The European Union:
economics, policies and
1st edition
Chapter 6
From the Single
Market to the ‘New
Susan Senior Nello
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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
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The fragmentation of European
• 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.
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The fragmentation of European
• Krugman (1991), for example, found that the
level of specialisation in the US was higher than
in the EC, even though the distances were
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Industrial specialization (share of manufacturing
employment) in Germany, Italy and the US,
Krugman (1991)
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Steps in introducing the Internal Market
• In March 1985 Delors, presented
programme to the European Parliament.
• The Cockfield White Paper
‘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.
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According to the European Commission, the
main non-tariff barriers to be eliminated were:
• frontier controls;
• differences in technical specifications and
• restrictions
• restrictions on providing certain services (in
particular financial and transport services)
in other EC countries; and
• differences in national tax systems.
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The effects of eliminating trade barriers
(Emerson, 1989)
Fig 6.1
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Implementation of the Single Market
• 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
• The real difficulties arose in implementation of
the measures and the granting of temporary
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Implementation of the Single Market
• 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.
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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
• In 2002 the SOLVIT redress system was
introduced in order to improve implementation
of Internal Market rules.
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The removal of frontier controls
• A key aim of the removal of frontier controls was
to facilitate free movement of people within the
• 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.
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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
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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.
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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.
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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
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).
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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.
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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.
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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
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• 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.
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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.
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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.
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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
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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
• 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.
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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 crossborder 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.
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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).
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Liberalisation of the service industries
Alternatively, restrictions are said to be justified
to protect national industries, for instance:
• for strategic or prestige reasons (air
• to control key technologies (information
science or telecommunications),
• for regional, social or environmental reasons
(rail transport),
• or for cultural reasons (audiovisual services).
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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).
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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.
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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 lowpaid workers from Central-East Europe).
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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
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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
• 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.
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The revised proposal for the service directive:
• 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.
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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
• 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).
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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.
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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
• 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.
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Liberalisation of the banking sector
• In 1989 three Directives were passed which
formed the basis for liberalisation of the banking
• 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
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The Financial Services Action Plan
The FSAP of 1999 set out 42 measures, to:
• create a single EU-wide financial market
• ensure state-of-the-art prudential rules and
In 2005 the legislative phase of the Action
Plan was completed.
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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
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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’.
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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.
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Estimates of the effects of the Single
Market Programme: 10 years later
According to a study 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.
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Public Consultation on a Future Single Market Policy SEC(2006) 1215/2
To 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.
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