The European Chapter 6

Union: economics,
policies and history From the
1st edition Single
Market to
the ‘New
Europe’

Susan Senior Nello

©The McGraw-Hill Companies, 2004

 The internal market
• After the 1973 and 1979 oil crises the European
economy experienced a prolonged recession with
stagnating output, rising unemployment and
declining world export shares.

• During these years the terms ‘Eurosclerosis’ and

‘Europessimism’ were coined to describe the
flagging process of integration.

• The main energies of the Community appeared

absorbed by budgetary squabbles and the annual
marathons to fix ‘common’ agricultural prices.

©The McGraw-Hill Companies, 2004

 The fragmentation of European
markets
• The EC member states were becoming
increasingly concerned about the growing
lag between their economic performance
and that of countries such as Japan and the
US, especially in high technology sectors.

• In searching for the explanation for this lack

of competitiveness, European industrialists
and policy makers laid the blame on the
fragmentation of the EC market.
©The McGraw-Hill Companies, 2004
 The fragmentation of European
markets
• Krugman (1991), for example, found that
the level of specialisation in the US was
higher than in the EC, even though the
distances were greater.

©The McGraw-Hill Companies, 2004

 Industrial specialization (share of
manufacturing employment) in Germany,
Italy and the US, Krugman (1991)
Germany Italy Midwest South

Textiles 3.7 9.1 0.3 11.7

Apparel 2.6 5.6 2.4 10.6

Machinery 15.8 12.9 15.0 7.1

Transport
Equipment 13.2 10.4 12.8 5.9

Automobiles 38.4 17.6 66.3 25.4

©The McGraw-Hill Companies, 2004

Steps in introducing the Internal
Market programme

©The McGraw-Hill Companies, 2004

According to the European Commission,
the main non-tariff barriers to be
eliminated were:
• frontier controls;

• differences in technical specifications and

standards;

• restrictions on competition for public

purchases;

• restrictions on providing certain services (in

particular financial and transport services) in
other EC countries; and

• differences in national tax systems.

©The McGraw-Hill Companies, 2004

The effects of eliminating trade
barriers (Emerson, 1989)

Fig 6.1
©The McGraw-Hill Companies, 2004
 Implementation of the Single
Market Programme
• At the EC level rapid progress was made in
passing the necessary measures for the
Internal Market Programme.

• The transposition of EC measures into

national legislation was to prove a slightly
more lengthy process.

• The real difficulties arose in implementation

of the measures and the granting of
temporary derogations.
©The McGraw-Hill Companies, 2004
 Implementation of the Single
Market Programme

• Progress appears to be slow with regard to

public procurement, the recognition of
higher education diplomas, and (at least in
certain EU states) the liberalisation of
financial services, telecommunications,
transport, intellectual property and the
environment.

©The McGraw-Hill Companies, 2004

 Recent measures to improve
implementation of the Single market
programme
• The 1997 Amsterdam European Council endorsed
an Action Plan that entails the Commission drawing
up a ‘Single Market Scoreboard’ every six months.

• This indicates the shortcomings of the various

member states in implementing Single Market
measures.

• In 2002 the SOLVIT redress system was introduced

in order to improve implementation of Internal
Market rules.

©The McGraw-Hill Companies, 2004

The removal of frontier controls

©The McGraw-Hill Companies, 2004

The removal of non-tariff barriers
in trade between the member
states
1) The old approach

2) Mutual Recognition

3) The ‘new approach’ from

1985

©The McGraw-Hill Companies, 2004

 The old approach

The old approach involved

harmonising the national standards and
technical regulations of member states.

This was slow and inefficient, and ran the

risk of excessive bureaucratic interference.

©The McGraw-Hill Companies, 2004

Mutual Recognition

©The McGraw-Hill Companies, 2004

The ‘new approach’ from 1985
Wherever harmonisation of rules at the EC level
was deemed necessary, it was decided that this
should be limited to essential objectives and
requirements.

The task of defining technical specifications was

left to standardisation bodies such as the CEN
(Centre Européen de Normalisation), the
CENELEC (Centre Européen de Normalisation
Electrotechnique) and the ETSI (European
Telecommunications Standards Institute).

©The McGraw-Hill Companies, 2004

 Protection of consumer rights
 Actions for the protection of consumer health
and safety. These include rules on the testing
and registration of pharmaceutical, medical
and cosmetic products, measures to ensure
the safety of toys, health controls, and
labelling for food and agricultural products,
and so on.

 Protection of the economic interests of

consumers by, for instance, measures against
unfair contracts and misleading advertising.

©The McGraw-Hill Companies, 2004

Protection of consumer rights

©The McGraw-Hill Companies, 2004

Fiscal harmonisation

©The McGraw-Hill Companies, 2004

 VAT
• Differences in VAT between member states relate to
tax coverage (i.e. which products are liable to tax),
the number of VAT rates and their levels.

