2023 marked the 30th anniversary of the Single Market, an important milestone for the EU that has seen the free movement of goods, services, capital, and people across the Union, yielding remarkable benefits for its Member States.
Yet, three decades after its launch, the full potential of economic integration remains unlocked, and the hurdles hindering its completion pose an economic challenge for the Union. Addressing such barriers will thus prove crucial in the next years to ensure the continued growth and competitiveness of the EU.
In this third article of our SME series, we investigate what obstacles to the completion of the Single Market still exist and what measures are being taken at the EU level to tackle them.
Economic Integration: Why Does it Matter?
Now home to 447 million consumers and 23 million companies, the Single Market is undoubtedly one of the European Union’s most significant achievements. It promotes the free movement of goods, services, capital, and people, thereby positioning the EU as the world’s most integrated international economy, accounting for 18% of global GDP.
The vision to create an internal market was foundational to the European Economic Community. In 1968, this vision began to materialise with the creation of a customs union among the six original EEC members. Following the expansion of the Community, the European Commission’s 1985 White Paper on the Completion of the Internal Market detailed the program and schedule for establishing the common market. National governments endorsed this plan, signing the Single European Act (SEA) in 1986, which took effect the next year. On 1 January 1993, the European Single Market was officially established among the then 12 EU members.
Since its inception, the economic integration of the Union has significantly benefitted the Member States. A study published by the European Parliamentary Research Service has estimated such benefits to an increase in GDP by 8% to 9% compared to a scenario where the Single Market does not exist. Recent research further showed that economic integration has led to an average 63% increase in trade between EU countries, a figure that surpasses the achievements of any other regional trade agreement.
Within the members states, also EU citizens are said to have drawn considerable advantages from the common market, with higher incomes and employment rates. Furthermore, 3.7% of employees across the Union have citizenship of an EU country other than the one in which they work, and 2.4 % of tertiary level students are from an EU country other than the one in which they are studying.
And if you might think that this is enough, the impact of the Single Market is not limited to the EU, but its influence extends far beyond its borders. This is due to the so-called “Brussels effect”, a phenomenon where companies outside the EU voluntarily conform to EU regulations and standards. In essence, it is argued that thanks its market size, regulatory capacity, and influence on the global market, the EU possesses the unique ability to unilaterally establish global business rules and practices in various policy areas, including data, consumer, and environmental protection. To give an idea of the magnitude of the effect, between 2009 and 2019, the share of EU-style regulations adopted by third countries in sectors such as animal and vegetable products, prepared foodstuffs and beverages, precision and medical instruments, and textiles surpassed one third of all regulations implemented in these sectors.
The Remaining Challenges to Full Economic Integration
Despite the positive picture outlined above and the notable progress made since 1993, it must be acknowledged that remarkable obstacles to full economic integration persist, leaving the Single Market incomplete.
In 2020, the Commission engaged to determine the most problematic barriers to cross-border activity. The resulting document identifies five possible root causes of the most pressing remaining obstacles.
- Regulatory choices at EU level and national level
Regulatory choices at both the EU and national levels significantly contribute to create barriers in the Single Market. The complexity of EU legislation frequently presents challenges for companies, making compliance difficult. Intuitively, this task is further complicated when EU legislation allows for excessive flexibility or when national rules are more restrictive than their EU counterparts, such as when additional sector-specific and technical requirements are introduced.
In policy areas where EU legislation has a limited role, due to the principles of conferral, subsidiarity, or proportionality, the situation does not improve, as poor harmonisation equally emerges as a substantial barrier. In particular, the lack of tax policy harmonisation continues to be one of the primary obstacles faced by businesses operating cross-border.
- Transposition, implementation and enforcement of EU legislation
In some cases, low levels of harmonisation may be attributed to the imperfect transposition of EU directives or inaccurate implementation of EU legislation. Furthermore, there are instances where the enforcement of EU legislation appears to be inadequate.
- Administrative capacity and practices
Barriers to the Single Market may also be related to administrative practices and insufficient coordination between the Commission and national administrations, as well as between national administrations themselves.
Uneven access to public procurement and discriminatory practices, particularly at the national level, can also hinder economic activities in the common market.
- General shortcomings in the business and consumer environment in Member States
Companies may be hindered from selling goods or services in another EU State due to stringent registration or practice requirements for certain activities or professions. Similarly, perceived higher costs of resolving potential disputes and complaints further constitute obstacles to selling in other EU countries.
Skills-related policies could also contribute to a less conducive business environment by not adequately addressing skills mismatches and shortages in several occupations.
Additionally, businesses have reported challenges in acquiring information about the regulatory framework, market opportunities, and potential business partners in their target countries. This difficulty in accessing information on rules and requirements is a significant obstacle to the Single Market, ranking third in the 2024 Eurochambres Single Market Survey. In fact, more than 60% of the members of the European Chamber of Commerce cited this as a significant barrier.
