Blog Post

How to make the single market more inclusive after Brexit

The creation of the single market generated winners and losers. Yet redistribution remains first and foremost a competence of national governments. It is thus fair to state that a failure in national, more than European, policies and welfare systems can be partly blamed for current discontent with the EU and the single market.

By: and Date: August 18, 2016 Topic: Macroeconomic policy

The single market has been the cornerstone of European integration since 1957. With over 500 million consumers and €13 trillion GDP, it is considered the largest market in the world. Recent estimates suggest that EU GDP per capita would be as much as 12% lower without European integration. In addition, Mariniello et al (2015) illustrate how these benefits could be even greater, if integration were deepened in areas such as services, public procurement and free movement of workers, just to mention a few. Crucially, a complete and functioning single market would help foster productivity growth – something the EU sorely needs in order to preserve its long-term prosperity at a time of challenging demographic prospects.

Following the Brexit vote, the EU loses one of its evergreen champions of free trade, meaning that some single market initiatives might lose momentum. More importantly, the British referendum revealed an image of a country highly fractured along the lines of age, education, and geographical location. Former Commission President Jacques Delors once notoriously stated that “it is difficult to fall in love with the single market”. Nowadays, it seems like it is quite easy to be drawn into disaffection with the single market, especially when you belong to certain social cleavages.

Darvas (2016) quantitatively analysed the socio-economic characteristics of leave voters, coming to the conclusion that high inequality and poverty contributed significantly to shaping voting behaviour. Either at a personal or regional level, these leave voters are now being called the ‘losers of globalisation’.

To be sure, the single market – which is a spearhead example of globalisation – was always expected to increase overall welfare but indeed, in the process, generate winners and losers (see Terzi et al, 2015). For example, Burstein and Vogel (2016) showed how high-skilled workers are likely to disproportionately benefit from market integration. Furthermore, Egger and Kreickemeier (2009) illustrate in a theoretical model how market integration, and the consequent selection of the best firms into export status and exit of the least productive producers, might lead to an increase in wage inequality, even for workers with similar skill-sets.

The ‘harmonious development of economic activities’ was an EU objective straight from the Treaty of Rome, and in 1975 regional funds were set up in order to promote regional development. Together with cohesion policy, launched in 1988, these tools aimed to counteract some of the centrifugal forces unleashed by the creation of a single market. However, given the tiny size of the EU budget, these funds remain limited. For the period 2014-2020, overall regional policy has been allotted €351.8 billion – equivalent to 0.4% of EU GDP per year. As a matter of comparison, when Germany decided to promote regional development in the East following reunification, it introduced transfers of roughly 4% of West German GDP.

Redistribution, both across regions and between individuals, remains first and foremost a competence of national governments. Poverty and inequality played a prominent role in the Brexit referendum. It is thus fair to state that a failure in national, more than European, policies and welfare systems can be partly blamed for current discontent with the EU and the single market. This is particularly true in the UK, where territorial heterogeneity is far greater than in any other EU country. (Figure 1).

Figure 1. GDP per capita in PPP by NUTS2 region, EU28=100, 2013

Note: Regions below 75% of the EU’s GDP per capita receive funds under the Cohesion Policy, the largest programme under the EU’s Regional policy.
Source: Eurostat, Bruegel

at 18 8 16

Going forward, it is evident that more effective corrective mechanisms are needed to cushion the negative effects of the single market and, in doing so, prevent a further popular backlash against globalisation and the European Union. While many commentators are now calling for stronger redistribution, the key will be to strengthen welfare and regional support without hampering the inherent mechanics of the single market, or else do so at the expense of productivity developments, long-term growth and overall prosperity.

At the core of the single market is the concept of Schumpeterian creative destruction:  once countries open their borders to European competition, some firms (the most unproductive) will exit the market, allowing for a redistribution of resources to the most competitive. This will allow countries to develop and focus on their competitive advantages. National policies should not hamper this process, while ensuring that destruction is indeed ‘creative’ and does not merely result in long-term unemployment, permanent migration, and disinvestment.

At the national level, in order to alleviate poverty and inter-personal disparities, tax systems can surely be made more redistributive, particularly in some countries. However, this should be seen only as the first step of a wider strategy. Addressing the problem for the long term will require also significant investments in education and skills. At the same time, territorial cohesion calls for projects aimed at increasing the interconnectedness of marginalised regions, linking them to the wider European or global economy. In the 21st century, more than extending bridges and roads, this might take the shape of expanding high-speed internet connections, or widening the use of tools such as distance learning, 3D printing, or e-commerce.

