ISSUE 2016/ 01 policy brief JANUARY 2016 bruegel ONE MARKET, TWO MONIES: THE EUROPEAN UNION AND THE UNITED KINGDOM
by André Sapir THE ISSUE Access to the single market is one of the core benefits of the United Senior Fellow at Bruegel Kingdom’s membership of the European Union. A vote to leave the EU would [email protected] trigger difficult negotiations on continued access to that market. However, the and Guntram B. Wolff single market is not static. One of the drivers of change is the necessary Director of Bruegel [email protected] reforms to strengthen the euro. Such reforms would not only affect the euro’s fiscal and political governance. They would also have an impact on the single market, in particular in the areas of banking, capital markets and labour mar - kets. This is bound to affect the UK, whether it remains in the EU or not. POLICY CHALLENGE A defining characteristic of the banking, capital and labour markets is a high degree of public intervention. These markets are all regulated, and have implicit or explicit fiscal arrangements associated with them. Deepening integration in these markets will likely therefore require governance inte - gration, which might involve only the subset of EU countries that use the euro. Since these countries constitute the EU majority, safeguards are Participation of euro and non-euro EU countries in inter - needed to protect the governmental arrangements to strengthen EMU legitimate single mar - ket interests of the UK European Union and other euro-outs. Fiscal Compact, 2012 But the legitimate SE interest of the euro- Euro-area 19 Euro-plus area majority in deeper AT, BE, CY, DE, EE, ES UK Pact, 2011 HU market integration to IE, FI, FR, GR, IT, LT, LU, LV BG, DK, PL, RO MT, NL, PT, SI, SK bolster the euro should also be protected Banking Union (SRM), 2014 against vetoes from CZ, HR the euro-out minority. Source: Bruegel. SRM = Single Resolution Mechanism. 02 o c 3 1 ( d t p t 2 f o h i f E e e . . e t v o u
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all countries that are part of the inated but many non-tariff barri - addition, the Services Directive single market, whether they ers were still in place. But free did not cover regulated network 03 belong to the EU or not. But they movement of goods also meant services, such as transportation, f
will affect EU and non-EU coun - common competition, trade and telecommunications or energy. e i tries differently in terms of agriculture policies. The UK had For these activities, the creation r governance. For EU members, to adopt these policies, despite of a single market would require b y the governance mechanisms some reticence about loss of a common EU philosophy about c i would be mostly based on the EU sovereignty. regulation, if not the replacement l o
treaties, but the UK outside of national regulators by single p l
would have to rely on intergov - Free movement of workers had EU regulators. e ernmental agreements. also been technically achieved g by 1973 when the UK joined, but A NOT-SO SINGLE MARKET e u
Finally, no federation or confed - did not translate into much r eration remains static in labour mobility between EU The EU is characterised by differ - b governance terms. The EU will be countries. In addition to cultural entiated levels of integration for continuously subject to reforms obstacles, economic and social different countries and different and changes. This complicates conditions were sufficiently sim - policy areas, but the UK stands the definition of the relationship ilar across EU countries to result out as the most differentiated 4. between the euro area and the in little desire or necessity to single market because the euro move. The 1991 Maastricht treaty did area’s eventual shape is far from not affect the EU rules on free being agreed. We consider likely The single market programme movement of goods, persons, future developments in euro- that started in the mid-1980s services and capital, but it did area governance and how their sought to remove hundreds of introduce a permanent deroga - impact on non-euro area and remaining barriers to the free tion (‘opt-out’) from monetary non-EU countries can be man - movement of goods, persons, union for Denmark and the UK aged. As a blueprint for future services and capital. Non-tariff and a temporary, but not time- governance developments, we barriers to goods were largely limited derogation to fulfil the use the Five Presidents’ Report eliminated as were capital con - conditions to adopt the single issued by European Commission trols, resulting in substantial currency for all other EU coun - president Juncker (2015), capital movements. Further barri - tries. though we recognise that it ers to the free mobility of workers leaves many important ques - were also removed but intra-EU The Maastricht treaty also intro - tions unanswered. migration flows remained low, duced differentiation in social despite the accession in the policy. The UK received an opt- THE SINGLE MARKET THEN AND 1980s of the lower-income coun - out from the social protocol NOW tries Greece, Portugal and Spain. annexed to the treaty, though this ended