The European Single Market (SM) is the jewel in the crown of the ‘European Project’ with its four freedoms of movement – of goods, services, workers and capital – or so we are told. Within the SM, all goods and services produced are supposed to satisfy a common set of regulatory standards. This ought to make it easier to export to other member states of the European Union.
Trend growth in traded goods declined
So has the trade in goods and services increased between member states since the SM was launched on 1 January 1993? The answer is complicated by the introduction of the euro on 1 January 1999 and by the expansion of membership – in 1995 (from EU12 to EU15), in 2004 (to EU25), in 2007 (to EU27) and in 2013 (to EU28) – both of which were intended to increase intra-EU trade.
Nevertheless, Table 1 provides some surprising evidence. It compares export growth in the 20 years before the introduction of the SM and in the 20 years after. The first row shows that the real growth rate in trade between EU member states actually fell from an average annual rate of 4.71% to 3.05% (or by 35%) after the introduction of the SM. Export growth to the rest of the world (ROW) fell by even more – by 73% from 1.20% to 0.32%. This contrasts dramatically with the growth rate in trade between ROW countries which increased over the same periods from 3.66% to 4.22%. ROW export growth to the EU also increased after the introduction of the SM from 3.29% to 4.11% – so was growing between 1993 and 2012 at a faster rate than trade between EU members. And much of this trade is conducted under World Trade Organization (WTO) rules while facing the EU’s Common External Tariff (CET) – in other words, under what is disparagingly called ‘no deal’ arrangements. The CET covers more than 13,000 imported goods, with an average tariff of 3-4%, but with much higher tariffs on food, clothing, footwear and cars.
|Table1: Export growth 1973-2012|
|Intra-EU export growth (1)||4.71||3.05|
|Extra-EU export growth (2)||1.20||0.32|
|World export growth (3)||3.66||4.22|
|World export growth to EU (4)||3.29||4.11|
|UK intra-EU export growth (5)||5.38||3.09|
|UK extra-EU export growth (6)||3.70||3.11|
|Notes: (1) Exports of EU11 founder members of the EU Single Market to each other, (2) Exports of EU11 to 8 OECD countries (Australia, Canada, Iceland, Japan, Norway, Switzerland, Turkey, and the United States – Iceland, Norway, Switzerland and Turkey have negotiated substantial access to the Single Market), (3) World exports of all developed countries, (4) Exports of eight OECD countries to the EU12, (5) Exports of UK to EU10, (6) Exports of UK to 8 OECD countries. CAGR – cumulative annual growth rate.|
|Source: Figures 2, 3, 4, 5 and 6 and Table 4 of Michael Burrage (2016) Myth and Paradox of the Single Market: How the trade benefits of EU membership have been mis-sold, Civitas, London; https://www.civitas.org.uk/content/files/mythandparadox.pdf|
Even more striking is the decline in the growth rate of UK exports to the EU from 5.38% to 3.09% following the introduction of the SM. UK export growth to the rest of the world also fell, but was still at a marginally higher rate between 1993 and 2012 than for exports to the rest of the EU (3.11% v 3.09%). This helps to explain why UK exports to the EU have fallen from 55% of the total to 46% since the SM was introduced. Further, only 6% of UK companies export to the EU – accounting for around 13% of Gross Domestic Product (GDP) – yet all regulations on product and service standards – including for the 94% of UK companies that do not trade with the EU – are determined in Brussels.
Table 2 shows the growth rate of exports of the top exporting countries to the EU between 1973 and 2012. Although the UK had higher total exports in 2012 than fifteen countries – except the US – they all enjoyed higher average export growth over the period, including China, Russia, Brazil – even Hong Kong. By 2018, China’s exports to the EU at $472bn (€400bn) significantly exceeded the UK’s at $384bn (£289bn).
|Table 2: Growth of exports of selected countries to the EU 1973-2012 compared in 1973US$|
|% real growth||CAGR%||Total value in 2012 $bn|
|Source: Table 6 of Michael Burrage (2016) Myth and Paradox of the Single Market: How the trade benefits of EU membership have been mis-sold, Civitas, London; https://www.civitas.org.uk/content/files/mythandparadox.pdf|
The result is a £93bn goods deficit with the EU in 2018. The overall trade deficit was £64bn, which is lower due to a £29bn services surplus. The EU is keen for the UK to remain as a captive market in the SM and Customs Union, since we are one of the biggest buyers of its goods. But, as Michael Burrage points out, this could lead to a balance of payments crisis in a few years’ time. He estimates if the trend growth rates continue as in Table 1, then by 2030, there will be a goods deficit of £246bn, a services surplus of £58bn, and an overall trade deficit with the EU of £188bn.
