After Brexit: How To Bring Europe Back on Track

Brexit has been a shock – for EU policymakers as much as for those in Britain. The EU has known setbacks before but these were failures to further integration. Now the process is actually being reversed. Most of all, Brexit is a symptom of a trend to be found in many EU countries: The EU has never been less popular among the European public (see Figure 1). Anti-EU voices are gaining more traction in the political arena, and people put faith into national rather than European institutions.

So far, European leaders have been uncertain how to respond to the referendum result. Some have called for a further round of integration, others see this as a moment to return some powers to the national sphere. Similarly, public opinion on the matter is divided, according to Pew 2016.

Reversing the process of European integration would be a bad idea. A large body of research has clearly demonstrated the beneficial effects of European integration. However, fostering European integration, in the sense of moving additional policies to the European level, even if considered desirable, is not feasible in the present political climate. What is needed is a pragmatic approach, politically acceptable to all EU members, that restores the popularity of the EU with the EU citizens. This can best be achieved not by creating new EU policies but by making the existing ones work better.

There is one EU policy, which even most Brexiteers and other Eurosceptics believe to be a good idea in principle: The Single Market. The economic benefits of companies having access to other European markets and consumers being able to buy a large variety of products from other European countries at low prices are obvious to most people. The Single Market is one of the best-liked EU policies.

Unfortunately, the Single Market is in desperate need of an overhaul. ECIPE (2016) goes as far to answer the question “What is wrong with the Single Market?” with the quip that it does not really exist. While this is not entirely fair, a recent OECD report (Stráský 2016) demonstrates that even the Single Market for goods has not advanced much since 2007. As Figure 2 shows, inter-country trade in the EU has not progressed in the last decade. And it is still a long way off the degree of integration, the US has achieved. Similarly, other parts of the Single Market have stagnated as well, with the exception of labour mobility, which has increased in the aftermath of the crisis. This trend, however, was more driven by unemployment in Southern Europe rather than deliberate political measures to increase the ease to find work in another EU country.

Furthermore, the Single Market is still very much focused on goods. Services, capital and anything to do with the digital economy are only insufficiently part of an economic area that renders national borders meaningless for trade. The immense potential of the Single Market remains unused. Thus it is not surprising that in most European countries, a majority believe the EU is not handling the economy well (Pew 2016).

The EU Commission however understood that the Single Market had been neglected for too long, already long before the Brexit referendum. It has engaged in activities to modernise and improve the functioning of the Single Market. Thus, the capital markets union and the digital single market were launched. Also, there is a need to modernise the treatment of services in the Single Market. Three projects are crucial for spurring growth in the EU:

• Capital Markets Union: Presently, firms in the EU depend almost exclusively on banks in order to finance their investments and activities. In the US for example, this is different: Firms are mainly financed through bonds they issue on the capital markets. Especially in the light of sluggish credit growth in the Eurozone it would be desirable to make firms more independent from banks. However, the OECD criticises that the capital union is subject to too much complex regulation, thus limiting the ability of small and medium sized firms to use this tool. Also, while some regulation of capital markets is European, national regulation continues to have an effect, creating a regulatory maze.
• Digital Market: The digital market in Europe is extremely fragmented. Customers cannot access some of the digital features they have bought when in other European countries, something that is known is geo-blocking. Different national regulations apply. The digital single market initiative, aims at increasing the portability of digital features for customers but it does not aim at a single legal environment for digital services in the EU. However the digital industry is very much driven by economies of scale. Any network driven application increases in utility with the number of its users. In an integrated market such as the US, any new application can immediately be used by 300m US citizens. The EU may have 500m citizens within its borders, but any new application is still launched on a national scale, thus not being able to exploit this large potential for economies of scale. Creating a truly common digital market space is imperative for the EU’s ability to host innovative industries and thus remain competitive and achieve long term growth.
• Services: While services have officially already been liberalised within the EU, in practice there is not much trade in services between EU countries. In 2014, intra-EU trade in services amounted only to 6 percent of GDP – a far cry off its true potential (Stráský 2016). The reason for this is that professional services still remain highly regulated at the national level. The OECD recommends simplifying the bureaucratic procedures to recognise qualifications. But maybe a more radical approach can be considered: Rather than forcing the provider of services to prove the equivalence of their qualification, why not assume equivalence as a default and require national authorities to prove that a qualification from a certain country is in fact insufficient to provide a certain service.

In the present situation, Europe’s priority must be to restore growth, reduce unemployment and make sure that the beneficial effects of integration are not only felt a globalised elite but by all citizens of the EU. Improving and modernising the Single Market must be the essential building block in this strategy. It is something that is politically feasible and yet an effective tool.

Britain has always been a staunch supporter of the Single Market and has been an advocate for its modernisation. In addition, Britain would have particularly profited from the Capital Markets Union and an easier trade in services. Earlier and more ambitious reforms of the Single Market might have helped to keep Britain in the EU – for now, it is important to draw some lessons from the Brexit referendum and make the economic advantages of European integration more obvious to its citizens. The Single Market has the potential to deliver on this promise of prosperity.

References:

ECIPE; What Is Wrong With the Single Market?; Working Paper 1/2016

Petersen, Thieß; 20 Years of European Single Market: Growth Effects of EU Integration; Bertelsmann Stiftung Policy Brief, Gütersloh 2014

Pew Research Centre, Global Attitudes Survey, Spring 2016

Stráský, Jan; Priorities for Completing the European Union’s Single Market; OECD Economics Department Working Papers No 1315, Paris, 2016