At the European level, regional policy seems appropriately targeted – focussing on infrastructure, education, employment, research and innovation – but poorly funded. Because globalisation, combined with technological innovation, seems to be augmenting agglomeration effects within Europe, a case could be made for substantially expanding the funding of these instruments, while at the same time ensuring their local take-up and good use. Ultimately, if the ‘losers of globalisation’ turn against the European project, this will have repercussions for the whole Union and, as such, the heavy-lifting cannot be left only to national policies and welfare states.

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article
 

Blog Post

European governance

Opaque and ill-defined: the problems with Europe’s IPCEI subsidy framework

Lack of strict governance and transparency creates serious risk that fair competition within the single market will be undermined. Fundamental overhaul of the framework is needed.

By: Niclas Poitiers and Pauline Weil Topic: European governance, Macroeconomic policy Date: January 26, 2022
Read article
 

Blog Post

Inclusive growth

The triple constraint on artificial-intelligence advancement in Europe

Skills, data and financing shortcomings constrain artificial-intelligence innovation in Europe.

By: Mia Hoffmann and Laura Nurski Topic: Digital economy and innovation, Inclusive growth Date: December 6, 2021
Read article Download PDF More on this topic More by this author
 

External Publication

Chinese economic statecraft: what to expect in the next five years?

Chapter from 'Storms Ahead: the Future Geoeconomic world order' on the expectations from the next five years of Chinese economic policy, published on 27 October 2021.

By: Alicia García-Herrero Topic: Global economy and trade Date: November 26, 2021
Read article
 

Blog Post

European governanceInclusive growth

The socioeconomic effects of COVID-19 on women

The pandemic has disproportionately affected women both professionally and at home. Although the gender gap in labour force participation since the onset of the pandemic hasn't worsened, policy still needs to tackle existing gender gaps, which for some EU countries are very substantive.

By: Maria Demertzis and Mia Hoffmann Topic: European governance, Inclusive growth Date: November 3, 2021
Read article More on this topic
 

Blog Post

Strong, balanced, sustainable and inclusive growth? The G20 and the pandemic

The G20 is not doing enough to support strong, balanced, sustainable and inclusive growth in the wake of COVID-19, with the poorest countries left behind by the recovery.

By: Suman Bery and Pauline Weil Topic: Global economy and trade Date: October 29, 2021
Read article Download PDF
 

Parliamentary Testimony

European ParliamentInclusive growth

Understanding the socioeconomic effects of the COVID-19 pandemic on women

Testimony before the European Parliament's Committee on Economic and Monetary Affairs (ECON) on the consequences of the pandemic on women.

By: Maria Demertzis and Mia Hoffmann Topic: European Parliament, Inclusive growth, Macroeconomic policy Date: October 27, 2021
Read article More by this author
 

Blog Post

Inclusive growth

Making antitrust work for, not against, gig workers and the self-employed

Policymakers should act to deal with labour-market concentration trends that potentially harm workers, especially gig workers and the self-employed.

By: Georgios Petropoulos Topic: Digital economy and innovation, Inclusive growth Date: October 11, 2021
Read article More by this author
 

Podcast

Podcast

Is tech redefining the workplace for women?

Laura Nurski, Sabine Theresia Köszegi and Giuseppe Porcaro explore the relationship between artificial intelligence and job transformation and ask whether the impact differs by gender.

By: The Sound of Economics Topic: Digital economy and innovation, Inclusive growth Date: October 6, 2021
Read article More on this topic More by this author
 

Opinion

The pandemic’s uncertain impact on productivity

The pandemic has certainly permanently affected our way of working. Whether this is for the better remains to be seen.

By: Maria Demertzis Topic: Macroeconomic policy Date: September 28, 2021
Read article More on this topic More by this author
 

External Publication

Brexit and European finance: Prolonged limbo

It will take longer than many had anticipated for the dust to settle on the post-Brexit financial landscape and its respective implications for the EU and the UK.

By: Nicolas Véron Topic: Banking and capital markets Date: September 24, 2021
Read article More on this topic
 

External Publication

Winners and losers of energy and climate policy – How can the costs be redistributed?

Who should bear more and who less of the burden achieving climate policy goals?

By: Gustav Fredriksson and Georg Zachmann Topic: Green economy Date: September 24, 2021
Read about event More on this topic
 

Past Event

Past Event

How to strike the right balance between the three pillars of the pension system?

In this event panelists will discuss the future of European pension schemes.

Speakers: Elsa Fornero, Svend E. Hougaard Jensen and Suvi-Anne Siimes Topic: Macroeconomic policy Date: September 23, 2021
Load more posts