Trend growth in traded services barely changed
The situation is even worse when it comes to services. There is little evidence that the SM has so far helped to develop an integrated EU-wide market in services. There are, for example, no common standards in areas important to the technology sector, such as copyright, data format, licensing and tax.
In 2015, intra-EU and extra-EU service exports to the EU were 6.9% and 5.9% of EU GDP, respectively, a difference of just 1%. Further, exports of services to the EU by countries outside the EU have grown at a faster rate (0.5% p.a.) than those of EU members to each other. So the 3.05% p.a. increase in intra-EU trade reported in Table 1 must have been mainly in the form of goods. Indeed, over the period 2002-2012, the extra-EU exports of services of 11 of the 12 founder members of the SM, and in particular those of the UK, grew faster than their intra-EU exports. France is the only exception.
Overall, the UK’s benefit from the SM in terms of goods and services trade has been negligible. In 2005, an internal Treasury report – which later emerged because of a Freedom of Information request – found that the SM had only a marginal impact on UK trade. UK goods exports to the EU are 49% of total exports, amounting to 8% of GDP. Services account for 80% of the UK economy, but only 40% of the UK’s service exports go to the EU, amounting to just 5% of GDP.
There is still no Single Market in labour
When it comes to the third freedom of movement in workers, there is no real SM in labour. EU workers are, of course, free to look for work in any member state and both unskilled and very highly skilled workers are able to find work if they are willing to accept the working conditions involved. However, a whole range of professional workers in between these two groups find it difficult to get jobs in their own profession, because there is frequently no mutual recognition of qualifications. For example, a qualified German hairdresser must requalify to practise in France (and there are two different qualifications, domicile and shop), and an English solicitor cannot provide conveyance for a residential property sale in most EU countries. There are, in addition, other barriers, such as language differences, the non-portability of pension rights etc.
Labour mobility within the EU is estimated to be one-third the level found in the US, and there are significant wage rigidities in European labour markets. Wage rigidities, combined with poor labour mobility, inevitably lead to high unemployment. Average unemployment in the inner core of the SM (the Eurozone) is 7.8%. It is 18% in Greece, 10.5% in Italy, 8.8% in France, although only 3.2% in Germany. Youth unemployment is far worse. It averages 16.1% in the inner core. It is 40% in Greece, 33% in Italy, 20% in France, and 5.6% in Germany.
Some member states have, however, been forced to show wage flexibility by Brussels. A striking example is Ireland. Between 2008 and 2011, median and mean total disposable income (excluding all social transfers) in Ireland fell by 30% and 21%, respectively. These cuts were required as part of the EU’s rescue package for the collapsed Irish banking system. Irish banks had lent excessively to property speculators, leading to a property boom. Had Ireland had its own currency, the Irish central bank would have raised interest rates to curtail the boom. But Ireland is a member of the Eurozone where interest rates are set to suit the economic needs of core members such as Germany, rather than peripheral members like Ireland. Ireland had no alternative but to sit it out and wait for the inevitable collapse of its banks – and then pay for it through massive wage cuts. This is what is meant by the ‘integrity’ of the SM.
There is still no Single Market in capital
The fourth freedom of movement is in capital. The EU claims it wants its capital markets to be as deep and liquid as those in the US – in line with its programme for capitals market integration. Despite numerous attempts to create a Capital Markets Union, the European capital markets are far from integrated. Stanislas Yassukovich – the euromarket pioneer who was Deputy Chairman of the Stock Exchange during and after the 1986 Big Bang – goes further and argues that there is ‘certainly [no “single market”] in financial services. …As there is no unified capital market and no European stock exchange, the regulation of financial services, focused largely on investor protection, is at national not EU level’.
