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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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3.35 This could well continue into the future and would be a strong reason for the UK to remain fully engaged economically and politically in Single Market developments. Some commentators claim, however, that this process is reaching its limits and that economic developments since 2008 are moving the EU’s centre of gravity in a less free-market direction which the UK will find harder to influence and might be less to the UK’s benefit in, for example, financial services62. Still others argue that the UK’s success in driving Single Market liberalisation has come at the price of accepting regulatory and legal arrangements that are different to UK norms, or more social and employment legislation than the UK would have chosen given a free choice, as part of explicit or implicit political bargains63.

Evidence submitted by Open Europe, Europe Economics (2013) Evidence submitted by Vodafone paragraph 1 Europe Economics (2013), pp88-90

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3.36 The second area stems from the relationship between the Single Market and other areas of EU competence. The argument is that the existence of the Single Market generates the need for EU-level policy-making in many other areas, facilitating and

constraining Member States’ freedom to set national policy. That debate has two aspects:

whether this is economically necessary for the efficient operation of the Single Market, and whether it is inevitable as part of a wider political bargain.

3.37 Some EU competences are generally accepted to be economically integral and intrinsically linked to the establishment and development of the Single Market.

• Competition policy and state aids establish the conditions under which the Single Market can operate effectively. They have been in the Treaty from the start. They are intrinsically linked to the Four Freedoms. For example, an effective cross-border merger regime is a significant element of the Right of Establishment, and state aids are a form of non-tariff barrier which can impede the free movement of goods or services if it is not regulated. They operate on a highly integrated basis: they are an exclusive competence of the EU, with extensive enforcement powers for the Commission, and with Member States’ authorities operating within a framework set at EU level. British businesses and policymakers are often most aware of the restrictions on state aids at the point as which they restrict some desired course of action, such as interventions to encourage investment. However, without such restrictions, there would be the risk of a free-for-all subsidy race, where nations distort competition by funding domestic undertakings and hence undermining the level playing field within the Union.

• Equally closely linked is the Common Commercial Policy, the logical consequence of the creation of a customs union. It too is an exclusive competence of the EU, giving the Commission power to negotiate on Member States’ behalf on international trade, with Member States having no freedom to conclude their own trade agreements or set their own customs duties. The existence of a common policy enables the weight of the Member States to be brought to bear in international negotiations and, as trade agreements become broader in nature, gives the EU the ability to help set international standards64.

• Competences in the network industries such as energy, telecoms and transport are also closely linked. Economically they are specialised forms of the free movement of goods and services, sometimes now with their own legal base within the Treaty (energy, transport) with other policy objectives in play, such as energy security or diversification of supply, sometimes operating under the basic Single Market arrangements described in Chapter 2.

• Finally, aspects of taxation65 are intrinsically linked to the Single Market. There are specific provisions within the Treaty preventing differential taxation of other Member States’ goods. VAT is applied on a harmonised basis and with minimum rates across the EU for the same reason. Direct taxation has been much affected by the development of CJEU jurisprudence, which in this area has taken a different route to the generality of Single Market jurisprudence, allowing Member States to distinguish in certain situations on the grounds of nationality. The City of London Corporation argued that differences in tax rates are also relevant to Single Market arrangements, since they affect pricing and competitiveness of products, notably in financial services66. This is perhaps most obvious in the excise area. British American Tobacco and Imperial Tobacco claimed that widely differing rules on taxation of tobacco products and Evidence submitted by CBI, Schroders EU competence on taxation is being considered in parallel with this review in Semester 1 Evidence submitted by City of London Corporation 48 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market labelling meant that the Single Market in this area was a myth.67 The Road Haulage Association argued that differing levels of fuel duty between Member States distorted competition between companies based in different Member States.68 Others, for example the Wine and Spirit Trade Association, argued that national discretion within a broad EU framework remained important.69

3.38 Certain other areas of competence have become gradually established at EU level over time because of the existence of spillover effects. The environment competence70 is one area where, though not inherently part of the Single Market as defined in the Treaty, some common standards are generally thought to be needed to avoid a Member State getting free-rider benefits in relation to cross-border pollution and to protect the environment more generally.

3.39 Still other areas of competence have become gradually established at EU level over time for broadly political reasons and where the need for EU policy-making, at least in its current form, is much debated. One example is EU regional policy71, which was developed in large part for political reasons, to help poorer regions of the EU catch up with the richer. The UK, as one of the poorer Member States in the 1970s, was instrumental in the early development of this policy, but it expanded massively as new members joined from the late 1980s, and became a quid pro quo for the greater competitive forces to which poorer Member States were exposed through the Internal Market and, for some, monetary union. The evidence about the effectiveness of regional policy in actually achieving this goal is controversial. Regional policy will be covered in the Cohesion report later in the year.