in 1997 when the UK The common market and subse - The one area in which there was joined the other EU countries in quently the single market have little progress was services. The signing the Amsterdam treaty, been the cornerstones of Euro - Services Directive (2006/123/ which incorporated the social pean economic integration. EC) eventually took effect at the protocol in the EU treaty. end of 2009, but left many When the UK joined the EU, the remaining barriers because of The Amsterdam treaty also incor - common market essentially fears of unfair wage competition, porated the provisions of the meant free movement of goods resulting from the accession of Schengen Agreement abolishing 4. For an early discus - and workers. In the former case, ten lower-income central and border controls between EU sion of differentiated integration, see Stubb tariffs and quotas had been elim - eastern European countries. In member states. From this, the UK (1996). 04 t d 9 f c r t o f s ( e v f i . r h i 6
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r n r r e m s i s y a v n e e a i i k s s ) ) n n n y d d d i i t e k s s s ) r t t - - - - l l l , , ...... ’ bruegel policy brief ONE MARKET, TWO MONIES: THE EUROPEAN UNION AND THE UNITED KINGDOM
done in a way that left the equal in pursuit of fiscal and political not negatively impact the perma - 06 treatment principle untouched integration. nent opt-out countries. for the euro area, where labour f
e mobility is essential on effi - By 2025, the time horizon for Other EU countries agreed to join i
r ciency grounds and as a shock completing EMU envisaged by the euro in due course when they b absorption mechanism. the Five Presidents’ Report, there joined the EU. This puts a greater y
c are two possible scenarios: one onus on them to accept the i l In fact, the euro area needs more in which the UK (if still an EU changes necessary to reinforce o
p cross-border labour mobility, not member) is the only EMU. However, it l
e less. This might require even country outside the would be fair that ‘The minority g deeper integration of labour mar - euro, and one in they are fully associ - e ket policies and the portability of which other coun - must be protected ated with the reform u
r at least some welfare benefits tries have also not against the process in the euro b (Claeys et al , 2014). Differentia - joined the euro. The tyranny of the area, even while wait - tion of labour market integration UK certainly stands majority, and the ing to join. could thus come both from the out as the only coun - majority against side of (some) euro outsiders try that has not But it is not only the and from euro area members. signed the three the tyranny of the countries currently Both would require treaty change. post-crisis intergov - veto.’ outside the euro that ernmental need safeguards to HOW TO MANAGE FRICTIONS agreements to strengthen EMU protect their legitimate single BETWEEN DEEPER INTEGRA - (see the figure on the front market interests. The majority TION OF MONETARY UNION AND page). But that does not mean also needs protection to ensure THE SINGLE MARKET? that all the other countries will that their legitimate efforts to join the monetary union in the strengthen EMU, including where We have shown that there are next decade. This will largely be a necessary by deepening the sin - few if any genuine economic political question, but a better gle market, will not be vetoed by forces arising from monetary functioning EMU will surely the non-euro minority. This boils union that necessarily drive a increase the pull of monetary down to creating mechanisms to wedge between euro and non- union. protect both the minority against euro countries in the single the tyranny of the majority and market. However, The question of the the majority against the tyranny monetary union ‘Introducing relationship between of the veto. requires a deeper discrimination in the UK and Denmark level of economic and the euro area is, Agreement should be reached on integration, in partic - the treatment of in a sense, the easi - this within the existing treaty ular in banking, EU citizens would est one. Both have a framework. Giving the UK (and financial markets and limit EU labour euro opt-out and other non-euro members) a veto labour markets 15 , a mobility.’ could not have antici - right would not be any more defining feature of pated that future appropriate than the euro coun - which is that all are subject to changes to the single market tries having the right to disregard significant regulatory, supervi - would be needed to strengthen the opinions of their non-euro sory and even implicit and EMU. It seems normal, therefore, counterparts. This mutual guar - 15. Fiscal policy inte - explicit fiscal arrangements. The that the countries that now wish antee would have to apply to EU gration of the euro area should also be consid - agenda of deeper EU integration to introduce such changes, laws as well as the actions of ered in this context to will therefore entail various regu - either through new EU rules or existing institutions. the extent that it is latory and institutional through intergovernmental important for the single market. approaches, as well as measures agreements, ensure that they do It is up to lawyers and politicians ONE MARKET, TWO MONIES: THE EUROPEAN UNION AND THE UNITED KINGDOM
