You thought we’ve got an EU single ? Think again!

Forget Europe’s constitutional crisis or disputes over enlargement. EU member governments’ failure to complete the single market is the greatest threat argue R. Daniel Kelemen (far left) and Anand Menon

t’s hard to overstate the importance of it Polish or French attempts to protect the single European market. Its creation ‘strategic’ industries from foreign takeovers, Ihas been the centre-piece of economic or Spanish reluctance to sell its energy integration for 20 years and has provided giants. They are also becoming more brazen the basis for EU expansion into many new in their defiance of the Commission’s efforts policy arenas. These include economic and to ensure fair play. Rhetorical support for monetary union (EMU) and EU social and the single market is being undermined by environmental legislation. An extra two member states’ actions, with legal and and a half million jobs have been created, political obligations being ignored. Moreover, European firms are more competitive in the Europe’s political leaders appear incapable global economy and the Union itself is more of recognising the far-reaching consequences attractive to foreign investment - all thanks of their deeds, which threaten the very heart to the single market. of the integration process.

Less than two decades ago, Europe Instead, political debate has been was warned about the grave economic and distracted by the future of Europe’s political risks of failing to complete the constitutional treaty following the French market in a seminal 1988 report by Paolo and Dutch rejections of it. While the failure Cecchini, former Commission deputy director to ratify the treaty delivered a powerful for the internal market and industrial affairs. psychological blow, it was less momentous Yet today the EU’s greatest achievement is for the future of Europe than most in real and present danger. commentators imply. For instance, the text was notably timid over the institutional National governments are being reforms it proposed to help the EU to cope increasingly seduced by , be with further enlargement. And, despite the

80 | Europe’s World Summer 2007 warnings of doomsayers, the Union has OMMENTARY continued to function remarkably well on C the basis of arrangements established by By Roger Helmer the Nice Treaty. Indeed, significant progress has been made on two ‘pillars’ of EU policy- making – justice and home affairs and the It’s not a single European Security and Defence Policy – and there is no evidence that constitutional market that we gridlock has affected the legislative process need, but a free in key areas related to the single market. area So, if treaty reform is not the toughest challenge facing the EU, why are problems ike the curate’s egg, the article by Daniel with the single market process still hidden Kelemen and Anand Menon is good in below Europe’s political radar? Lparts. It is right in its central thesis that increasing economic rivalry and protectionism The economic benefits of the Union are between EU countries in areas like financial often either misunderstood or downplayed services and energy now pose a major threat deliberately by national politicians. When was to the economic heart of the European project. the last time you heard Britain's Chancellor of But the authors fail to get to grips with an ambiguity that runs like a fault line through the Exchequer, Gordon Brown, attribute any their analysis: the dual nature of the EU’s single of the credit for Britain’s economic success market. to its participation in the single market? Yet this political oversight should not blind us to The term is designed to enable left and the scale of its actual impact. right to interpret it in wholly different ways. To the free-market minded, the single market This can be measured in terms of seems to be euro-speak for , and aggregate economic activity. EU Gross we all applaud that. But to the left, it means Domestic Product, for example, is estimated what it is − a Trojan Horse for transfering to have been 1.8% higher in 2002 than it powers from independent, democratic nations would have been without the single market, to unaccountable technocrats in Brussels. according to the Commission. This explains two of the great mysteries of EU history. Why did the British people vote in It can also be seen in the major EU 1975 for the European project when it would policy initiatives that owe their genesis to undermine their self-determination? Because the single market. EMU itself was launched they thought it was simply a matter of trade partly because a single currency promised and jobs. Euro-apologists say we British should to enhance market efficiency. Remember the have read the small print. But if one of the last tale of the American who traveled across surviving architects of the UK’s accession, Lord Europe with $100 and, having changed Carrington, could say as recently as March this money in every EU member state, ended up year that he never realised where it was going, with only $45? National currency regimes how was the average voter to know?