Where there are financial regulations at EU level, these tend to be protectionist, excessive or ineffective – and this is impeding rather than promoting the process of integration. Here are some examples:
- Markets in Financial Instruments Directive (MiFID) II – dealing with the trading of and the provision of services by investment intermediaries relating to financial instruments (e.g., shares, bonds, units in collective investment schemes and derivatives). Jeff Sprecher, CEO of Intercontinental Exchange, has described MiFID II – which came into effect in January 2018 – as ‘a terrible piece of legislation that imposes tremendous costs on the industry’. MiFID II grew out of the G20 financial regulation principles established in 2009 to reduce systemic risk following the Global Financial Crisis, but has been criticised as being excessively complex and its implementation was delayed by a year. One particular issue is the unbundling of investment research and transaction costs. MiFID II, in order to achieve full cost transparency for end customers, has ended the standard industry practice of brokerage firms providing investment research free of charge in return for execution business. McKinsey has estimated that the profits of European asset managers that pay for research in full will be reduced by 15-20%. Larry Fink, CEO of BlackRock, expressed concern that MiFID II could lead to a dearth of research coverage focused on smaller listed companies. Crispin Odey, of Odey Asset Management, believes that MiFID II will lead to fewer trades, reduced price discovery and less efficient markets. Another issue is the reporting of trades to regulators within a specified time – the cost of which has encouraged some hedge funds, such as Brevan Howard and Tudor, to register under the Alternative Investment Fund Managers Directive [AIFMD] rather than under MiFID II. The total cost to the finance industry of implementing MiFID II has been estimated at more than €2.5bn. Within months of its introduction, trading in a number of futures and options contracts was moved from London to the US and European investment banks were losing business to their US rivals.
- The Capital Requirements Directive IV is damaging for EU financial markets in terms of restrictions on cross-border lending and a bankers’ bonus cap.
- Solvency II. The Treasury select committee announced an inquiry into the ‘manifest shortcomings’ of the Solvency II Directive dealing with insurance companies. It received numerous criticisms from industry practitioners, including the risk of procyclicality and market distortion, and the volume and complexity of data required from firms.
The effect of all these regulations – which were designed to protect investors – is to reduce competition – which ends up being detrimental to investors. A clear illustration of this comes from a report from New City Initiative, entitled M&A in Asset Management: Is it stifling competition? The report shows that fund managers’ costs have ‘increased exponentially’ as a result of regulations such as MiFID II, AIFMD, PRIIPs, UCITS V and GDPR which have increased the burden on compliance departments. This, in turn, has led to mergers across the fund management industry because ‘larger enterprises can better absorb the increasing costs that come from running an asset management business in 2019’. But there is a risk that these mergers ‘are drowning out competition and undermining investor choice’. It pointed out that the top 20 largest fund managers have 43% ($41tn) of the top 500 assets under management: ‘For investors, this represents serious risk concentration risk’.
In addition to excessive regulation, there is another important factor that is limiting the growth of Europe’s capital markets and that, according to Larry Fink, CEO of BlackRock, is Europe’s ‘excessive reliance’ (around 70%) on borrowing from banks and insurers to fund growth. He claimed that the problems European companies face when accessing bond and equity markets had ‘stifled economic recovery’ on the continent: ‘In the years since the crisis, much of Europe’s economic potential has been locked up. Strengthening capital markets and retirement systems can help unlock that potential, and doing so will be vital to Europe’s economic future’. He also said that European bond markets are complicated by different insolvency laws across member states: ‘The lack of a unified European corporate bond market raises costs for companies, deters investors and holds down liquidity’.
Fink praised the European Commission’s efforts to unify European capital markets, under the Capital Markets Union project, but he also warned that the EU was ‘pulling itself in two directions’, claiming that other initiatives, such as new capital rules for insurers under Solvency II, could ‘severely restrict a key source of funding for European companies. While a long-term objective is greater funding from capital markets, limiting insurance companies’ capacity for investment before capital markets are fully developed could significantly damage growth’.
Underlying all this is a widespread and long-standing hostility on the European continent to money and finance, given the risk that they cannot be completely controlled from the centre and so can disrupt well-laid plans. This is clearly reflected in the Plan for a European Economic Community launched in Germany in 1942 – as I explained in a previous Briefing for Brexit. Modern-day France is also opposed to ‘finance capital’ – as exemplified by François Hollande who, when elected President, announced that his ‘only real enemy’ was the ‘world of finance’.
