From the Single Market to the ‘New Europe’

1. The European Union: economics, policies and history 1st edition Chapter 6 From the Single Market to the ‘New Europe’ Susan Senior Nello

2. 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.

3. 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.

4. 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.

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

6. Steps in introducing the Internal Market programme • In March 1985 Delors, presented his programme to the European Parliament. • The Cockfield White Paper of 1985, ‘Completing the Internal Market ’. • The Milan Summit decided on the intergovernmental conferences to prepare the necessary revision to the existing Treaties. • The Single European Act of 1987 set out the formal procedure necessary to implement the 1993 programme.

7. 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.

8. The effects of eliminating trade barriers (Emerson, 1989) Fig 6.1

9. 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.

10. 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.

11. 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.

12. The removal of frontier controls • A key aim of the removal of frontier controls was to facilitate free movement of people within the Community. • Key to this strategy was the Schengen Agreement that, according to the Amsterdam Treaty, was to be incorporated into the Community pillar. • Other aspects of the elimination of border controls include the abolition of customs formalities, veterinary and road safety checks at frontiers. In addition, quantitative restrictions could no longer be applied at the national level by EC member states.

13. 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

14. 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.

15. Mutual Recognition Mutual Recognition was defined in the Cassis de Dijon case of 1979. All goods lawfully manufactured and marketed in one member state should be accepted also in other member countries. Some exceptions were allowed related to public health, the fairness of commercial transactions and the defence of the consumer.

16. 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).

17. 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.

18. Protection of consumer rights • Actions to ensure that consumers have comparative information, through rules on packaging and labelling, and support for consumer organisations. • Measures to ensure the right of consumers to redress with simple clear procedures.

19. Fiscal harmonisation Differences in national tax systems represented a barrier to completion of the internal market in two ways: • Tax differences may cause price distortions and so undermine the competitive process. • Differences in national taxation have to be adjusted at the border, thereby necessitating controls at the frontier. Moreover, operating with different tax systems adds to the cost and complexity of doing business in other EU countries.

20. 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.

21. 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.

22. 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.

23. 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.

24. Tax competition • Ireland, for example, was accused of setting its taxes on profits low, which helped to contribute to high levels of inward foreign direct investment. • New member states were warned that if they attempted to emulate the successful Irish model they would not be permitted to introduce what were considered as unfair tax concessions.

25. 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.

26. 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).

27. 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).

28. Services in the Treaty of Rome The Treaty called for two types of freedom in this context: • to provide services: any company of a member state can provide services in other member states without having to set up an office there (Article 49), and • to set up an establishment (Article 43): companies (or persons) from one member state may set up an establishment in another member state on the same conditions as nationals of the other member state (the principle of national treatment).

29. 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.

30. 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).

31. 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.

32. 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.

33. 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.

34. 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).

35. 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.

36. 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.

37. 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.

38. 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.

39. The ten-point plan of 2003 to improve the working of the Internal Market • enforcing the rules, • integrating service markets, • improving the free movement of goods, • meeting the demographic challenge, • better essential services, • improving conditions for business, • simplifying the regulatory environment, • reducing tax obstacles, • more open public procurement markets, • providing better information

40. 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’.

41. 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.

42. Estimates of the effects of the Single Market Programme: 10 years later According to astudy 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.

43. Public Consultation on a Future Single Market Policy SEC(2006) 1215/2To 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.