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The whys and hows of a single market for Europe

Be it sluggish growth performance, high unemployment or an incomplete monetary union, completing the single market is often offered as a silver bullet

Publishing date
23 March 2015

In a recently published Working Paper, we have aimed to bridge this gap by offering a holistic reflection on the theoretical channels of single-market-induced growth and have verified their relevance, building on existing empirical literature.

Figure 1. The single market at work

RTEmagicC_ATerzi_19_03_15_1.png

Source: Bruegel

Figure 1 sketches some of the theoretical channels through which the four freedoms (labour, capital, goods, and services) are supposed to stimulate growth and employment. However, mostly due to data limitations, verifying and quantifying these channels at micro-level is all but methodologically trivial. Furthermore, aggregating the individual (micro-level) channels to estimate the overall (macro-level) impact of the single market on GDP requires extraordinarily audacious modelling assumptions. This has resulted in a wide variety of studies yielding sharply different results (see Table 1).

Table 1: Summary of studies and main macroeconomic effects of the single market

RTEmagicC_ATerzi_19_03_15_2_02.png

Source: Bruegel

All in all, however, even taking all this into account, it is safe to conclude that the impact of the single market has somewhat fallen short of initial expectations. Certainly the Single Market Programme has not succeeded in reversing the declining (though still positive) trend in EU productivity growth and its gap with the US. In our view, this is for three broad reasons:

  1. Barriers remain prevalent under several headings. Although the exact degree of integration (or lack thereof) might be difficult to assess, it appears evident that the EU single market is far from complete. Along with the economic literature, we identify problems of a) poor quality of directives’ implementation, b) insufficient mutual recognition, c) a highly fragmented public procurement and d) services market, and finally e) significant barriers to the free movement of workers.
  2. Key complementary policies to the abolition of barriers were not put in place. Albeit important, the prevailing barriers in the single market tell only part of the story. In several areas, even fully abolishing barriers does not translate into the automatic engendering of a common market. For example, the mere recognition of the right of establishment failed to spark significant integration of the banking sector at European level, which rather required the creation of a single supervisor and a common resolution mechanism (see Pisani-Ferry et al, 2012). Similarly for workers, the creation of a truly integrated European labour market might require not only better recognition of professional diplomas and pension portability, but rather wide-ranging coordination of welfare policies.
  3. Some national policies were not supportive of the positive effects of the single market. National regulations protecting undue rents, rigid labour market rules, industrial policy supporting national champions, prevailing public monopolies, cumbersome procedures to set up new businesses, to mention just a few, are all policies that will hamper the crucial process of ‘creative destruction’ and attenuate the benefits of the single market, even in a situation in which all barriers are removed. At the same time, an effective national welfare system is fundamental to ensure that there is not just ‘destruction’ but rather ‘creative destruction’ and that, as unproductive firms shut down, capacities are not wasted but rather re-channelled to productive sectors and firms.

With this last point in mind, one can then interpret the single market as a catalyst, rather than a motor, of growth. Reforms of product and labour markets, together with policies increasing the effectiveness of welfare systems, while keeping public finances under control, will boost competitiveness and growth. A complete functioning single market will then amplify the positive effect of these reforms. However, if progress is not made under these headings, the single market cannot act as a substituting policy to bring Europe back to growth.

A key observation is that although the overwhelming prediction is for the single market to generate positive aggregate effects, specific categories might be negatively affected. A large part of the constituencies that currently show support for Eurosceptic parties are possibly to be ascribed to this category. If this were true, and given points 2 and especially 3 above, failures in national policies and welfare systems are to be partly blamed for the opposition that is currently being channelled against the EU and the single market.

Perhaps precisely because of the acknowledgment of the heterogeneous effects arising from further integration, and led by the desire to overcome distributional conflicts, the approach of the Commission in the past has been to adopt wide-ranging directives and regulations aimed at completing the single market across the board – the 1992 SMP being the most notable case. Recently however, we note a policy shift towards a more targeted approach.