The failure of the banking system to fund European equivalents of Apple, Amazon, Facebook, Alibaba and Tencent has led Ursula von der Leyen, the next European Commission President, to consider launching a €100bn ‘European Future Fund’, since these US and Chinese tech giants have ‘the potential to obliterate the existing innovation dynamics and industrial position of EU industry in certain sectors’. This top-down approach to meeting this challenge is entirely consistent with the underlying economic philosophy behind the 1942 Plan which is ‘state economic leadership’ over heavily regulated private sector companies which are expected to operate as efficiently as possible using the latest available technologies. By contrast, the laissez faire approach adopted by the UK has resulted in the UK being Europe’s largest recipient of foreign direct investment in high tech, with more than £9bn invested between 2015 and 2018, and £5.5bn in the first seven months of 2019 alone.
Even strong supporters of the EU acknowledge the Single Market’s enduring failings
Even strong supporters of the EU acknowledge the SM’s enduring failings. The Financial Times’ Wolfgang Münchau concedes that the SM is ‘not visible in the macro statistics…. the data are telling us a different story – that the Single Market is a giant economic non-event, for both the EU and the UK’.
As another example, take Fredrik Erixon and Rosita Georgieva from the European Centre for International Political Economy:
New initiatives to reform the Single Market are often presented as initiatives to ‘complete the Single Market’. However, they have all fallen substantially short on that ambition, and Europe is far away from having a Single Market. In fact, it is further away from it now than ten years ago. The European economy has undergone profound structural changes, and as the economy has shifted profile, it has moved further into sectors and areas where there is very little of the Single Market. The more Europe’s economy grows dependent on services and the digital sector, the less Single Market there will be in Europe.
Arguably, the piecemeal approach has prevented Europe from reaping the gains of structural change, and the relative policy conditions between sectors have damaged Europe’s desire to grow faster on the back of new sectors and services. The failings of Europe’s Single Market are becoming ever more evident and, left unaddressed, will cause real economic disintegration in Europe and depress the rates of productivity and economic growth.
Furthermore, given the vast complexity of regulations in Europe, and the increasing layers of bureaucracy they entail, it is difficult to see how improvements could be made without a vast overhaul of the structure of regulations and the design of the Single Market. And such a reform has to start from a completely different proposition: Europe’s ambition should not be to continue building its Single Market, it should be to create a European market. As reforms are moving closer to areas like digital services, energy, and advanced business services, it is evident that the improvements that can be made in Europe’s integration is less about classic Single Market reforms and more about building adequate market institutions and advance structural reform.
A further example of SM ineffectiveness comes from a report (Steps towards a deeper economic integration: the Internal Market in the 21st century) commissioned by the Directorate-General For Economic and Financial Affairs of the European Commission which found that the SM had failed to increase either foreign direct investment:
Since 2001 the volume of FDI from the rest of the world into the EU25 has gradually declined …[and the SM is] losing its attractiveness for international R&D investment. Multinational companies prefer to carry out their R&D activities in the US – and more recently in China and India – rather than in the EU.
The innovative performance of the EU as a whole and of most EU countries lags significantly behind that of top performers such as the US and Japan…What is more worrying is the widening gap between the laggards and frontrunners and between the EU and other developed economies.
The report further noted that ‘The trade boosting effect of the introduction of the euro has… been far less pronounced than the trade effect of enlargement’, that ‘…since 2000 the trade effect of the enlargement process and particularly intra-EU15 trade integration, seem to have stalled’, and further that ‘EU product markets remain heavily regulated, business dynamism is insufficient and prices rigidities are persistent’.
Yet the EU and big business continue to praise its ‘success’…
Despite all this powerful evidence of failure, the European Commission is publicly effusive about the SM’s ‘success’, as its 25 years of the EU Single Market factsheet makes clear: ‘The Single Market is one of the EU’s greatest achievements. It makes everyday life easier for people and businesses, and fuels jobs and growth. Today, the EU’s economy is the largest in the world. The Single Market is the beating heart of the EU. Thanks to the Single Market, people, goods, services and money can move around the EU almost as freely as within a single country. EU citizens can study, live, shop, work and retire in any EU country, and enjoy products from all over Europe’.