Summer 2007 Europe’s World | 81 were also rendered unsustainable by the Despite scoring such significance free movement of , which was an advances during its short existence, the integral part of the single market. single market must now overcome perhaps its greatest hurdles. These include issues The single market also provided an outstanding since its inception in the mid- intellectual and legal catalyst for the EU to 1980s. When EU member states decided extend its powers into new policy sectors. to remove barriers to the free movement Many on Europe’s political left argued of , services, capital and labour, they that the single market, with its neo-liberal did so in very general terms. Ambiguity was bias, would endanger national regulations the price of agreement between political to protect workers, the environment and leaders as diverse as British Prime Minister public health. But their critique ignored Margaret Thatcher and French President the fact that the creation of the single François Mitterrand. Some 20 years later, market was coupled with the member states are once establishment of common The Commission again trying to sort out the standards in these areas at is unwilling to flex equivocal details, only to the EU level. its full legal muscle discover continued disputes over the appropriate balance Debate continues on the to enforce single between, for example, the degree to which European market legislation state and the market in the rules have or should replace for fear of a national sector. national regulations that were dismantled in the name backlash In the energy sector, of free trade. However, it is meanwhile, European-wide clear that without single market legislation, restructuring is being stymied by repeated there would have been no legal basis for, government interventions to protect national say, Europe-wide limits on working times or producers from foreign takeovers. Last year, vehicle emissions. following a bid by the German corporation E.ON for Spanish power company Endesa, Environmental policy provides a good Madrid empowered the Spanish electricity illustration of how the single market has and gas regulator to block foreign permitted initiatives in other areas. Member acquisitions. This legislation was passed states have proven willing to sign up to despite the Commission informing the ambitious EU greenhouse gas reduction Spanish authorities that they were violating programmes partly because their multilateral single market legislation guaranteeing nature means that their major trading free movement of capital and freedom of partners are doing likewise. And stringent establishment. Indeed, Spain currently faces targets on car emissions are less painful if, two infringement proceedings brought by the because of the size of the European market, Commission over its behaviour concerning other states apply them as well. Endesa.

82 | Europe’s World Summer 2007 Meanwhile, the French government in OMMENTARY 2006 sought to engineer a merger between C Roger Helmer energy giant Suez and state-owned Gaz de France to prevent a feared takeover attempt by Italian utility firm Enel. French Prime And why did Margaret Thatcher ever sign Minister Dominique de Villepin reacted up to the , which virtually angrily to accusations of protectionism, created the single market? Because the euro- enthusiasts at the Foreign Office told her it was defending a policy of “economic patriotism.” a free-market, liberalising treaty. The French approach also included vitriolic and often totally misplaced criticisms of The authors recognise that the single the services directive that contributed to its market has led to the further extension of eventual dilution. EU competences, but they assume uncritically that an extension of the EU’s powers must be Nor is protectionism the preserve of “old unequivocally a good thing. They complain that Europe”. New member states have been Chancellors of the Exchequer, Britain's finance quick learners, as exemplified by the Polish ministers, never remark on the economic government’s efforts to prevent mergers benefits of the EU. But surely even Gordon between Polish and foreign banks. Member Brown (who can announce cuts with a states are in effect throwing down a political straight face while actually raising ) could gauntlet to the Commission, challenging not pretend that the EU offers net economic benefits. The authors must have forgotten the very principles of the single market. (if they ever knew) that European countries While remaining rhetorically committed to outside the EU like Norway and Switzerland building the single market, they undermine do better economically than its member states, it by their actions. while member states outside the like the UK and Denmark do better than those The Commission tries to “name and inside it. shame” offenders but that policy can only work if targeted countries are concerned Keleman and Menon make much of the about public opprobrium. With national Commission’s claim that the benefits of trade governments increasingly willing to challenge in the single market amount to 1.8% of GDP, the Commission, it would seem that no one but they wholly fail to note Commission Vice- can shame the shameless. President Günter Verheugen’s recent estimate that the costs of excessive EU regulation amount to 600bn a year − or around 5.5% The Commission is unwilling to flex its ` of GDP. The costs are therefore more than three full legal muscle to enforce single market times the benefits. legislation for fear of a national backlash, which might damage its own legitimacy If Britain were to leave the EU, London and even the reputation of the entire EU would undoubtedly negotiate the same - system. After all, from Amsterdam to Athens free access to the single market as have dozens and Vienna to Vilnius – even at times from of other nations. But even in a worst-case