- Other root causes not linked to public policy
Among non-policy related obstacles, language barriers certainly stand out, further exacerbating the difficulties of access to information.
From their part, EU consumers also seem to retain a certain scepticism towards cross-border shopping, with levels varying according to education levels, language knowledge, and internet usage.
Finally, different consumers’ preferences across different countries must also be considered.
Working for the Better: Towards a Barrier-Free Market
Addressing the remaining obstacles to head towards the completion of the Single Market is crucial for the future of the EU economy. A study by the European Parliament estimates that the benefits of removing the barriers to a fully functioning Single Market could account for up to €713 billion by the end of 2029. More in detail, the completion of the common market could lead to an additional growth of up to EUR 269 billion annually for manufactured goods and for up to EUR 338 billion annually for services.
In a comprehensive attempt to improve the implementation and enforcement of Single Market rules, a Long-Term Action Plan was adopted by the European Commission in 2020. Among other measures, the plan provided for a Single Market Enforcement Task-Force (SMET), which was accordingly set up that same year. Based on a strong partnership between the Member States and the Commission, the SMET holds regular meetings to assess the state of compliance of national law with Single Market rules and jointly devise and implement solutions to the remaining barriers.
In doing so, the SMET supplements other instruments, such as SOLVIT, an assistance service for individuals and businesses whose Single Market rights have been allegedly breached by public authorities; EU Pilot, a mechanism for informal dialogue between the Commission and the Member State; and the Internal Market Information System (IMI), an IT application that connects national and subnational authorities across the EU enabling easy and quick cross-border communication.
In addition to this, further steps were taken at the EU level to confront specific challenges.
While far from full accomplishment, the Banking Union and Capital Markets Union have both made progress over the past decade, contributing to financial integration. On the one hand, the Banking Union has significantly enhanced the resilience and stability of the European banking sector by establishing a level playing field for EU banks; on the other hand, the Capital Markets Union has simplified cross-border investments and provided businesses with a wider range of funding options.
Also worth mentioning is the Once-Only Technical System (OOTS), the first EU-wide cross-sectorial and cross-domain dataspace. This pioneering initiative is meant to streamline the exchange of information between public administrations across EU countries’ borders, thereby addressing the above-mentioned challenges related to accessing information about national regulatory frameworks.
In the same digital domain, the recent adoption of the Digital Markets Act (DMA) and the Digital Services Act (DSA) are also significant developments. These acts aim to create a safer and more open digital space for individuals and businesses alike. The DMA lays down clear rules for big platforms, aiming to stop them from imposing unfair conditions on businesses and consumers. The DSA, on the other hand, primarily concerns online intermediaries and platforms, including specific rules for very large online platforms and search engines.
The Letta Report: Steering the Course Ahead
But without diminishing the significance of the initiatives outlined in the previous paragraph, it is undeniable that the Letta Report is the recent development that has garnered the most media attention.
Commissioned by the European Council on 30 June 2023, the long-awaited High-Level Report on the future of the Single Market was finally unveiled by former Italian Head of Government Enrico Letta last 18 April. The document is the culmination of a comprehensive stakeholder engagement process conducted across Europe to gather insights and inputs.
Among the numerous engagements, Letta participated in the 2023 SME Assembly, where he was involved in a session titled “The Single Market at 30: Nobody Falls in Love with a Common Market”. This session was aimed explicitly at gaining a deeper understanding of the main issues faced by SMEs and integrating these perspectives into his broader analysis. This focus is well-reflected in the report, which dedicates substantial coverage to SMEs, discussing the regulatory burdens they encounter and offering suggestions for addressing these challenges.
Recognising that the changing global and European landscapes have exposed the limitations of the Single Market, the Letta report emphasises the importance of adapting it to meet the demands of a rapidly changing world. Specifically, it presents six proposals, that we proceed to analyse in depth below.
- Liberalising research, innovation, and education
The discussion on the reform of the Single Market begins with the proposal of introducing a “fifth freedom”. Besides the free movement of goods, services, people, and capital – Letta argues – EU citizens should enjoy “the freedom of investigating, exploring and creating for the benefit of humankind without disciplinary or artificial borders and limitations”. In concrete terms, this additional liberalisation effort should focus on enhancing research and education to address the current need for innovation and global competition. The idea is that, only if educational and research resources can move freely across borders, can the EU harness its intellectual and creative potential to drive growth and maintain its competitive edge on the global stage.
