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Market integration and internal market issues

The European Union and its Member States have been engaged in a process of market integration over a long period. An initial key objective of economic integration has been the removal or elimination of barriers between Member States' markets. Despite important successes, the process of EU integration can be further exploited.

To form a basis for deeper integration, in 2006 the European Commission decided to launch a Single Market Review to redefine the strategy and to give the process a new impetus. One of the new agreed approaches towards the single market of the 21st century is a shift from the initial emphasis on removing barriers to trade to one of making sure that markets function better and benefit consumers and businesses.

Background

A cornerstone of the market-integration process was the adoption and implementation of a major legislative programme, the Single Market Programme, resulting in the elimination of non-tariff trade barriers by 1 January 1993. The removal of these barriers was targeted at creating a large integrated market for goods and services, enabling the realisation of economies of scale. The fiercer competition in this integrated market was expected to result in (allocative and productive) efficiency gains. It was also aimed at providing more incentives for European producers to invest in product and process innovations, thereby improving the dynamic efficiency of the European economy. For European consumers, the internal market was also seen as a source of benefits through wider choice and lower prices.

While the internal market has contributed to promoting integration and, to a certain extent, competition within the EU, its potential has not been fully exploited. Initial expectations that it would be a launching pad for a more dynamic, innovative and competitive economy at world level have not been met. In the early 1980s, the convergence in the level of GDP per capita in the EU towards US levels came to an end. Over the past ten years, the average annual per capita growth rate of the European Union has even been below that of the US.

Steps towards a deeper economic integration: the internal market in the 21st century

A recent DG ECFIN study analyses the effects of the implementation of the Internal Market Programme and proposes ideas on how its potential can be better exploited. First, the paper offers a broader perspective to the analysis of the internal market by exploring its close links to the rapidly changing economic environment. Second, it puts together a comprehensive body of empirical evidence, based on an analysis of trade, FDI, M&A, prices, and regulation data, which enables a thorough stock-taking exercise of what has been achieved in terms of European economic integration. Thirdly, it analyses the remaining barriers to the completion of the internal market while presenting a critical review of the adequacy of the instruments that have been used so far.

Overall, the paper concludes that the internal market is a powerful instrument to promote economic integration and to increase competition within the EU, and that it has been the source of large macroeconomic benefits. However, these gains could have been substantially larger if the removal of most of the remaining cross-border barriers had been achieved. In particular, the initial expectations that the internal market would serve as a catalyst for creating a more dynamic, innovative and competitive economy at the world level have not been met. Various reasons for this have been identified, namely: the slow and sometimes incomplete implementation of EU Directives, the inadequacy of some instruments, the persistence of barriers to cross-border trade and investment, particularly in services, and the slow development of an internal market for knowledge. Building on the evidence and analysis, the paper concludes with eight suggestions to guide the design of policy-making for the internal market in the 21st century.

A more impact-driven and result-oriented approach

The process of EU integration is far from exhausted and the internal market can be further exploited. As a consequence, in 2006 the European Commission decided to launch a Single Market Review to redefine the strategy and to give the process a new impetus.

One of the new agreed approaches towards the single market of the 21st century is a shift from the initial emphasis on removing barriers to trade to one of making sure that markets function better and benefit consumers and businesses. To achieve this, the EU needs to modernise its approach to make single market policy more impact driven and result oriented.

Market monitoring is key to understanding the obstacles that prevent markets from functioning well. Therefore, we need to analyse the barriers to market integration, market access, technological developments and innovation, as well as to understand well the price and wage adjustment mechanisms in changing market conditions. This will enable better solutions for the particular challenges of each sector and market. Furthermore, this approach will enable identification of those markets where there are concrete problems and where policies will have maximum impact. Accordingly, clear priorities have to be established and attention has to be focused on those areas where consolidation of the internal market has stalled, particularly in the service sectors. In this regard, one essential element is to achieve greater financial integration.

In the framework of the Single Market Review, an inter-service Working Group on Product Market and Sector Monitoring was set up. The working group's mandate has been to define a common approach for the organisation of product market and sector monitoring within the European Union. An improved monitoring of markets is expected to define better-targeted and more result-oriented single market policies. The approach proposed is flexible, acknowledging that no single method of market monitoring can cover all possible situations, and it is based on the analysis of existing experience with market and sector monitoring within the Commission services and in the Member States. A two-stage process is foreseen: the first stage consists of a sectoral screening aimed at identifying the sectors offering the greatest potential benefits from market monitoring. In the second stage, the selected sectors will be examined in more detail.