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«July 2013 Review of the Balance of Competences between the United Kingdom and the European Union The Single Market © Crown copyright 2013 You may ...»

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Evidence submitted by Kingfisher 21 Evidence submitted by Centre for European Reform, Wine and Spirit Trade Association. For further case 22 studies of the advantages of harmonisation for cross-border trade, see submissions from the Scotch Whisky Association and Safelincs Evidence submitted by Federation of Small Businesses 23 Evidence submitted by CBI 24 Evidence submitted by Institute of Directors 25 Evidence submitted by Standard Life 26 Evidence submitted by Lloyd’s 27 Evidence submitted by BAE Systems 28 Evidence submitted by Senior European Experts Group 29 30 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market

2.60 In practice, both processes are used together. There can be a process of regulatory development as economic actors become more comfortable with each others’ approaches, with initial EU regulation handled through mutual recognition, before progressing to minimum harmonisation and finally exhaustive harmonisation30. Or the two approaches can be used together, with mutual recognition combined with elements of common, positive rules, for example in Directive 2005/36 on the Mutual Recognition of Professional Qualifications. Another alternative is the so-called “28th regime”, for example in some EU consumer law, whereby an EU framework exists in parallel, for voluntary use, as well as the national frameworks31. In all these processes there is in practice much scope for consultation with stakeholders and for getting the detail of the arrangements right.

2.61 Whatever the objective merits of the two systems, harmonisation has been used more in practice. One estimate is that only around one-fifth of goods are traded under mutual recognition without the need for a Directive.

…it has turned out to be difficult to get mutual recognition accepted with all its consequences, despite the almost universal acclaim of its great merits. The widespread recognition on its own has neither led to a sweeping liberalisation of the Internal Market, whether in goods or services, nor to much of a deeper analytical economic understanding.

Jacques Pelkmans, ‘Mutual Recognition in Goods and Services,’ Centre for European Policy Studies 2003 Implementation

2.62 Effective market integration depends not only on the regulatory mechanisms themselves, but on how effectively they are used.

2.63 First, Member States must transpose EU Directives into national legislation on time and correctly (EU Regulations are directly applicable and generally do not require such transposition). Member State performance has improved significantly over the past fifteen years, but there is still significant variation between Member States on the speed and accuracy of transposition. Performance can depend on political factors such as government stability and the controversy of the measures, or practical ones such as whether sub-national administrations also need to legislate.

2.64 Second, Member States must enforce the agreed legislation in practice. Government authorities and regulators need to be properly aware of the legislation, understand what it means, and allow individuals and companies to use their rights under it. Standards here can vary too, reflecting sometimes limited capacity in smaller or poorer Member States, sometimes a lack of political will.

As, for example, the BSA argues in its submission is the case for financial services.

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2.65 Ultimately, if Member States transpose incorrectly or do not enforce legislation, the Commission, Member States, or individuals can take legal action against them. This is usually a last resort. To avoid it, Member States are supported by a range of Commissionrun practical problem-solving mechanisms, such as SOLVIT (see paragraph 1.13).

However, these mechanisms handle few cases, which suggests that there is low awareness or confidence in them to resolve problems32 33. This may give rise to a perception that trading in the EU is more difficult than it actually is34, having a ‘chilling effect’ on intra-EU trade.

2.66 There are also other mechanisms, such as prior notification, which can be more effective than problem-solving after problems arise35. For example, under the Telecoms Regulatory Framework, the Commission can review and publicly comment on national telecoms regulatory measures; this process has delivered greater convergence of regulation without the need for extensive European legislation36. Similarly, under the “98/34” process, Member States must notify national technical regulations to the Commission and other Member States in good time before implementing them. This is backed up by the sanction that an un-notified national measure cannot be enforced against a private party. This process is generally seen as an effective way of preventing technical barriers to trade.37 38 Conclusion: what powers remain with Member States?

In this centrally important field of EU law, the boundary between national and Union competence has the character, not of a clear dividing line, but of a potentially infinite series of actual and potential interactions.39

2.67 It should be clear from this discussion that it is not possible to establish a clear division between Member State and EU competence in the Single Market area. It is clear, of course, that where the EU has legislated, Member States no longer have the right to act or to behave in a way that is contrary to that legislation. Given the range of legislation, that is a significant constraint on Member States’ action. But Member States’ freedom of action is also limited more broadly because of the application of Treaty principles. Anything Member States do in almost any area of public policy is in principle subject to the general principles of the Treaty and of the specific Single Market jurisprudence, and almost any action can be struck down by the Court if a Member State infringes them.

For further analysis on the SOLVIT process, see Pelkmans, Enforcement in the EU Single Market, October 2012 Evidence submitted by BRC BCC, UK European Consumer Centre, United Utilities The Industry Council for Packaging and the Environment Evidence submitted by CER Directive 98/34/EC of the European Parliament and of the Council of 22 June 1998 The BRC notes that EU-wide systems for product certification, authorisation, and registration have been largely successful Evidence submitted by Dougan, p13 32 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market

2.68 That said, it is possible to summarise the nature of the constraints and obligations on Member States in broad terms. They must, unless they can establish a clear justification for not doing so, allow the free circulation of goods from anywhere in the EU; allow companies formed under another Member State’s laws to set up on the same basis as their own; allow individual or corporate service providers to set up in any Member State or deliver services across a border, and allow their citizens to receive those services; allow capital (investment, dividends, interest) and payments to flow freely within and outside the EU; allow nationals of other Member States and family members access to the labour market on broadly the same basis as nationals; and allow the free movement and (within the rules) residence for EU citizens and in some cases third country citizens.

