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Review of the Balance

of Competences between

the United Kingdom and

the European Union

The Single Market

July 2013

Review of the Balance

of Competences between

the United Kingdom and

the European Union

The Single Market

© Crown copyright 2013

You may re-use this information

(excluding logos) free of charge in any

format or medium, under the terms of the

Open Government Licence. To view this

licence, visit http://www.nationalarchives.gov.uk/

doc/open-government-licence/ or

e-mail: psi@nationalarchives.gsi.gov.uk.

Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned. Any enquiries regarding this publication should be sent to us at BalanceofCompetences@cabinet-office.gsi.gov.uk.

This document is also available from our website https://gcn.civilservice.gov.uk/ Executive summary 5 Introduction 9 Chapter 1 The historical development of the Single Market 13 Chapter 2 The current state of competence 19 Chapter 3 The Single Market and the UK’s national interest 35 Chapter 4 Future options and challenges 51 Appendix 1 Comparative analysis of economic studies on the impact of the Single Market 61 Annex A Certain third-country relationships with the Single Market 75 Annex B Submissions to the Call for Evidence 77 Annex C Engagement events 80 Annex D Other sources used for the review 82 Executive summary This report examines the balance of competences between the European Union and the United Kingdom in the area of the Single Market. It is a reflection and analysis of the evidence submitted by experts, non-governmental organisations, businesspeople, Members of Parliament and other interested parties, either in writing or orally, as well as a literature review of relevant material. Where appropriate, the report sets out the current position agreed within the Coalition Government for handling this policy area in the EU. It does not predetermine or prejudge proposals that either Coalition party may make in the future for changes to the EU or about the appropriate balance of competences.

Chapter One sets out the historical development of the Single Market since its inception in 1958 with the Treaty of Rome. The Single European Act, which came into force in 1987, committed the EU to creating a functioning single market allowing for the free movement of goods, persons, services and capital (the so-called Four Freedoms). Subsequent Treaties have seen the addition of other areas, such as environmental, social and employment policy, to the original core. The jurisprudence relating to the Single Market has also developed in parallel through a number of important European Court of Justice (CJEU) judgments. Although the completion of the Single Market was celebrated in 1992, in reality it was far from complete at that point. Subsequent liberalisation over the past twenty years has created a deeply integrated, but not perfect, Single Market. Much further liberalisation remains possible and many barriers, both formal and informal, still remain.

Chapter Two sets out the legal framework which makes the Single Market work. It explains the Treaty structure, the Four Freedoms (goods, services, people, and capital), and how the EU legislates. It sets out the scope of competence within each of the Four Freedoms and the debates that surround each of them. It considers the pros and cons of harmonisation and mutual recognition as ways of encouraging market integration. It explores the debate surrounding the powers given to the EU by Article 114 in the Treaty on the Functioning of the European Union (TFEU). It concludes that it is not possible to establish a clear division between Member State and EU competence in the Single Market area, but that any situation where there is a restriction of movement on people, goods, services, or financial flows is potentially unlawful, susceptible to legal challenge, and must be shown to be objectively justified in the public interest.

6 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market Chapter Three explores the impact of the Single Market on the UK’s national interest. It

looks successively at:

• The economic benefits of the Single Market. It notes that most studies suggest that the GDP of both the EU and the UK are appreciably greater than they otherwise would be, thanks to economic integration through the Single Market. There is a fuller discussion of the studies in Appendix 1 of this report, including a summary table on page 72;

• The effect of the legal regime on economic actors, noting that businesses value the additional access to EU markets that the Single Market brings and recognise this will bring a regulatory burden. Views vary about the nature of that burden, the direction of it, and whether the UK “gold plates” it. The evidence also indicates that the standard of implementation and enforcement of legislation varies greatly across the EU and that this forms a significant barrier to UK firms’ ability to take advantage of the Single Market’s opportunities in practice;

• The impact of the Single Market on policy development. It highlights the strong influence the UK has had on the development of the Single Market, driving it in a broadly liberalising direction. It looks at whether the Single Market necessarily generates the need for EU-level policy-making in other areas, for either economic or political reasons, and concludes that it inevitably does in areas such as state aids, competition and network industries; potentially does in areas such as environment or regional policy; and that views vary about whether it necessarily requires EU-level employment and social policy-making, with large corporations and business trade associations being broadly sceptical.

• The Chapter concludes that:

… integration has brought to the EU, and hence to the UK, in most if not all observers’ opinions, appreciable economic benefits. It has also spread the UK’s liberal model of policy-making more widely across the EU. But it has brought with it constraints on policy-making of varying kinds, and a regulatory framework which some find difficult to operate within or find burdensome, even if the obligations are not necessarily any greater than would have been imposed nationally. Is that trade-off, between cost and benefit, between economics and politics, of overall benefit to the UK? … Most observers, and indeed most of the evidence received for this report, answer positively. They do so, not without qualifications or reservations, but with a focus on the economic benefits already achieved… and on those potentially available in the future.

Chapter Four considers the future direction of the Single Market.

• It explores how the economic crisis has caused many to look for ways to deepen the Single Market further to generate new growth across Europe. It highlights that the evidence submitted to the Review shows very strongly how important it is that the Single Market remains open to the wider world economy. It considers the impact upon the Single Market of possible further euro area integration.