Big business is also glowing with praise. Take this from a report entitled 25 years of the European Single Market prepared for the Danish Business Authority: ‘In 1993, the European Single Market was created to make the lives of European citizens and businesses easier. Still today, 25 years after its establishment, the Single Market delivers on this promise, giving European companies direct access to 500 million consumers and 26 million businesses; providing European consumers with greater choice and lower prices. The report demonstrates that the Single Market has been key to maintain and improve the competitiveness of all the European economies. A great success story’.
…Especially at the complacent Confederation of British Industry
Nowhere is support for the SM – and Customs Union – stronger than from the Confederation of British Industry (CBI). In its 2013 report, Our Global Future, it said that the SM is ‘fundamental’ to the UK’s economic future, boosting living standards and amplifying the UK’s role globally.
Richard Tice takes a different view of why organisations like the CBI want to remain in the EU. It restricts competition from abroad and allows businesses to recruit workers easily from other member states rather than going through the effort of training young British workers. He is clear on who ultimately pays the price for this: ‘Being encased by the protectionist wall of the EU’s Customs Union has kept prices of food, clothing and footwear artificially high, while uncontrolled unskilled EU immigration, thanks to our membership of the Single Market, has depressed the wages of working people. These two factors have conspired to hit the pockets of the poorest in society’. The benefits of being encased by the EU’s protectionist wall are reflected in the ‘bloated’ pay packages of the FTSE100 bosses which averaged £5m in 2018 – rising to a maximum of £39m. Median FTSE 100 CEO pay is currently 117 times more than the average UK worker. Peter Lyon offers another reason why: ‘It is not surprising the CBI wants the UK to stay as closely tied to the EU as possible. Since 2009, the CBI has received huge sums in funding from the European Commission, making up a fifth of its total post-tax income; in return, loyally supporting Britain’s EU membership’.
Far from helping to ‘amplify the UK’s role globally’, British businesses are happy to take a back seat and let the EU negotiate trade deals. This is clear from submissions to the UK government’s 2013 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market. The majority of submissions believed that trade agreements are best negotiated by the EU and not by the UK government. They are happy for trade promotion to remain a national competence. Since this corresponds to the existing balance of competences between the EU and its member states, it is clear that British businesses – hiding behind the protective shield of the EU’s Common External Tariff – have become complacent.
Even more shocking is the revelation that many businesses believe that the UK is ‘no longer equipped to conduct its own trade negotiations’. This is certainly the view of the CBI which in its Our Global Future report (p.155) warns that ‘It would take time for the UK to first regrow the capability to negotiate FTAs [free trade agreements] and there would be a period of dislocation – perhaps for many years – while new UK bilateral deals were finalised.’ And this defeatism coming from the business leaders of the country that invented global free trade!
But countries cannot hide from global competition indefinitely
But countries cannot hide from global competition indefinitely – as a new book The Future is Asian: Global Order in the 21st Century by Parag Khanna makes clear:
Americans and Europeans see walls going up, but across Asia they are coming down. Rather than being backward-looking, navel-gazing, and pessimistic, billions of Asians are forward-looking, outward-oriented, and optimistic.
Five billion people, two-thirds of the world’s mega-cities, one-third of the global economy, two-thirds of global economic growth, thirty of the Fortune 100, six of the ten largest banks, eight of the ten largest armies, five nuclear powers, massive technological innovation, the newest crop of top-ranked universities.
This, unfortunately, is a warning that complacent British businesses and their representatives in the CBI are likely to ignore, hoping instead that the ‘integrity’ of the Single Market will protect them – and their bloated fat cat salaries – from global competition. Like much of the rest of the ‘European Project’, the Single Market is an illusion. Far better to ‘access’ this illusion from outside, as China has done – without even thinking about applying for SM membership.
This makes it all the more curious why so many businesses and politicians in this country insist we have to have unfettered ‘access’ to the Single Market after we leave the EU. Don’t they make any effort to find out the facts? The ignorance in this country about the failings of the Single Market – as well as the failure of British businesses to sell effectively into it – is woeful. The price of that ignorance will turn out to be very high – not only over here, but also over there.