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4.22 Greater enforcement, especially if by a European regulator, would certainly raise political difficulties in many Member States, not least the UK. It would also require a significant increase in the proactivity and resourcing of the European Commission’s enforcement arms, greater determination by Member States to collaborate, and a swifter CJEU. That would bring its own political problems since it is precisely the remaining non-tariff barriers which have most political support and which would be most resistant to change.
Evidence submitted by TheCityUK
4.23 A package of institutional reform could help progress in this area. Structural changes to the Council, such as establishing a dedicated Single Market Council, and to the Commission, including splitting the overly extensive Single Market and financial services portfolio, might give greater focus and leadership to the Single Market agenda. Thought could also be given to establishing a Single Market Authority, charged with market studies, research, annual health check and audit of the Single Market, to ensure that implementation and enforcement is adequately resourced and not the poor relation to the legislative process.
The recent Single Market Integration report, published as part of the EU Annual Growth Survey, is a welcome development.
Where would the UK gain from the EU doing less?
4.24 The Single Market is one of the areas where the “bicycle theory” of EU politics, i.e. that forward movement is necessary to keep things on track, seems to apply most clearly.
Unless there is a consistent and determined attempt to keep up with technological and commercial progress and best practice, either through legislation or enforcement, the result is likely to be the growth of non-tariff barriers to trade, and the entrenchment of incumbent economic actors with a vested interest in the status quo. This is why there appears to be a never-ending pipeline of EU legislation presenting difficult regulatory choices and political trade-offs.
4.25 So a decision to do less in this area could be a decision to weaken the depth of integration over time. It is hard to see how that could be in the UK’s interest. Depending on the view taken of the economic benefits, as set out in Chapter 3, it is possible to make a case that the UK would benefit from not participating in the Single Market at all, though it is not one that the Government agrees with. But it is hard to make any kind of case for remaining within the Single Market framework but encouraging it to function defectively or not at all.
4.26 Accordingly, although it is easy to say that the EU should regulate less, it is important to look at what might fill the vacuum. The EU could certainly try to do less legislatively, and rely on better application of Single Market principles and CJEU jurisprudence to drive liberalisation and to improve conditions for economic actors within the Single Market. This would make a lot of sense economically. Global competitiveness is not static but depends on the EU’s ability to respond to changing market conditions and opportunities,20 so less legislative harmonisation and more emphasis on mutual recognition would make it easier to adjust rules to evolving conditions. Some might see this as analogous to the way the common law system in England and Wales evolved by proving itself capable of dealing with a wide range of very different situations. But it would be important to couple it with the effective enforcement mechanisms described above if mutual recognition were to work well in practice. And such arrangements would be significantly less predictable for businesses, particularly SMEs, operating across the Single Market.
4.27 Less and better legislation would be of benefit to the UK and the EU more broadly. Since the Lisbon Treaty was agreed, there has been greater use of delegated and implementing acts, reflecting the speed at which the legislative machine is having to operate. This pressurised legislative process also tends to encourage the political machine to focus inwards, and to encourage a sense that passing legislation is the most important task, rather than focusing on external competitiveness. The EU could help itself in this area by, for example, ensuring it has a properly-functioning mechanism that screened legislative proposals more systematically and objectively, for example that a proposal would only proceed if it clearly had a positive impact on growth21. A “red card” mechanism giving Evidence submitted by City of London Corporation Evidence submitted by BT suggests such a “competitiveness test” 58 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market national Parliaments a bigger role could also help. There is also the potential for a more consultative approach to policy development and for better appraisal of likely costs and benefits to give rise to higher quality legislation that can be implemented more readily.
4.28 The Single Market is entering its most challenging period since its creation in the late 1980s. There is still a broad consensus that it 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.
Appendix 1: Comparative analysis of economic studies on the impact of the Single Market 1. Many studies have attempted to quantify the impact of the creation of the Single Market.
It is not an easy task. The gradual and continuous nature of action to remove internal European barriers to trade presents considerable difficulties in quantifying the full ‘impact’ of the Single Market. Furthermore, the wide range, complexity and interdependence of policies and measures, and the need to control for the various stages of EU enlargement, complicate the analysis. Estimates are therefore often not comparable and depend on the objective and nature of the study, the methodology used, the geographical area and time period covered.
2. Moreover, not all studies cover both static gains from, for example, increases in market size, economies of scale, changes in market structure, and productivity gains from increased competition, leading to a one-off permanent increase in GDP; and dynamic gains from, for example, a wider range of different products, and impacts on rates of accumulation of factors of production, leading to a permanent increase in the growth rate.
While static gains predominate in the short term, dynamic gains dominate in the long term.
3. This appendix summarises the methodologies and headline results of some of the main studies in this area, highlighting the similarities and differences in the approaches undertaken, and hence whether they are comparable. The intention is not to attempt to deliver a ‘consensus view’ on what the impact of the creation of the Single Market has been. Nor will this paper single out a preferred methodology or analytical approach.