• The compromise under the Single Market

Programme entailed a standard minimum rate of
VAT of 15 per cent and a list of products (food,
pharmaceuticals, energy, water, hotels, passenger
transport etc.) on which a reduced rate of 5 per cent
could be applied. Subsequently a band of 15-25 per
cent was introduced for the standard rate. Existing
zero rates could be continued but not extended.

©The McGraw-Hill Companies, 2004

 Excise duty

• There are considerable differences in the

level and coverage of excise duties (on
petrol, alcohol, cigarettes, wine, beer etc.)
in the various EC countries. These reflect
differences in social customs, public health
considerations, the revenue requirements
of governments of the member states, and
in some cases the existence of state
monopolies.

©The McGraw-Hill Companies, 2004

 Excise duty

• The 1993 programme simply entailed

minimum rates of duty for alcohol,
tobacco, cigarettes and mineral oil, and an
imprecise commitment to harmonisation in
the medium term.

• Duty-free on intra-EU trips was eventually

abolished in 1999.

©The McGraw-Hill Companies, 2004

 Tax competition

• The fear of ‘tax competition’ again came

to the fore from the late 1990s.

• It was argued that removal of the barriers,

with capital and labour becoming more
mobile, would lead workers and
investment to move to low-tax
destinations.

©The McGraw-Hill Companies, 2004

Tax competition

©The McGraw-Hill Companies, 2004

 The liberalisation of public
procurement
In practice public procurement has proved one of
the most difficult markets to open. According to
the Commission, the estimated value of cross-
border procurement as a share of all public
procurement only rose from 6 per cent in 1987 to
10 per cent in 1998.

In 2003 the Commission called for simplifying of

national rules, standardisation of procedures,
and modernisation of public procurement
systems to make it easier for foreign companies
to participate in calls for tender.

©The McGraw-Hill Companies, 2004

 Liberalisation of the service
industries
Restrictions on trade in services are said to be
necessary to protect consumers, for example:
• to ensure safety (air travel),

• minimum standards (medical services),

• and financial solidarity (the banking system),

• or for cultural reasons (audiovisual services).

©The McGraw-Hill Companies, 2004

 Liberalisation of the service
industries
Alternatively, restrictions are said to be
justified to protect national industries, for
instance:

• for strategic or prestige reasons (air

transport),
• to control key technologies (information
science or telecommunications),
• for regional, social or environmental reasons
(rail transport),
• or for cultural reasons (audiovisual services).

©The McGraw-Hill Companies, 2004

Services in the Treaty of Rome

©The McGraw-Hill Companies, 2004

 The proposed service directive
• Progress in liberalizing the EU service sector in the Community has
been slow. By 2006 services accounted for 60-70 per cent of
economic activity in the EU (25), but only 20 per cent of intra EU
cross-border trade.
• The Lisbon Summit of 2000 called for a strategy to remove cross-
border barriers to service provision.
• In 2002 the Commission published ‘State of the Internal Market for
Services’ setting out the legal, administrative and practical
obstacles to the movement of services in the EU. These included
delays in receiving the necessary licenses and permits; the
‘economic needs’ test’ imposed by some member states to ensure
that businesses would not destabilise local competition, and
difficulties in obtaining information about legal and administrative
formalities in the host country.

©The McGraw-Hill Companies, 2004

 The proposed service directive
• In January 2004 the then Internal Market Commissioner,
Frits Bolkenstein, proposed a directive to create an
effective Single Market for services.
• Inter alia the directive envisaged applying the country of
origin principle, which would mean that if a service operator
were operating legally in one member state (i.e. following
home-state legislation), it could offer its services freely in
others.
• There were widespread protests that the directive would
lead to unfair competition (the ‘Polish plumber’ was
considered the personification of the fear that there would
be a huge influx of low-paid workers from Central-East
Europe).

©The McGraw-Hill Companies, 2004

The revised proposal for the service directive

• Easier for businesses to establish anywhere

in the EU and to provide services across
borders, but country of origin principle
removed.
• Businesses would be able to complete all
formalities online with a single point of
contact.
• However, member states would be able to
apply restrictions that are non-
discriminatory, and proportionate if this is
required to protect public safety, social
security, health, and the environment.
©The McGraw-Hill Companies, 2004
The revised proposal for the service directive

• Member states would be obliged to

remove unnecessary obstacles (such as
the need to open a national office or
register with the local authorities).
• Service providers were to be supervised
under enhanced provisions for co-
operation between national authorities,
backed up by an electronic information
system allowing authorities to exchange
information.

©The McGraw-Hill Companies, 2004

 The revised proposal for the service
directive: Exceptions
• Financial services, telecommunications, transport
services, broadcasting, and recognition of professional
qualifications were already covered by specific
legislation so were excluded from the Directive.
• In line with the EP’s amendments the revised proposal
does not affect labour law(such as collective
agreements and domestic legislation on working hours
and minimum wages), posted workers (for which there
is separate legislation),healthcare, social services
relating to social housing, childcare, support of families
and persons in need, activities related to the exercise
of official authority, temporary work agencies, private
security services, gambling and audiovisual services.