to find the best ways to achieve the three single market areas we In conclusion, having the euro this. Currently, there seem to be have discussed, we see at least and other currencies has not 07 adequate measures in place to some situations in which the cur - undermined the single market so f
protect outsiders. For example, rent EU treaty would not provide far. But there could be attempts e i the UK filed a complained against adequate safeguards. This con - to deepen the single market in r the European Central Bank about cerns both the deepening of the the euro area in order to increase b y its treatment of clearing houses euro area and the stepping back its resilience, which will create a c i and won the case before the of the UK from some already- need for new regulations, new or l o 16
European Court of Justice (ECJ) . undertaken integration steps, strengthened institutions and, p l
And the UK has won safeguards most notably in migration. ultimately, greater democratic e in banking union matters through legitimacy mechanisms. These g the European Banking Authority. In terms of deeper euro-area developments could, but would e u
integration, one could not necessarily, affect the func - r Nevertheless, the ‘Day-to-day gover - imagine further inter - tioning of the EU single market. b day-to-day gover - nance of monetary governmental Soon rather than later, the euro- nance of monetary agreements or even a area majority, and the UK (and union takes place union currently takes new euro-area treaty. other outs) must agree on how to place largely inside largely inside the The question then is protect their respective interests. the Eurogroup, which Eurogroup, which what legal safe - Without such agreements, signif - is causing friction. We is causing friction.’ guards could be put icant economic conflicts could have argued else - in place to prevent emerge from governance deci - where that the relationship such a euro-area treaty from sions and policy divergence in a between the ECOFIN council and unduly damaging the UK’s sin - deepening single market in the the Eurogroup should be re- gle-market interests. euro area. This would be damag - thought (Pisani-Ferry et al , ing for all EU countries. 2012). For example, it would be a As far as situations in which the strong symbol of good-will for UK might wish to opt out of EU Finally, a UK exit from the EU 16. Case T-496/11 Eurogroup meetings to follow the legislation relating to labour would not make the potential United Kingdom v Euro - pean Central Bank. ECOFIN, instead of the other way mobility are concerned, and problems we have discussed dis - 17. We accept the argu - around, as currently. especially if the UK decided to appear. Geography dictates that ment of Piris (2016) leave the EU, we would imagine it the UK’s relationship with the EU that such a status is legally difficult to However, as we have argued, the to be possible that a single market would achieve. We are less fault-lines between the euro area new legal status for remain paramount. sure about his assess - ‘A UK exit from ment about the UK’s and the single market could the UK could be nego - With respect to its par - comparatively weak widen, which would require a tiated 17 . This status the EU would not ticipation in the single negotiating position. more robust arbitration mecha - could give access to make the poten - market, all that the UK 18. Such a special treaty would put the UK nism. Piris (2015) proposes to the single market for tial problems we would achieve by outside of the EU and entrust this to the ECJ, but there goods but be much leaving the EU would would obviously fulfil have discussed David Cameron’s could be other forums. David more restrictive for be to weaken its posi - demand to end the UK’s Cameron’s proposal to give labour mobility. How - disappear.’ tion to influence commitment to an ever- closer union. The national parliaments a veto right ever, access to the European regulations, special status could is problematic, however, because single market for (financial) serv - institutions and politics. emerge as a possible it would change the nature of the ices would be a core issue of the alternative to EU mem - bership for other union and potentially slow down negotiations and would most cer - We thank colleagues, as well as Ian countries such as euro-area integration. tainly be used as a bargaining Harden and Helen Wallace, and a Turkey, with which the EU may want to inten - chip to limit the reduction in number of policymakers, for their comments on earlier drafts of this sify the economic Arbitration would hardly solve labour mobility 18 . relationship without paper. Remaining errors are our committing to free the deeper issues, however. In own. labour mobility. 08 bruegel policy brief V S V S S P P P M J H H B G B B F C A E C R B t o © O h u r e é a s a l u i i i r t a a e i a a N M i E o
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