Around 450 million people, a GDP of about 15 trillion euros and the freedom to move goods, services, capital, and people across borders: That’s the European Single Market as we know it today. Launched on 1 January 1993, the economic bloc boosts income for its inhabitants and wields considerable influence in global markets through its standard-setting power – and that without being a state in its own right. But whether it is supply-chain problems during the coronavirus pandemic, the current energy crisis or global competition for critical goods and technology, it is clear that not everything always runs smoothly in Europe’s economy. As the Single Market celebrates its 30th anniversary this month, it is a good moment to reflect on its goals and benefits, its gaps, and the challenges that lie ahead.

The programme: lifting barriers, integrating Europe

The origins of the Single Market can be traced back to the Treaty of Rome in 1957 which called for the creation of a common market. However, realizing that goal proved difficult in post-war Europe. New technologies, concerns with environmental protection or consumer welfare, and pressure from domestic actors to limit competition all contributed to the adoption of new national rules and regulations, which effectively impeded cross-border trade among European countries.

Only in the 1980s, when the European economy began to lag behind other industrialized countries such as the United States and Japan, did new ideas about market integration start to circulate among European policy-makers.

The discussions culminated in the Single European Act as the first major treaty revision that established the “1992 programme”. Its ambition was that by 31 December 1992, the necessary legislative reforms would be completed to make the Single Market and the free movement of goods, services, capital and people (read: workers) a reality.

Building on landmark cases of the European Court of Justice and a heavy dose of European Commission entrepreneurship, the new Single Market relied on minimum levels rather than an exhaustive harmonization of rules and regulations to govern the common economic area.

The new approach to regulating cross-border trade advanced “mutual recognition” of equivalent national rules and restricted much of harmonization to agreeing only on “essential requirements” (mainly regarding basic health and safety standards), leaving much of the detailed standard-setting to private standard-setting bodies and national authorities.

By the end of 1992 about 90% of the issues that had been identified in the mid-1980s as impeding cross-border trade had been resolved. Work on freedom for services took longer, accomplished mainly through the Posted Workers Directive (adopted in 1996) and the hotly contested Directive on Services in the Internal Market in 2006.

The rules and regulations that govern cross-border economic exchange in the EU sit – sometimes uneasily – with other issues on the political and economic agenda of the member states. Such tensions contributed to the United Kingdom’s decision to leave the EU: The Single Market was central to the 2016 referendum campaign and during the high-stakes negotiations about the future economic relationship between the UK and the EU that followed.

From the outset, the EU’s position was that the four freedoms (to move goods, services, capital, and people freely across borders) of the Single Market were indivisible. As a result, the UK’s insistence on ending the free movement of persons meant that it could not enjoy access to the Single Market in goods and services. The challenges confronting the UK as a result of the government’s decision to leave the Single Market, however, illuminate how closely intertwined the economies of the EU member states have become.

The benefits: large, but unequal

The European Single Market is the regulatory backbone of the European economy and an important driver of prosperity in Europe. It increases competitionlabor specialization, and economies of scale, allowing goods and services as well as labor and capital to move to the area where they are most valued, thus improving the efficiency of the allocation of resources. What’s more: It is simply cheaper for producers to make a product to meet one set of regulations than to try and follow 27 different national rulebooks.

Moreover, the large market allows innovation to spread faster to boost productivity. Likewise, an integrated area allows for diversification. For example, banks with loans across the continent avoid trouble if their home market falls into a recession.

The Single Market also offers tangible benefits to European citizens in the form of a larger variety of high-quality goods. High consumer protection regulations, for example in food or drug safety, are one thing, but an improved product range from producers across the EU is another. And of course, open borders are also an important feature of living and working in Europe.

According to a 2019 estimate, because of the Single Market, the GDP of its members is on average 9 percent higher than it would be if tariff and non-tariff restrictions were in place and the EU countries traded with each other on the basis of WTO rules alone.

In our study on “Estimating economic benefits of the Single Market for European countries and regions” from the same year, we calculated that the internal market brings every European citizen an annual income advantage of around 840 euros.

chart: per capita welfare gains from the trade boosting effect of the single market | European Single Market
Estimating economic benefits of the Single Market for European countries and regions

The EU – and particularly participating in the Single Market – has been dubbed a convergence machine equalizing economic conditions across Europe (see also our blog articles on economic cohesion in the EU). Yet not all countries and regions have benefited in the same way: It is the relatively small, but export-strong nations that benefit the most.