The Juncker Commission has identified the main priorities for the single market as the establishment of a Capital Market Union, and the completion of the European energy and digital markets. This targeted approach might cater better to focusing on setting up the ‘complementary policies’ we have mentioned. But without comprehensive support from member states entailing not only devolution of powers but also appropriate national redistribution policies, those initiatives are likely to face increasing political resistance, significantly affecting the chances that the single market will deliver the benefits expected of it since its inception.

 

About the authors

  • André Sapir

    André Sapir, a Belgian citizen, is Senior Fellow at Bruegel. He is also University Professor at the Université libre de Bruxelles (ULB) and Research Fellow of the London-based Centre for Economic Policy Research.

    Between 1990 and 2004, he worked for the European Commission, first as Economic Advisor to the Director-General for Economic and Financial Affairs, and then as Principal Economic Advisor to President Prodi, also heading his Economic Advisory Group. In 2004, he published 'An Agenda for a Growing Europe', a report to the president of the Commission by a group of independent experts that is known as the Sapir report. After leaving the Commission, he first served as External Member of President Barroso’s Economic Advisory Group and then as Member of the General Board (and Chair of the Advisory Scientific Committee) of the European Systemic Risk Board based at the European Central Bank in Frankfurt.

    André has written extensively on European integration, international trade, and globalisation. He holds a PhD in economics from the Johns Hopkins University in Baltimore, where he worked under the supervision of Béla Balassa. He was elected Member of the Academia Europaea and of the Royal Academy of Belgium for Science and the Arts.

  • Mario Mariniello

     

    Mario Mariniello was Senior Fellow at Bruegel. He led Bruegel’s Future of Work and Inclusive Growth project, which closely analyses the impact of artificial intelligence (AI) on the nature, quantity and quality of work, welfare systems and inclusive growth at large. In particular, the role of technology in reshaping society when subject to extreme stress (i.e. during a pandemic).

    Before joining Bruegel, Mario was Digital Adviser at the European Political Strategy Centre (EPSC), a European Commission in-house think-tank that operated under the authority of President Jean-Claude Juncker. The EPSC provided the President and the College of Commissioners with strategic, evidence-based analysis and forward-looking policy advice. In his capacity of Digital Adviser, Mario led the EPSC’s work on Digital Single Market issues.

    Mario has also previously been a Bruegel Fellow focusing on “Competition Policy and Regulation”. From 2007 to 2012, Mario was a member of the Chief Economist Team at DG-Competition, European Commission. During that time, he developed the economic analysis of a number of topical antitrust and merger cases in the technological and transport sectors.

    Mario holds a Ph.D. in Industrial Organization from the European University Institute of Fiesole (Florence) and a M.Sc. in Economics from CORIPE (Turin). He currently teaches a course in Digital Economy at the College of Europe and has previously taught a course in European Economic Integration for Master students at the Université Libre de Bruxelles (ULB).

    Declaration of interests 2021

    Declaration of interest 2020

    Declaration of interest 2015

  • Alessio Terzi

    Alessio Terzi, an Italian citizen, joined Bruegel in October 2013. Prior to this, Alessio was a Research Analyst in the EMU governance division of the European Central Bank. He has also worked for the macroeconomic forecasting unit of DG ECFIN (European Commission), the Scottish Parliament’s Financial Scrutiny Unit, and BMI Research (Fitch group), a country risk and forecasting firm in the City of London, where he was a Europe Analyst.

    He holds a Bachelor's degree in International Economics from Bocconi University and an MPA in European Economic Policy from the London School of Economics, where he specialised in public economics. During his studies, he spent a semester at Dartmouth College (USA). Alessio’s main research interests include structural reforms, competitiveness, EMU governance, and the G20.

    Between 2016-2018, Alessio was a Visiting Fulbright Fellow at the Kennedy School of Government of Harvard University. He completed a PhD in Political Economy at the Hertie School of Governance in Berlin, with a thesis on economic growth, written under the supervision of prof. Henrik Enderlein, Dani Rodrik, and Jean Pisani-Ferry.

    He is fluent in Italian and English, has a good knowledge of French, and an intermediate level of German and Spanish.

    Declaration of interests 2015

    Declaration of interests 2016

    Declaration of interests 2017

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