Summer 2007 Europe’s World | 83 within the Commission itself – politicians and the opted out of provisions seem anxious to parade their anti-European regarding shareholder consultation. credentials in front of domestic audiences. It pays political dividends to blame Brussels. Member states thus appear to be doing their utmost to wriggle out of their own As well as flouting existing single market commitments to market integration by rules, EU governments are putting stumbling exploiting opt outs and derogations or blocks in the path of new regulations too. Take even, in some policy areas, supplanting the failure to agree on a patents directive. the traditional legal approach to market And legislation to govern cross-border regulation with the toothless “open method takeovers is another case in point. After 13 of coordination”. years of Commission proposals, member states finally adopted new takeover rules in Despite the evident and universal 2004, but only on condition that certain “opt benefits of the single market, it would outs” were available. Twenty-one countries seem that member states are succumbing then opted out of provisions on the legality to short-term incentives to undermine its of certain forms of takeover defenses, while progress. For example, as the market- Germany, Denmark, , Poland making process moves further into sensitive areas such as the reduction of public subsidies and politicians worry about the E.W. ADVISORY BOARD MEMBER effect on unemployment, governments are tempted either to maintain subsidies or to blame Brussels for any cuts.

EU institutions were created to overcome such temptations, but member states are making it increasingly difficult for them to succeed. It is clear that public pronouncements from member states in support of the single market are meaningless unless they allow the Commission to fulfill its as guardian of the community’s legal framework.

So what, then, are the potential costs of failing to get the single European market back on track? Despite great progress in generating jobs and growth, the single market is still far from complete. Yawning gaps exist in the service sector and there remains a strong and persistent “home bias” in consumption and investment patterns, according to a recent study by the Bruegel think tank.

84 | Europe’s World Summer 2007 A recent report by the European Central OMMENTARY Bank also pointed to growing restrictions C Roger Helmer on labour mobility as a source of economic inefficiency and a potential threat to the stability of the euro. Thus greater market scenario where the UK was forced to pay efficiency, lower consumer costs and further the EU’s Common External Tariff, the total employment growth all remain goals of an duties incurred by UK plc on to the EU would be less than Britain’s current net budget expanded single European market – and all contributions. And that’s before we’ve added in are threatened by a resurgence of “economic the frightening costs of the EU’s red tape. patriotism”. Nowhere is the authors’ analysis more If the economic cost of failure is high, simplistic and naive than in the observation the political costs would be greater still. that "national currency régimes were rendered The single market is the foundation upon unsustainable by the free movement of capital, which the European project is built. Many of which was an integral part of the single the tasks that the EU now undertakes, and market". Perhaps they have missed the fact many powers it has assumed, are justified that the City of London, itself outside the explicitly by the need for the single market eurozone of course, more euro assets to succeed. As political leaders conduct than anywhere else, and that vast foreign abstract debates about the constitution and exchange transactions take place there, demonstrating that capital can move freely enlargement, they ignore the steady erosion without a single currency. of the EU’s foundations at their peril. Nor do they seem to note the huge damage What happens when businesses that that the euro is doing. By ensuring that every restructured operations to take advantage of euro-land country has a sub-optimal monetary ‘Europe’ start to question the existence of policy, the euro is hurting growth, employment the single market? If we reach that point, then and competitiveness to the point where serious the rationale for itself commentators are starting to ask when, not if, might be called into question. And, if people the euro will unravel. loose faith in the EU’s ability to manage its own single market, where will this mistrust European nations would do much better, in end? When national leaders subvert the terms both of economics and politics, to single market for short term gain, they are abandon their and their ambitions for , and to create playing a very dangerous game. The Union instead a free trade area of independent and can survive without a constitution. It cannot democratic states. live without the single market.

R. Daniel Kelemen is a Fellow in Politics of Roger Helmer MEP is a member of Lincoln College at Oxford University and Anand the European Parliament’s Committee Menon is Professor of European Politics at the on Employment and Social Affairs. University of Birmingham. ELFMFNFO!QPMJTDJSVUHFSTFEV SPHFSIFMNFS!FVSPQBSMFVSPQBFV BNFOPO!CIBNBDVL

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