3.40 Another, and still more controversial example, at least in the UK, is social and employment policy72, and the extent to which this is felt to be necessary for the operation of the Single Market. These issues are the stuff of domestic political controversy within the UK, and, given the divergent positions taken, it is hard to define a clear national interest.

The evidence submitted to this report suggests strong views on both sides of the debate.

Consumer associations and trades unions tended to consider social and employment policy as an essential part of the Single Market. Large corporations and business trade associations tended to hold the opposite view.

3.41 Some – the Bioindustry Association, the Trades Union Congress, the GMB and the Senior European Experts Group – argued that some elements of common employment law could be helpful in ensuring free movement of persons and in facilitating cross-border establishment and provision of services, for example in regulating drivers’ hours to enable the provision of transport services across the EU73; or that EU social and employment policy was necessary to ensure that competition in the Single Market was based on increasing productivity and innovation, rather than on undercutting of labour costs and “social dumping”74, and to ensure that the benefits of liberalisation were equitably distributed75. The CityUK argued that “some employment legislation, conferring common basic standards for employment, may facilitate the operations of international businesses working across borders… and may reduce the overall regulatory burden by requiring Evidence submitted by BAT, Imperial Tobacco Evidence submitted by Road Haulage Association Evidence submitted by Wine and Spirit Trade Association EU competence on the environment will be considered in Semester 2 EU competence on regional policy will be considered in Semester 3 EU competence on social and employment policy will be considered in Semester 3 Evidence submitted by SEEG Evidence submitted by GMB

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compliance with only one set of norms. Equally, however, an absolute identity of rules seems unnecessary and impractical, given the range of local factors in play in any market;

and intrusion into terms of employment… may create distortions.”

3.42 But many major businesses or associations – the CBI, the Institute of Directors, the British Retail Consortium, Next, BAE Systems, the American Chamber of Commerce, and the Wine and Spirit Trade Association – argued variously that EU social and employment policy was not necessary for the efficient operation of free movement of persons; that it could distort the Single Market by having a differential impact in different Member States because of differing national legal frameworks76; that competition was needed between different social models to deliver the most efficient outcome and to ensure experimentation and innovation; that there was little evidence in practice of differences in social and employment protection distorting competition77 78; and that, since wages were primarily set by market forces and productivity levels, the primary impact of employment legislation was simply to reduce cash wages, because indirect wage elements, such as increased social protection, constituted a larger share79.

3.43 To conclude, the existence of the Single Market, and law and legislation on the Four Freedoms, generates a range of political pressures. Some of those pressures are about how to exploit, or resist, the opportunities to extend one country’s laws, norms, or practices, across the EU more widely. In this area the UK has been broadly successful in enshrining its more liberal economic model into at least some of the DNA of the Single Market. Other pressures are about whether, over time, more EU-level policy-making is necessary to make the Single Market work, for economic or political reasons. That powers exercised at EU level have increased since the Single European Act is a matter of fact, though the existence of the Single Market is only part of the reason, and views vary on whether that is a necessary or a good thing, and on whether they are still increasing or should be diminished.


3.44 The broad legal framework established for the Single Market does not necessitate any one model of economic integration. It is consistent with many. Indeed, the extent of integration is under permanent negotiation by Member States, influenced by a range of economic and political factors. The trend has been towards deeper integration over time, for political as much as economic reasons. 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.

3.45 Is that trade-off, between cost and benefit, between economics and politics, of overall benefit to the UK? It is not possible to give a simple, unambiguous, and universally accepted response. But 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, which have made the EU’s and UK’s GDP appreciably greater than what it would otherwise have been, and on those potentially available in the future. They also often note that much depends on the future direction of the Single Market and of the EU more broadly, to which this report now turns.

Evidence submitted by CBI Evidence submitted by SEEG Evidence submitted by CER Evidence submitted by IoD The context 4.1 The financial crisis and subsequent economic downturn have caused many to focus on the prospects for deepening the Single Market to generate new growth across Europe.

4.2 In the short run, the Commission has acknowledged and supported this, through bringing forward two packages of measures – two Single Market Acts – in 2011 and 2012. These packages, endorsed in broad terms by Member States, constitute political commitments to legislate in specific areas in order to deepen the Single Market and to develop more impetus around reform more broadly. They were responses to the Monti report and, as the

Commission put it, aim at:

...putting an end to market fragmentation and eliminating barriers and obstacles to the movement of services, innovation and creativity....

strengthening citizens’ confidence in their internal market and ensuring that its benefits are passed on to consumers. A better integrated market which fully plays its role as a platform on which to build European competitiveness for its peoples, businesses and regions...1 4.3 A new strategy will need to be shaped under the new Commission and new European Parliament, nominated and elected in 2014. That longer-term strategy, and the future of the Single Market, will be shaped by two major developments.

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