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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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4.4 The first is the continued process of globalisation of the world economy and the growth of centres of economic power outside Europe and North America. The evidence for this report showed very strongly how important it is that the Single Market should be, and remain, open to that wider world economy2. The Single Market was conceived in an era when globalisation was only just beginning. During the 1980s and 1990s some Europeans argued for a “fortress Europe”, a Single Market behind high protectionist barriers, and a rival to other centres of economic strength. That argument ceased to be viable as globalisation developed, and protectionism is no longer respectable as a policy position within Europe. But constant vigilance is still needed to avoid the temptation of measures which are protectionist in effect if not in name.

COM(2011)206: Single Market Act Among others Open Europe, CBI, Vodafone 52 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market 4.5 Winning that argument, and keeping the EU open, is vital to the continued competitiveness of the EU and of the UK. Otherwise the balance of advantage for UK businesses operating beyond Europe – almost all the major ones and many of the smaller ones – could shift significantly. Europe also needs to keep focus on maintaining a business environment that is competitive at the global level and that does not impose excessive regulation, both for reasons of domestic competitiveness and to enable regulatory coherence with other major economic powers.

4.6 Europe’s record in this area is good but could be better. The EU has been outwardlooking in the WTO and through an ambitious programme of FTA negotiations, notably the Transatlantic Trade and Investment Partnership just launched with the US. Europeans have a liberal regime for inward and outward investment. The EU’s record of openness to the emerging markets is good. But EU tariff barriers are still relatively high: the average Most Favoured Nation (MFN) tariff is 5.3%, 2.8% on a trade-weighted basis, compared to 3.5% and 2.1% for the US3. Some evidence points to the risk of (perhaps disguised) protectionism, or to the imposition of “reciprocity” requirements which have the effect of closing the EU market in practice4. The EU has a home bias for EU products three or four times that of the United States, risking poor specialisation and weak exploitation of comparative advantage5.

4.7 The second development is the move to strengthen the architecture of the Economic and Monetary Union. As a result of the financial crisis, Euro area Member States have taken steps to reinforce both their political institutions and decision-taking apparatus, e.g. through the creation of euro summits and stronger support for the Eurogroup) and the financial, fiscal and economic rules of the single currency, e.g. the Treaty on Stability, Coordination and Governance and the Single Supervisory Mechanism. The President of the European Council is leading a process to look at what further measures may be needed in the area of economic coordination and to ensure the ongoing democratic legitimacy of the EU. It is unclear yet how far this process will go, but the logic of monetary union points to the eventual development of closer fiscal integration, and greater financial and economic policy coordination within the euro area.

4.8 This could present risks to the Single Market, of two kinds. It could fragment, if the euro area develops into a clear political entity, deepening its cooperation such that in practice it creates a single market within a market. Or it could become dominated by euro area Member States, with the market remaining coherent, but with norms set in practice by the euro area.

4.9 Fragmentation could lead to the loss of some of the economic gains that have been achieved from market integration to date. It could also weaken the collective commitment of all Member States to maintain and deepen market liberalisation and competition.6 It could put non-euro area countries at a competitive disadvantage. Alternatively it could reduce competitiveness within the euro area, with a positive impact on relative competitiveness for UK firms but a negative economic impact on the EU as a whole.7 WTO figures: http://stat.wto.org/TariffProfiles/E27_e.htm, http://stat.wto.org/TariffProfiles/US_e.htm Evidence submitted by CBI Evidence submitted by Open Europe Evidence submitted by City of London Corporation

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4.10 All that said, so far, with the exception of some narrow areas such as the European Central Bank (ECB)’s insistence that clearing houses handling significant Euro business be based in the euro area, currently being challenged by the UK at the Court, there is little sign of significant fragmentation in areas central to the Single Market. EU leaders have consistently acknowledged that the Single Market must be protected in the different legislative proposals brought forward to strengthen economic and monetary union.

4.11 Euro area dominance is perhaps a stronger possibility. The European Banking Authority now has power to regulate the operations of financial service providers across the EU, including those based outside the euro area, but would have had a permanent euro area majority were it not for the deal secured by the UK in December 2012 requiring decisionmaking majorities among both Euro members and others. The direct supervision of major banks in euro area countries by the ECB will cover UK-based banks subsidiarised into euro area markets.8 Lloyd’s argue, in their evidence, that this ECB supervisory role could arguably set a precedent for replacing national supervision of insurance with pan-European supervision9. The proposed Financial Transactions Tax, through formal enhanced cooperation, is potentially another example, although this is not a euro area measure. Looking beyond the financial sector, there is clearly a possibility of the euro area agreeing deeper monitoring of and intervention in a broader range of economic policies, to drive structural reform. This could have a positive dynamic for the Single Market, as structural reforms become more politically possible. Equally, some argue that it might generate pressure to extend this tighter regime to non-euro area countries to prevent euro area economies being undercut by the others. The use of Article 114 for any of these measures could have significant implications for the integrity of the Single Market in future.

