there have been advancements made that are important. But a single market for services is grossly incomplete [if] markets are drawn along national lines. And that can be everything from architectural services to financial insurance services. And some of this nationalism has also been encouraged by EU regulations that are required: For instance, financial services regulations or capital-requirement directive regulations that have largely empowered national financial supervisory authorities to get banks and others to hold more capital in their own economies and avoid exposing themselves to creditors outside their own borders.
If the EU now was a state in the United States, there would only be two American states that were poorer than us, and that would be Idaho and Mississippi.
If you want the single market to generate more economic growth in Europe, you need to continue with reforms. One of the really big problems right now [is] that state aid rules have been continuously relaxed ever since the start of the pandemic and now are of such a scale that it's beginning to lead to very unfair competition between companies that are located in different countries in Europe. The amount of state aid that now is being channelled out into the economy – basically governments supporting their own national firms – is extraordinarily high and it's predominantly driven by countries that are large and have the fiscal space to do so. And that's causing a lot of unfair competition.
What would you say are the most important aspects of Enrico Letta’s report?
I think the most significant parts are the concepts that he sets out for basically going towards more of a single market in sectors like energy, telecommunications and finance.
Could you explain why an industry like finance should be more fully adapted to the single market?
Banking and insurance services is a sector that has been extraordinarily slow to integrate across borders. There are a couple of instances – for instance, payment services – where you've seen a bit of it. But the core bulk of financial services remains very much nationally oriented. This is definitely having negative impacts on the ability of the financial sector to help drive economic growth in Europe. It leads to higher costs for banking services, and reduced competition.
When looking beyond European borders, Letta also argues for a “resilient single market in the new geopolitical scenario.” What does that entail?
He's pointing at two trends. The first trend is that Europe is a shrinking part of the world economy. It means you're going to become more dependent on what happens outside your own region because more patents, more R&D [research and development] expenditures, more new ideas, more businesses, more technologies are going to emerge outside of Europe than inside of Europe in the future compared to today or the past. It's important for Europe to be part of that development, because if we try to shield ourselves against it, in a ‘Fortress Europe’ type of way, huge economic losses [will come] from it, because we are going to become more dependent on others as our share of the world economy is shrinking.
The other part is there are tensions here. There are frictions and there are geopolitical risks. And the new type of geopolitics that is emerging is different from the one that grew from the 1990s after the end of the Cold War. It's going to be much less global and much more focussed on our economic alliances with countries who are friendly, who are partners, perhaps even allies. But even with countries that are friends and allies, there [are] going to be frictions as well. For instance, in our relations with the United States. And that, in [Letta’s] view, means that Europe needs to become more capable of either supplying itself, or accessing from others, key technologies and products that we need.
How is the European economy performing globally?
If you look at the European economy more broadly, we have been on a declining path for quite a while. In relation to the United States, for instance, we are getting poorer and poorer and poorer, and this is predominantly driven by very low levels of economic growth in Western Europe, especially continental Europe. Eastern and central parts of Europe have been growing at a very fast clip. Estonia is now richer than Spain. Poland is now richer than Portugal, which is an amazing trend in itself.
But Europe's general performance vis-a-vis the United States has been going down. If the EU now was a state in the United States, there would only be two American states that were poorer than us, and that would be Idaho and Mississippi. All other states in America would otherwise be richer than the EU.