What is more, EU countries in the geographical centre of Europe take significantly greater advantage than EU members in the South or East of the continent. At the regional level, the winners are mainly industrial and urban places. These are also characterized by a strong influx of skilled workers because the elimination of borders promotes the EU-wide concentration of industries in regional clusters.

The structural change that comes with digitalizing and greening the European economy threatens to widen the gap between Europe’s regions in the Single Market further. We show in a recent study on “The Future of EU Cohesion” that the green and digital transition put a growth premium on those very countries and regions that are already well-off and ready to adapt. This reinforces the need for more investment to reduce the economic disparities between countries in the Union’s economic core and periphery so that all member states can benefit from their participation in the Single Market.

The gaps: updating the common rules in digital, finance and energy

From artificial intelligence and the movement of data to green technology and the circular economy, the economy is constantly changing. New technology and structural changes require updates to the EU’s rules and regulations that govern it. The creation of the Single Market as one seamless economic area is therefore an ongoing process.

This is maybe most obvious in the area of the digital economy. As the Economist put it rather wittily, “a policy originally devised to break down trade barriers in the era of coal and steel has not adapted fast enough to the era of bits and likes”. Updating the rules that govern the digital Single Market has been one of the EU’s top regulatory priorities over the past years.

The most recent – and far-reaching – additions to the Single Market rulebook have been the Digital Markets Act (DMA) and the Digital Services Act (DSA) in 2021 that cover, among other things, digital services and goods, online platforms (the “FAANGs”), e-commerce, copyright issues and digital (dis)information. DMA and DSA have been hailed by some commentators as the new constitution for the digital world. The coming years will show whether this ambition will be met in practice.

Financial markets have also been slow to integrate in Europe, and banks have retrenched to their home markets in the past decade. The plans to create a Capital Markets Union in which investments and savings flow across the EU regardless of where they originate has been riddled with delays.

The most glaring gap in the Single Market is probably the energy market, which remains fragmented. Given the challenges of short-term energy security in the wake of Russia’s war against Ukraine and Europe’s long-term climate goals, integrating the European electricity and gas market further, and securing energy supply through renewable sources across member states, will be a massive feat of strength for the EU and the Single Market.

The challenge: keeping up with the US and China

The Single Market accounts for around 20% of global economic output – third to the US and China. This gives European countries a large domestic market to fall back on in the event of trade disruptions and provides the EU with significant weight in trade negotiations. While the Single Market was inherently a project for lifting barriers internally, its rules and regulations also influence the conditions under which foreign goods and services may enter the large market.

The size of its market and the subsequent standard-setting power has a powerful impact on its neighbors, economic business partners and competitors across the globe. An example of what is often referred to as the “Brussels effect” is the General Data Protection Regulation of 2016, where the EU has shown that it is capable of creating a legal order in an area of high strategic relevance that will become the global standard.

Nevertheless, Europe’s share of the global economy has steadily declined. In the last decade, the European economy has been losing ground to global rivals, particularly in the realm of technology and digital businesses. It risks becoming an economic backwater.

According to the Economist, a decade ago ten of the world’s 40 largest listed companies by market capitalization were based in the EU; now there are only two. And very few of the world’s leading startups are based in the Single Market.

30 years after the launch of the Single Market, European policy-makers find themselves at a similar fork in the road as in the 1980s. The end of hyper-globalization and the trend toward a re-regionalization of the world economy makes the Single Market ever more important: If the EU is to keep up with other major economic regions such as the US and China and remain a source of growth and opportunities for European citizens and companies, it must rise to the new challenges that come with next-generation technologies and the reconfiguration of the world economic order. A well-functioning Single Market is key to achieving its ambitions for strategic autonomy and to chart its course in line with its values and interests at the global stage.

About the author

Katharina Gnath is Senior Project Manager at the Bertelsmann Stiftung. She is an expert on European and international economic governance and is in charge of the foundation’s work on the European economy.

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