©The McGraw-Hill Companies, 2004

 Posted Services Directive of 1996
• Posted workers are employed by a firm and for a time work
in a member state other than the State in which work is
normally carried out.
• Firms have to guarantee a central core of mandatory
protective legislation laid out in the State where the work is
carried out.
• Transitional arrangements for the 8 new CEEC member
states
• In order to avoid disruption in certain vulnerable sectors
Germany and Austria may limit the temporary movement of
workers providing services provided they respect the
general transitional arrangements to free movement of
labour (reciprocal measures by Hungary, Poland and
Slovenia).

©The McGraw-Hill Companies, 2004

 In 2006 the Commission published
‘Guidance on the Posting of Workers in the
Framework of the Provision of Services’.
• Businesses providing services should encounter fewer
obstacles (e.g. no obligation to have a permanent
representative or to obtain prior authorisation in the host
country), less bureaucracy and quicker procedures.
• Member states must make it clear what they require of
companies when they post workers.
• Companies must have better information regarding wages
and working conditions.
• The Commission will help exchange of information and
administrative co-operation between member states.

The Commission will present a separate initiative on health,

covering issues such as patient mobility, and publish an
initiative on social services and services of general interest.

©The McGraw-Hill Companies, 2004

Liberalisation of financial services
• The 1985 White Paper identified the main barriers
in this sector as controls on capital movements,
and different regulatory frameworks for banks
and other financial institutions.

• In 1988 a Directive called for complete

elimination of controls on capital movements both
between EC member states and with third
countries. This was achieved from July 1990, with
the later deadlines of 1992 for Ireland and Spain,
and 1994 for Greece and Portugal.

©The McGraw-Hill Companies, 2004

 Liberalisation of the banking
sector
• In 1989 three Directives were passed
which formed the basis for liberalisation of
the banking sector.

• The Second Banking Directive established

a single banking license. Any bank, which
has received authorisation by the
appropriate authority in any EC state, can
provide services over the border, and can
open branches in any other EC state
without the need for further authorisation.

©The McGraw-Hill Companies, 2004

The Financial Services Action Plan
(FSAP)
The FSAP of 1999 set out 42 measures, to:

• create a single EU-wide financial

market

• ensure state-of-the-art prudential

rules and supervision.

In 2005 the legislative phase of the

Action Plan was completed.
©The McGraw-Hill Companies, 2004
The ten-point plan of 2003 to improve
the working of the Internal Market
1) enforcing the rules,
2) integrating service markets,
3) improving the free movement of goods,
4) meeting the demographic challenge,
5) better essential services,
6) improving conditions for business,
7) simplifying the regulatory environment,
8) reducing tax obstacles,
9) more open public procurement
markets,
10) providing better information
©The McGraw-Hill Companies, 2004
 Recent initiatives
• Unbundling of the energy sector. In many member
states infrastructure is not separate from supply
companies and electricity generators, creating
potential opportunities for discrimination. For
instance, groups such as Eon and RWE Germany,
and EdF and GDF in France have a strategy of
combining infrastructure and supply, and in some
cases integrate gas and electricity operations. The
aim is to break up large integrated groups to
stimulate cross-border competition.
• Full market opening for postal services by 2009. This
implies that national operators will no longer have a
monopoly on mail below a certain weight (currently
50 gm) known as the ‘reserved area’.

©The McGraw-Hill Companies, 2004

 Estimates of the effects of the
Single Market Programme
According to the Cecchini Report, in the case of
passive macroeconomic policies, the overall
impact (after an estimated 5-6 years) of the Single
Market Programme could be a 4.5 per cent
increase in GDP, a 6 per cent reduction in the
price level, and the creation of about 2 million
jobs. With a more active macroeconomic policy
(reflecting the improved economic performance),
there would be a 7 per cent increase in GDP, a 4.5
per cent reduction in inflation and the creation of
5 million jobs.

©The McGraw-Hill Companies, 2004

Estimates of the effects of the
Single Market Programme: 10
years later
According to a study carried out by the EC
Commission 10 years after the January 1st
1993 deadline, the Internal Market added
1.8 per cent (or €164.5 billion) to the EU
GDP in 2002. The cumulative extra
prosperity due to the Single Market was
estimated at €877 billion and, according to
the Commission, 2.5 million jobs had been
created since 1992.

©The McGraw-Hill Companies, 2004

Public Consultation on a Future Single Market Policy SEC(2006)
1215/2
To prepare for review of the Single Market by the Commission
in 2007.
• 1514 replies (member states (MS) and public sector,
individual businesses, citizens academia etc.). All MS
but few from new MS and few regional and local
authorities.
• Broad agreement that Single Market has brought
benefits, but some (consumer organisations, SMEs)
question benefits to consumers and small businesses.
• Gaps need to be addressed in services, retail financial
services, insurance, transport, energy, taxation, free
movement of workers and intellectual property.
• Problems with implementation and enforcement.
• Some call for the development of the ‘social
dimension’ of the Single Market.

©The McGraw-Hill Companies, 2004