• It looks at areas where the EU doing more might be in the UK’s interest, and suggests that the EU could strengthen its own enforcement efforts, focus on network and services liberalisation, and maybe make some small institutional changes.

• It also considers where the EU doing less would be in the UK’s interest. It suggests less and better legislation, with more reliance on the mutual recognition principle.

• It concludes that there is:

a broad consensus that [the Single Market] is at the core of the EU’s development, that it has driven growth and prosperity in the Member States, and that it should continue to do so. At the same time the political will to drive its development into more politically sensitive areas is under challenge. The “free good” of significant enlargement of the market may not be on offer in the near future. Institutional developments in the euro area could also influence it significantly, for good or ill. All this means that the Single Market could once again be more at the centre of European political debate, which could open up opportunities for Britain.

This report is one of 32 reports being produced as part of the Balance of Competences Review.

The Foreign Secretary launched the Review in Parliament on 12 July 2012, taking forward the Coalition commitment to examine the balance of competences between the United Kingdom and the European Union. It will provide an analysis of what the UK’s membership of the EU means for the UK national interest. It aims to deepen public and Parliamentary understanding of the nature of our EU membership and provide a constructive and serious contribution to the national and wider European debate about modernising, reforming and improving the EU in the face of collective challenges. It has not been tasked with producing specific recommendations or looking at alternative models for Britain’s overall relationship with the EU.

The Review is broken down into a series of reports on specific areas of EU competence, spread over four semesters between 2012 and 2014. More information about the Review, including a timetable of reports to be published over the next two years, can be found at https://www.gov.uk/review-of-the-balance-of-competences.

The objectives of this report

The objectives of this report are:

• To consider the broad issues and main debates underlying the Single Market as a whole, in particular exploring the level of market integration thought to be necessary for an effective Single Market, and the mechanisms (such as harmonisation or mutual recognition) for achieving it;

• To explore the interrelationships between the Single Market and other areas of competence, and to assess the strength of the arguments that certain other areas of competence are needed to enable the Single Market to operate effectively;

• As a result, to assess the implications for the UK national interest of the current state of integration and EU competence in the Single Market field.

Chapters 1 and 2 of this report set out the essential background: the history of the development of the Single Market and the current nature of the EU’s powers in the Single Market area.

Chapter 3 considers the three areas set out above. Chapter 4 looks to the future, identifying trends and possible policy options.

10 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market The nature of this report The analysis in this report is based on evidence gathered following a call for evidence. It draws on written evidence submitted, notes of seminars and discussions held during the call for evidence period and existing material which has been brought to our attention by interested parties, such as past Select Committee reports or reports of the European Commission.

These are set out in the Annexes.

Chapter 1:The historical development of theSingle Market

1.1 What is now known as the Single Market was a concept at the heart of the original Treaty of Rome, which came into force in 1958. That Treaty aimed at creating a “common market”, later “internal market”, covering the whole territory of the then six members of the then EEC. That common market involved a Customs Union and the free movement of goods – that is, a single external customs tariff plus the abolition of all duties and similar mechanisms between the Member States – as well as provisions on the free movement of workers, of services, and (in guarded form) capital, known as the Four Freedoms. There were provisions on competition policy and government aid to business (state aids). All these mechanisms continue to form the core of the Single Market (the more usual term nowadays for the common or internal market), today.

1.2 There was limited formal evolution in the system until the mid-1980s. The Customs Union was completed, and duties between Member States abolished, in 1968. But there was little EU legislation, partly because at that time it had to be agreed unanimously by all the Member States.

1.3 In parallel, though, there was significant evolution of the jurisprudence affecting the system, through a series of important judgments of the Court of Justice of the European Union (CJEU), judgments that promoted the Single Market, and invalidated trade barriers.

The Single European Act and the Single Market programme 1.4 This all changed in 1985. For some years Europeans had been preoccupied by “Eurosclerosis”, the perceived stagnation of European economies. A possible solution was quickly identified: to make a reality of the plans in the Treaty for a genuine single market for Europe. The UK was a major driving force in generating political impetus behind this, and pressed for the Single Market portfolio for the UK’s Commissioner, Lord Cockfield, in

1984. In 1985 the Commission submitted to the Milan European Council a White Paper1, Completing the Internal Market, which argued for a new more dynamic strategy based on mutual recognition and on more legislative harmonisation. It listed 279 specific legislative measures to be brought into force by 1992, and proposed a series of Treaty changes to enable that to happen more swiftly. This essentially set the agenda for the Single Market as we know it today.

European Commission, Completing the Internal Market, COM(85)310 final 14 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market 1.5 Some, but not all, of these changes were incorporated into the Treaty through the Single European Act (SEA) which came into force in 1987: notably, a new Article which committed the EU to creating a functioning single market by 31 December 1992 and defined it as “an area without internal frontiers in which the free movement of goods, persons, services, and capital is ensured”, and an Article which allowed legislation with this aim to be agreed by qualified majority voting in Council (albeit with some exceptions such as tax policy). The SEA also added specific provisions on research and technological development, environmental policy, social policy, and economic and social cohesion.

1.6 At the same time the Commission proposed a new approach to Single Market legislation.

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