The Single Market is at the heart of the EU project.
According to European Commission, the bureaucracy that administers EU law and regulations, the Single Market “… refers to the EU as one territory without any internal borders or other regulatory obstacles to the free movement of goods and services. A functioning Single Market stimulates competition and trade, improves efficiency, raises quality, and helps cut prices. The European Single Market is one of the EU’s greatest achievements. It has fuelled economic growth and made the everyday life of European businesses and consumers easier.”
The EU Single Market project aims to create a single economy out of the 28 sovereign states of the EU. This encompasses a total of 500m people and, in aggregate, the world’s largest economy.
The Single Market is inspired by free market economic theory conditioned by comprehensive regulation. This defines the rules for the trade in all goods and services created and consumed in the EU; the employment of labour and the movement of capital.
It entails a programme of reform that is unprecedented in history.
Free trade in goods is, in principle, the most easily understood element of the programme. Free trade is an ideal most economists accept, though it has been rarely applied in practice.
The EU, of course, does not support free trade. It is a customs union that fixes a common external tariff to promote and protect EU manufacturers. The Common Agricultural Policy (CAP), which subsidises EU farmers and taxes food imports from outside the EU, is one of the most glaring global breaches of the principle of free trade. The subsidies alone cost around $75bn a year.
Free trade in services is more complex, as the EU concedes. Services account for about 70 per cent of EU GDP and the figure is significantly higher in some EU economies, including the UK. The Single Market calls for a single set of rules to be established for all services created in the EU to enable a service provider any one of the EU’s 28 member states to sell that service anywhere in the EU without administrative and other obstacles.
As Economics2030 argues, a service is an intangible and by definition indefinable. Any attempt at classification will inevitably be inaccurate. Regulation will consequently be impossible. And even if it wasn’t, it would require a system of administration so extensive it would make Stalin’s Soviet Union look liberal.
In practice, the Single Market in services has failed to take off. Financial services have been excluded to address British objections. State social services have been excluded. Service companies seeking to open a business in another EU country often face insuperable practical obstacles.
The elimination of barriers to trade in services also requires a common approach to intellectual property rights (IPR), the capital upon which all service industries are built. The EU is at a very early stage in developing a common approach to IPR and there is little prospect that much progress will be made quickly. Economics2030 argues elsewhere that IPR is the principal reason for the growth of unsustainable service corporations and tax evasion. Further facilitation of IPR, which invariably favours large corporations, is bad for the EU but necessary if the Single Market in services is to be delivered.
And, of course, the Single Market involves discriminating against non-EU service providers in the same way that the common external tariff does with tangible goods. These barriers are the reason why the US is seeking the TTIP deal with the EU.
The Single Market for capital has profound implications. To achieve the Single Market ideal, a single currency is required to make it easy for savers and investors to move financial resources across the EU. Some EU countries have refused to join the Eurozone and some have not yet done so.
Whatever the merits of a Single Market in capital as an ideal, the reality is that the Euro has failed to deliver the benefits its proponents suggested. For most economists, the creation of a single currency zone encompassing countries with sharply different economic profiles is impossible to justify.
The free movement of labour is another ideal that faces severe practical problems. The theory is that economic output and efficiency will be optimised in the EU as a whole by allowing workers to work anywhere in the EU without administrative hindrance. It would also be unfair to prevent a Polish worker, for example, to be barred from following capital originating in Poland and invested elsewhere in the EU.
In practice, the sharply different conditions of employment across the EU are providing a stimulus for a structural movement of labour from low-income nations to high-income ones. This is comprehensible. A skilled Polish construction worker in London should be able to save in little more than five years enough to buy a four bedroom home in Warsaw. Many will be set up for life by working in Germany, Denmark, Sweden, the Netherlands or the UK. Low-income or unemployed workers in those countries will see no equivalent benefit of finding a job in Poland. Differences in social welfare arrangements across the EU are also substantial.
The movement of labour from low-income EU countries to rich ones also risks a permanent loss of talent to the former. Ireland’s economic development has been severely affected for almost two centuries by the loss of young and talented workers to the UK, North America, Australia and elsewhere. This is a tragedy that could be repeated in EU states suffering low growth, high unemployment and low incomes.
The UK’s vote in favour of leaving the EU creates an opportunity for economists to consider afresh the merits of the Single Market project, particularly:
- The continuing relevance of a common external tariff on imports that penalises most heavily low-income, non-EU economies
- The impact of the CAP on EU food prices, the income of EU landowners and global agricultural markets
- The practicality of creating a Single Market in services and the potentially damaging effect of bad regulation on output, income and employment in EU service industries
- The dangers of extending EU IPR, the machine through which intangible capital is manufactured
- The consequences of encouraging migration of the young and talented from low-income EU countries to high-income ones
- The consequences of creating a Single Market in capital, which must involve extending the Eurozone
- The impact on global trade, output and employment of an expanding protectionist association of European nations and the EU plan to apply the Single Market in goods, services, capital and labour in increasing detail.