Papers are considered in order of publication.
Cecchini Report (1988)1 – 1992 – The European Challenge – The Benefits of the Single Market
4. In 1988, the European Commission launched a series of reports aimed at a comprehensive quantitative assessment of the economic gains that could be achieved from a Single Market through targeting non-tariff barriers that kept the European market fragmented – ‘the costs of non-Europe’. The report specified the conditions for establishing the Four Freedoms by examining the costs and benefits of a Single Market.
Cecchini, P., M. Catinat & A. Jacquemin (1988) The European Challenge 1992: The benefits of a Single Market, for the Commission of the European Communities 62 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market 5. The Report argued that nationally fragmented markets generated three types of barriers to trade – physical barriers, for example, customs controls and associated paperwork, technical barriers, for example, divergent national product standards and technical regulations and fiscal barriers, for example, differing rates of VAT and argued that reducing these barriers would lead to both significant static gains such as increases in output and lower prices and dynamic gains from greater competition and economies of scale by improving the rate of innovation and productivity.
Overview of Methodology2 6. The Report used various techniques to estimate the potential impact of the Single Market Programme. At its heart was a static approach to assessing the impact, through comparing to a status quo baseline the costs of trade between Member States after the implementation of the programme. Competition effects were estimated as one-time shocks to the economic system, and hence did not include long-term dynamic impacts.
Much of the detailed analysis was undertaken for seven Member States3, and then scaled up to deliver a whole economy 12 Member State picture.
7. The analysis assessed the effects of market barriers through looking both at horizontal issues affecting many different industries4 and at vertical assessments of specific goods and services sectors.5 The sectors covered by the latter accounted for 28% of the economy’s total value added, just over half services and just under half goods.
8. It also assessed the effects of market integration by using partial equilibrium analysis to capture size and competition effects6 from the removal of Non-Tariff Barriers (NTBs) and from the greater integration of European markets in ten industrial sectors. Tariff-equivalents of barriers were calculated to model the impact of a reduction in the costs of intraCommunity trade, with further scenarios taking account of the extent of potential market integration.
9. In addition, various macro-economic scenarios7 assessed the timeframe over which the impacts would be felt and considered the impact on other macro-economic indicators such as employment and inflation. The analysis also modelled scenarios with more active economic policy measures (increased public investment and a reduction in direct taxation) that would be enabled through the creation of room for manoeuvre from integration that would lead to, for example, easing of constraints on public finances.
Cecchini, P., M. Catinat & A. Jacquemin (1988) The European Challenge 1992: The benefits of a Single Market, 2 for the Commission of the European Communities.
Germany, France, Italy, the United Kingdom and the Benelux states (together approximately 88% of GDP of 3 the EC).
The analysis of market barriers included a survey of around 20,000 enterprises across all 12 Member States 4 to ascertain which barriers were considered most significant (from technical standards and regulations and frontier formalities to restrictive procurement procedures).
Nine in-depth micro-economic studies – Manufacturing: telecoms equipment, automobiles, foodstuffs, 5 building materials, textile and clothing, pharmaceuticals; Services: business services, financial services, telecommunication services.
The effects are: (i) welfare gains associated with increase product variety; (ii) technical efficiency gains through 6 exploitation of economies of scale – generated by increased output in the short term and restructuring in the long-term; and (iii) the fall in prices and costs resulting from greater competition.
The analysis uses the Commission’s Hermes model, and the OECD’s Interlink model which both look at 7
10. Critics of the Cecchini Report analysis either suggested that gains were over-estimated, on the basis that not all NTBs would be removed in practice by the Single Market Programme, or alternatively that they were under-estimated given the focus on the short-term effects of the removal of NTBs rather than the longer-term, more dynamic impacts associated with increased competition (and increased innovation) and thereby a permanently higher growth rate for the EU economy.
11. There were also some weaknesses in the partial equilibrium approach. It assessed the impact on individual product markets before aggregating the results to deliver a macroeconomic assessment. This suggests that interactions between sectors were not accounted for, a significant omission given the integrated nature of supply chains across many different areas of activity.
12. Moreover, the welfare costs of adjustment were not included in the estimates due to difficulties in quantification. But they certainly existed, and could affect individuals and businesses in all sectors of the economy in all regions through needing to adapt to new competitive pressures.
13. Finally, the analysis did not consider the impact of further enlargement.
14. Overall, the Cecchini Report estimated the “costs of non-Europe” to be between 4.25% and 6.5% of GDP, depending on assumptions (see below). This was a range of around ECU8 170-250 billion at 1988 prices for the 12 Member States, with an oft-quoted mid point of around ECU 200 billion. The gains associated with reducing costs were expected to deliver a short-run impact, while the effects associated with changes in market structure were expected to persist for longer.
Source: Commission of the EC (European Economy paper No. 35); *if (4) and (5) are computed jointly; Note: All lines except the last reflect the results for 7 Member States at 1985 prices.