4.12 All this means that safeguards to preserve the Single Market and the rights of Euro “outs” within it could well be necessary in the coming years. The precise shape of any safeguards is not clear and will depend on the nature of the proposals that are put forward. They will need to be designed carefully, for example to avoid them being overrobust and hindering further economic integration in the Single Market as a whole.10 4.13 There will of course be other broader developments, notably enlargement. As in the past, enlargement offers further economic gains – through new opportunities for specialisation and through increasing the size of the Single Market.11 The successive waves of enlargement have positively influenced competition, specialisation, and economies of scale, and have enhanced growth and employment opportunities. Moreover, the obvious geopolitical advantages of enlargement, as regards extension of democracy, the rule of law, respect for human rights, non-discrimination and free markets, all have a positive Evidence submitted by BCC, TheCityUK Evidence submitted by Lloyd’s Evidence submitted by CBI Evidence submitted by SEEG 54 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market impact on trade levels both within and without the EU.12 But only enlargement to Turkey – currently a distant possibility – would have anything other than a trivial effect on economic prosperity in the rest of the EU.

Where would the UK gain from the EU doing more?

4.14 Against this background, is further deepening of the Single Market likely, and is the UK likely to gain from it?

4.15 There is little question that further deepening of the Single Market would produce economic gains. Full liberalisation of all areas where there are significant non-tariff barriers could increase EU GDP by 14% and UK GDP by 7%.13 But to achieve that would require a major drive on both legislation and enforcement, largely in areas which have so far proved resistant to liberalisation for political reasons. There is little sign that this is possible, and trying might undermine political support for the market as it stands. Indeed it is unrealistic to think that every barrier can be removed. Expecting everyone in Europe to speak a single language14 would undoubtedly eliminate a huge range of non-tariff barriers and therefore boost growth, but no-one would think the political costs were worth it.

4.16 The issue is therefore whether there are areas where further liberalisation is politically plausible, and what the balance of advantages would be. There are possibilities both in substance and in process.

Substance 4.17 The EU could make a new drive towards network liberalisation. EU markets in network industries such as energy, telecoms and some transport services, or in the broad area of the Digital Single Market, are still fragmented and progress towards creating a single market in some of these areas has been slow and uneven. Greater integration could deliver significant economic gains, both to consumers and the wider economy, by promoting greater competition, service innovation and choice. As set out in Chapter 3, this is fundamentally because markets in some of these areas are still national, with only the conditions of operation of the market and the interaction with others being set at European level. The Government has been working for some time to support the further development of the Digital Single Market.

Evidence submitted by British Influence 12 Aussilloux, V., Boumellassa, H., Emlinger, C. & Fontagné, L. (February 2011), The economic consequences for 13

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What is the Digital Single Market?

• Simplify the pan-European licensing for online works;

• Open public data for re-use;

• Simplify the distribution of creative content;

• Revise the e-Signature directive;

• Update the e-Commerce Directive;

• Develop new means for redress in relation to e-commerce transactions.

4.18 A similar further effort could be made on services liberalisation. Services make up 71% of total EU GDP, but the Services Directive only covers half of the services sector, and is only partially implemented.15 As Open Europe says in its report Trading Places, “the failure to liberalise services within the Single Market and Member States’ reluctance to compete on the global stage in this sector means the EU is punching below its weight in global talks on services, to the detriment of UK interests.”16 Fuller services liberalisation could produce considerable GDP gains, even though 60% of barriers to cross-border trade in services are natural, as a result of services being local, personal or dependent on cultural or language, rather than regulatory.17 Whilst many of the sectors outside of the Services Directive are covered by other EU legislation, the 15 approaches between these sectoral Directives are at times incoherent, leading to inadvertent barriers to cross­ sectoral service provision.

Open Europe (June 2012), Trading places: is EU membership still the best option for UK trade?; Fresh Start 16 Group (July 2012) PWC study for DTI, as cited in TUC evidence 17 56 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market 4.19 Better enforcement would also make a big difference: the peer review and mutual evaluation process introduced by the Services Directive has been a welcome innovation, but legal action may be needed to make a real difference. The Services Directive itself could also be reopened and reformed to remove many of the restrictions to cross-border trade that are currently permitted, or to be move more firmly towards the country of origin principle, as originally envisaged. However, further gains from services integration are likely to require deeper intrusion into Member States’ laws and processes, notably because many of the sectors not included in the scope of the Services Directive are government or public services of one kind or another. Much of this would be sensitive across Member States and some of it could be sensitive even in the UK.


4.20 The Single Market is much more heterogeneous than its designers originally anticipated, with significant variation in capability to implement and enforce legislation. For the Single Market to adapt to an enlarged EU, further reform is required. The EU could strengthen its own enforcement efforts. At the moment, Commission efforts tend to focus more on timely and correct transposition of legislation than on its enforcement once in place. Member States have little incentive to change that in the short run, since the political difficulties of eliminating an illegal non-tariff barrier can easily outweigh the minimal economic gains.

TheCityUK argues that the current infringement process does not seem to be having a deterrent effect across all Member States, not least because of the excessive time it takes for cases to come to court.18 Enforcement actions could be prioritised on the basis of economic impact or the damage caused to the Single Market by the offending measures, and be made faster, less bureaucratic and more transparent, in order to drive greater compliance with Single Market legislation19. The Commission could also reprioritise internally so that more resources go to DG Markt and to enforcement within it.

4.21 A more radical idea would be to establish more pan-European enforcement of Single Market legislation. The extent of market integration depends to some extent on how coherent and consistent enforcement is by different national regulators and enforcement bodies. Giving these powers to a European institution would improve the consistency of enforcement and hence increase the extent of integration. But this would clearly be politically sensitive.

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