Establishing a European Knowledge Commons, forming European data spaces in key sectors, creating public-private partnerships for knowledge exchange, strengthening the European Education Area, introducing a European degree, and launching the Erasmus for All initiative are all identified as key facilitators for the mobility of researchers and innovators. However, beyond these indications, a more comprehensive roadmap for the actual implementation of the free movement of research, innovation, knowledge, and education is yet to be detailed. For the time being, doubts have been raised about its feasibility and, more significantly, concerns have been expressed about the risk for its introduction to intensify fragmentation issues, compliance struggles, and disparities among Member States.
- Updating financial strategies
Financial strategies within the Single Market must also be updated to address the investment gaps that hinder the achievement of the EU’s ambitious goals. To this end, both private and public resources must be mobilised massively and strategically.
In terms of private resources, Letta proposes the establishment of a Savings and Investments Union. This initiative – which, Letta emphasises, is not a mere rebranding of the Capital Markets Union, but rather a new endeavour connected to the green and digital transitions – aims to facilitate the full integration of financial services, in light of a still incomplete CMU, whose failure was partially caused by Brexit.
As for public resources, Letta’s suggestion is somewhat more contentious, as it paves the way for State aid, albeit within a redefined framework that seeks to strike a balance between the urgency to mobilise national public support for industries on the one hand and the imperative to prevent fragmentation on the other hand.
As a longer-term solution, the report also mentions the prospect of European public investment as a concrete response to the US Inflation Reduction Act and analogous third countries’ initiatives.
- Scaling up EU companies
The third section is an invitation to scale up EU companies, while preserving the vital link between large and small enterprises. Four pillars are identified that must be put at the centre of the Single Market: defence, telecommunications, energy, and finance: sectors that, until now, “have seen the national dimension prevail” but represent “strategic European assets”.
The potential for a common market in the defence industry, in particular, is portrayed as a vital step towards a unified European approach to security, as well as an essential condition for maintaining and enhancing the EU’s strategic autonomy.
Health resilience also receives significant attention, with discussions centred on leveraging the Single Market to improve health systems’ responsiveness and robustness. This is seen as crucial not only for handling ongoing health challenges but also for preparing for future pandemics.
- Ensuring inclusion
To counter the mounting perceptions that the advantages of European economic integration are only yielded by wealthy regions, large companies, and highly-skilled individuals, the social dimension of the Single Market must be preserved and reinforced.
Cohesion policy certainly plays a crucial role in ensuring fair opportunities, workers’ rights, and social protection. Yet, it is not enough to truly ensure a “freedom to stay” for people within the EU. Further actions must be taken to prevent major economic and social imbalances and promote more even levels of well-being across the Union. Housing affordability, access to Services of General Interest, and labour market integration will all be fundamental issues to discuss.
As far as SMEs are concerned, these are defined as “the backbone of the EU economy”. To support them, the report suggests streamlining access to markets. This would include reducing regulatory burdens and enhancing the ease of doing cross-border business. The goal is to transform the Single Market into an enabling platform that encourages the growth and scaling up of SMEs, rather than being a barrier to their expansion.
In terms of tax policy, Letta highlights the need for harmonization to prevent tax fragmentation that can lead to inefficiencies and obstacles for businesses operating in multiple EU states. Better coordination among EU states is invoked also with regard to consumer protection.
- Streamline regulations and processes
Tackling regulatory complexities by refining the application of existing regulations is said to be paramount to unlock the full potential of the Single Market and ensure that it can contribute to the broader objectives of the Union.
Excessive regulation and bureaucracy create significant barriers to the effective implementation of Single Market rules. This surplus of overlapping regulations stems from a risk-averse regulatory approach and results in legal uncertainty and high compliance costs, particularly impacting SMEs. In this respect, the phenomenon of “gold plating”, whereby Member States complement EU directives by introducing additional requirements, earns a special mention in the report.
To reduce fragmentation, it is suggested that EU Institutions prioritise the use of regulations when formulating rules for the Single Market. Additional propositions include upholding the principle of non-regression (which prevents backsliding or regression once certain legislative standards have been achieved) and appointing an Executive Vice-President specifically responsible for the Single Market and tasked with overseeing the enforcement of its rules.
- Expand the Single Market
The final section highlights how the Single Market can act as a critical tool in the EU’s enlargement process and in enhancing economic cooperation with strategic global partners. It discusses the necessity of adapting the Single Market’s policies to ensure they are resilient and effective within the new geopolitical scenario marked by heightened tensions and economic competition.
Conclusion
As we have noted, despite being in existence for three decades, the European Single Market is still far from perfect. The task of enhancing it is challenging, but its benefits are now clearly visible, and the incentives to overcome the remaining obstacles and fully realize its potential are compelling.
The numerous initiatives and proposals currently under review provide a solid foundation for achieving this goal. The Letta report, in particular, offers a wealth of recommendations that could serve as an excellent basis for meaningful discussions. The question remains whether there will be enough political will to embark on this potentially turbulent journey, which, if navigated successfully, promises significant rewards.
by Farweb