2.69 In short, any situation where there is a restriction of movement on people, goods, services, or financial flows is potentially unlawful, is certainly susceptible to legal challenge, and must be shown to be objectively justified in the public interest.

Chapter 3:

The Single Market and the UK’s national interest Introduction 3.1 The Centre for European Reform’s evidence summarises the nature of the Single Market.

It is:

... a continuous bargaining process between member-states, who want both the growth in trade that arises from integration and also regulatory sovereignty – but must choose. The degree of integration reflects how far nation-states are willing to go. Negotiations between nation-states will not arrive at a magic formula that perfectly balances national regulators’ knowledge of local markets and firms, democratic accountability, and trade opening. Trade-offs and deals, based upon member-states’ perceptions of their interests, predominate.1 3.2 In other words, the level of integration is determined by a mixture of purely economic but also more broadly political factors.

3.3 There are many ways of looking at the effects of increased integration. This chapter looks

at it as follows:

• Effects on the economy – increased trade versus diverted trade, increased competitive pressures, innovation, and economies of scale;

• Effects on economic actors – increased opportunities and market access, against regulation and compliance costs;

• Effects on policy making – the trade-off between imposing our own policy choices on others, against having others’ imposed on us; and whether increased integration in one area forces it in others too.

Economic integration 3.4 The creation of the Single Market involved the reduction and removal of tariffs and quotas between Member States to create a free trade area, the establishment of a common tariff to the rest of the world to create a customs union, and the gradual integration of the various factors of production to create a true Single Market.

36 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market 3.5 The theoretical results should be increased trade between Member States, though perhaps with some trade diverted from and to third countries; increased competitive pressures on domestic markets, with benefits to consumers (through price reductions and greater choice) and businesses (through greater technical and allocative efficiency within and between firms and industries); greater innovation as it becomes easier to exchange ideas and methods across national borders; and greater economies of scale through a larger home market, with firms operating on a larger scale so they are more productive and more able to compete globally, and production moving to where it is most efficient.

Some of the gains will be static, i.e. permanent increases in GDP levels through greater efficiency in use of resources, better supply chain integration, and increased specialisation.

But there will also be dynamic gains, i.e. increases to economic growth potential on a sustained basis, from greater competitive forces, experimentation, and innovation.

Air transport in the EU Air transport had been traditionally a highly regulated industry, dominated by national flag carriers and state-owned airports. Liberalisation began in 1987 but the key element was the Third Air Transport Package, agreed in 1992, and coming into force fully in 1997.

Liberalisation covered carrier licensing, market access, and fares. The result was that decades of restrictions that had limited air transport markets in Europe and prevented crossborder investment by European airlines were removed.

The internal aviation market now gives every EU carrier freedom to carry out flights within any EU Member State and/or between them, whatever the airline’s home country, and complete freedom to set tariffs. The regulatory framework ensures appropriate safety and security.

It also allows Member States to serve certain areas which are not economically viable, but have to be served for reasons of territorial cohesion, by imposing a public service obligation on such a route.

This means that Europe has the world’s most open and competitive market for airline passengers. Passenger traffic has doubled. The number of intra-EU air routes increased by 140% between 1992 and 2010. As early as 2000, economy fare prices had fallen by 5% in real terms and promotional prices by about 30%. New business was generated, including new low-cost airlines, now more than a third of all EU airlines.

3.6 There is much evidence of integration in practice. For example, HM Treasury estimated in 2005 (in internal work, subsequently released) that trade between Member States was boosted by 38% by membership of the EU and by a further 9% because of the Single Market programme, with only 5% of trade diverted from non-member countries. However, UK trade with EU members was increased by only 7%, with 4% trade diversion, probably reflecting the relative openness of the UK economy already compared to other large European economies2.

3.7 The situation differs from sector to sector. In goods, there is significant, and increasing, integration, and those countries most deeply integrated have seen an improvement in their price competitiveness3. In services, integration is some way behind, and is not catching up. Indeed, in recent years prices have become more dispersed, especially in the older Member States, probably reflecting lack of competition in services. Labour markets HM Treasury, EU membership and Trade, 2005; http://www.hm-treasury.gov.uk/d/foi_eumembership_trade.pdf

–  –  –

are not very integrated at all, with wage dispersion levels still greater than one would expect in a well-integrated single market, in part because of the low levels of labour mobility compared to the US, Canada or Australia. This is obviously in part for cultural and linguistic reasons, but also because of non-tariff barriers such as pension rules or tax and social security differences. Labour productivity has not converged significantly relative to global trends since the early 1980s, with the specific exception, as one would expect, of convergence between the Member States who joined after 2004 and the then fifteen members4. In capital, cross-border investment and financial integration have fallen off dramatically since the 2007 peak, although they are now growing again slowly5.

It is worth noting that integration in all these areas is not one-directional: it can reach a plateau or even reverse out, for example, pharmaceuticals price dispersion has increased since 20066.

3.8 The nature of the market also varies from sector to sector, inevitably so given the complex legal framework described in Chapter 2, with its mixture of harmonisation and mutual recognition methodologies.

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