Internal market mid-term

Behind by design seems to lead the EU to the Sisyphean internal market and other policy areas, where the Juncker Commission is left to practise the art of the possible: Monitoring the European Commission’s progress.

Having found no comprehensive internal market (single market) mid-term review process or document, we turn to elements illustrating mid-life during the current Commission term.

Is the European Commission able to inspire the EU member states and the other European Union institutions to market reforms?

Single market integration and competitiveness

Instead of the statutory Single Market Pillar of the Annual Growth Survey and the European Semester the European Parliament had called for repeatedly, the European Commission published its latest:

Single market integration and competitiveness report 2016 (European Commission, Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs; 128 pages)

A few snippets, by way of introduction. We learn that (p. 5-6):

The evolution of productivity is the main determinant of competitiveness in the long run. Despite a relative slowdown in productivity growth in the USA, the correction of macroeconomic imbalances and the introduction of reforms in some EU Member States, the productivity gap between the USA and the EU still persists. The recovery remains tepid and fragile and the subdued aggregate demand is not contributing to stimulate investment and innovation.

This report identifies progress in the introduction of reforms, but there is still considerable scope for improvement in many areas and countries.

The internal market success story is modified (p. 9):

Compared to the USA, the size of EU firms remains relatively stable during their business life. Once established in the market, EU firms are unlikely to grow or shrink in size. This structural difference between the US and the EU seems to be a result of the relatively lower dynamism of EU markets.

However, some progress is noted, according to the World Bank’s Doing Business scores (p. 9):

Public sector regulations define the business environment in which firms operate. The US is considered to have a more dynamic business environment than the EU. According to the World Bank rankings, the EU has improved its business environment and is closer to the global frontier in 2016 than it was in 2010 (by 3.5 percentage points).

Deepening the internal market remains a challenge in three areas relevant for the efficient allocation of resources in the EU (p. 11):

Accounting for over 14% of GDP, public procurement activities have a significant economic impact on national economies and their efficient operation can contribute to improving the quality of public expenditure and reducing budgetary imbalances while contributing to innovation and the modernisation of Member States' economies.

Activities in the construction value chain present low productivity levels with multiple regulatory restrictions and low cross border trade activity.

Productivity improvements are particularly needed in business services markets, where rigidities are still considerable at national and Single Market levels despite some progress in a number of Member States.

A summary of conclusions is presented on page 14.

The business environment in the USA seems to be clearly superior to the EU seen as a whole (p. 55):

The World Bank Doing Business ranking of business environment in over 100 countries reflects the greater dynamism of business in the USA: USA is ranked 7th, while the EU is on the 31st place.

Single market integration

After discussion about competitiveness and growth factors (against the benchmark USA), chapter 6 discusses integration in the single market (from page 68):

Previous sections of this report have shown the importance of market efficiency in the allocation of resources for competitiveness and how it depends, to a considerably degree, on labour and product market regulations.

The characteristics and quality of the common regulatory framework provided by the Single Market also have a considerable impact on the individual and collective competitiveness of EU Member States. This became apparent during the past financial crisis when the regulatory framework applicable to financial markets proved to be insufficient to cope with the requirements of highly complex and integrated EU financial markets under stress.

At a general level (p. 75):

There are three main channels through which the Single Market can be expected to absorb and spread out the impact of asymmetric shocks:

• Labour markets: local labour market dynamics and flows of labour from surplus regions to regions where labour is in demand.

• Capital markets: flows of capital from regions of low to regions of higher return.

• Goods and services: a shift in intra-EU trade patterns in favour of the worst off economies, as a consequence of improving terms of trade.

A potential fourth channel could be exchange rate and interest rate adjustments, but with 19 Member States already having adopted the single currency and most of the remaining nine having pegged their exchange rates against it, the scope for Single Market shock absorption through monetary mechanisms is limited. In relation to third countries though, exchange rate adjustments remain a powerful channel for shock mitigation.

Thus, the effectiveness of the Single Market in absorbing shocks and facilitating an efficient allocation of resources hinges on the elimination of barriers to the free circulation of goods services, people and capital in the labour, capital and goods and services markets.

After finding the current internal market inadequate to resist shocks, the report discusses key areas in more detail: best value for money public procurement (from page 82), rigidities and market failures in the complex construction value chain (from page 94) and partly as a rehash of the 2015 report, services, especially the wholesale and retail distribution sectors (from page 111).  

Just a few random picks among the observations:

• The Single Market for public procurement is not sufficiently integrated and further opening could boost economic efficiency and growth (p. 93),

• In 2015, the Commission launched a fitness check of EU legislation in the fields of Internal Market, Energy Efficiency, Environment and Occupational Safety and Health, which aims at identifying overlaps or inconsistencies between the various relevant legal acts and analyse burdens and benefits for enterprises of the construction sector, including products manufacturers. The results will be presented in 2017 (page 104).

• Retailers wanting to establish in other Member States may face regulatory restrictions. Member States impose requirements relating to the size of retail outlets or to their location which may result in market entry barriers for certain store formats or business models and may affect secondary establishment. Such restrictions can have a negative impact on market structure and dynamics (page 124).

• For non-grocery retail e-commerce is completely changing the market conditions. Integration happens through cross-border retail sales. Member States should provide a regulatory framework supportive to the development of e-commerce and ensure a level playing field between physical and on-line retail (page 126).

Food for thought

The Single market integration and competitiveness report 2016 offers national governments and EU institutions elements to contemplate market reforms, but it does not really quantify or assess the adequacy of the current internal market strategy of the European Union:

Upgrading the Single Market: more opportunities for people and business; Brussels, 28.10.2015 COM(2015) 550 final

Neither does the 2016 report lay the foundation for a mid-term review based on what it would take to catch up with the United States of America, to name the obvious internal market benchmark.

Single EU regulator, single EU rule book

In practical terms, where the Single market integration and competitiveness report 2016 left off, Bruegel picks up the slack ahead of the mid-term’s invitation for the Commission to reflect on the future of the internal market, as on other priorities.  

Bruegel offers a policy contribution paper Making the best of the European single market (2017), which discusses what to do about the lack of growth and fairness when the easy parts of the internal market have been done.

In terms comprehensible to national politicians and administrations, the authors outline how to increase productivity growth, a new investment agenda and how the EU and its member states should promote fairness.

Even if the discussion is conducted within the existing treaties, it is refreshing to see main building blocks examined, instead of swarms of wafer-thin amendments to limited legal acts.

But I wonder if the EU member states are ever going to be able to break out of the Sisyphean internal market they created, if they fail to build the internal market and the digital single market according to the litmus test: each part as good or better than in the federal United States and Canada.

Ralf Grahn