Europe’s Controversial Single Market

When critics want to explain why the European Union (EU) is in crisis, they usually point to the euro or the Schengen Agreement. These are areas of vital national sovereignty, they argue. A government without a currency cannot preserve its national competitiveness and has no status as a lender of last resort. A government that cannot monitor its borders cannot stem the flow of illegal workers, criminals, and terrorists. There is merit to both of these arguments but they miss the deeper point. Europe’s problems do not originate in money or migrants; they stem from the single market.

The completion of Europe’s internal market is the crowning achievement of integration; it has done more than anything else to promote peace and prosperity from Iceland to the Baltic States and from Norway to Turkey. Moreover, as those reference points suggest, the benefits of the internal market extend far beyond the EU itself. To claim that Europe’s crisis originates in the common market is not to detract from Europe’s accomplishments. Any transformation so great is bound to have unintended consequences. In Europe’s case, those consequences are important.

Consider the free movement of capital. European governments chose to liberalize cross-border capital movements in order to foster development and to finance the retirement costs of an aging population. These motivations appear time and again in official reports associated with building a common market for European financial services stretching back to the 1980s.

In practical terms, the goal of financing pensions through productive investment meant that Irish and Spanish real estate markets would boom on the back of German and Dutch savings. It also meant that Europe would witness the rapid growth of multinational banking giants like Dexia, Fortis, HBOS, and Unicredit. Tiny countries like Cyprus, Iceland, Luxembourg and Malta could find a profitable niche in this new financial environment.

The problem is that capital flowed in all directions, not just from countries with surplus savings into countries looking to finance development. Some of that money moved from poor countries to rich countries; some also left Europe to head across the Atlantic. Worse, even relatively modest flows of cross border investments quickly accumulated in large stocks of assets. The European financial crisis started when the collapse of subprime lending in the United States imposed losses on the big European banks. It worsened as European investors switched to focusing on protecting their capital rather than looking for the highest rate of interest. With surprising speed, Europeans liquidated their foreign assets and repatriated their investments.

As European cross-border financial markets disintegrated, national governments struggled to mitigate the damage and prevent a full-blown panic. Whether the existence of the euro made this struggle easier or more difficult is debatable, but it was the functioning of Europe’s internal market that gave rise to these ‘sudden stop’ dynamics. The sudden repatriation of assets not only cut deeply into the total amount of European savings but also put a halt to financing for development.

Now think about the free movement of labor. Europe has always had cross-border migrants. Otherwise it would not have politicians like Nicolas Sarkozy or Elio Di Rupo. Some mixing is only to be expected on such a small continent. The genius of the internal market is to give cross-border labor flows some kind of structure. This way money invested in developing skills in one country are not wasted because a person decides to live elsewhere. A Dutch lawyer should not have to stop practicing law just because they move to Spain. The internal market also makes it easier to ensure continuous coverage in terms of health care and other benefits. And it helps to create a competitive cross-border market for skilled labor.

The results are not perfect. It is still hard (if not impossible) to consolidate pensions earned in different countries, for example. But the results are better than found in other countries on a number of dimensions. Here you might think of the retraining required for a barber to move from Indiana to Illinois or a lawyer to move from New York to Texas. Of course there is always some retraining involved in moving from one market to another. The recognition of qualifications only makes life easier, not perfect. Moreover, European labor markets remain inefficient. Here you only need to ask why there is so much more unemployment in Sicily than in Emilia Romagna. Inefficiency is as much a problem within countries as between them. Nevertheless, the current arrangement is better than the unstructured alternative.

The problem is that some labor markets are more attractive than others to non-nationals. This relative attractiveness could be due to a range of factors. It could be the result of relatively flexible hiring conditions that make it easier for foreign workers to experiment with living in another country. The ease of finding (and leaving) rental accommodation is also a potentially important. So is language. There is no inherent reason why an English plumber shouldn’t be able to learn Polish. Infants in both the United Kingdom and Poland tackle their respective languages with equal vigor. Adults confront a more uneven situation.

In contrast to their British counterparts, Polish adults, for example, are surrounded by opportunities to hear spoken English, and have incentives to use that English with other native and non-native speakers. This means you are likely to find more Polish students at UK universities than the other way around; you are also likely to find fewer UK workers looking to spend time in Poland than Polish workers looking to experience life in the United Kingdom. Moreover, the advantages that the UK has over Poland are similar to the advantages that the British labor market offers over just about anywhere else in Europe. The presence or absence of border controls is completely unrelated to this imbalance. What matters is access to the labor market.

The challenge for European policymakers is to ‘level the playing field’. That challenge applies across every dimension of the single market and not just the market for labor. Worse, European policymakers need to distinguish between advantages that are absolute (meaning that result from some inherently unique feature, like the ubiquity of the English language but also the location of scarce natural resources), advantages that are comparative (which result from how different things are done in different parts of Europe), and advantages that are created intentionally by national policymakers or business leaders who seek to distort market competition in their favor.

Unsurprisingly, this leveling of the playing field for the internal market is where you find most of the activity that we call ‘European integration’. It is a sprawling, complex, never-ending negotiation between representatives of different countries about how to mitigate natural vulnerabilities while at the same time fostering the prosperity that can be achieved by a large and competitive market.

It is easy to see who wins and who loses from any isolated aspect of this ongoing process. If you stop time and pull out a single agreement for scrutiny, it is impossible to see how everyone benefits from that isolated illustration. Someone somewhere in Europe will always be disadvantaged at the expense of someone somewhere else either inside or outside the European Union. It is also easy to imagine how little chance national representatives will have to be heard within the wider chorus of conflicting demands.

Europe’s heads of state and government try to ease this problem by giving each national representative a chance to speak. But no-one who has ever sat in a committee meeting is fooled by that kind of spectacle. It is far easier to imagine that the ‘real work’ is done is something like a cross between a smoke-filled room and a trading pit. The European Commission, the Council Secretariat, the permanent representatives, and the European Parliament all play a role. That is why critics of European integration are so quick to point out the very high percentage of legislation that they believe originates in Brussels. They do not believe they are represented within the legislative process at the European level and so they demand to be represented by the national legislative process itself.

These are mutually exclusive alternatives. Either people have to agree to work within Europe’s internal market – with all of the leveling and hence legislation that requires at the European level – or they have to accept the geographic limitations associated with national parliaments. Neither the single currency nor the Schengen Agreement compels Europeans to make this choice. What compels them to make this choice are the requirements for having a single market.

The time has come for supporters of the internal market to stop hiding behind criticism of the single currency and Schengen. They will not win the argument by deflecting the attention of Europe’s critics onto other aspects of integration. Because once (and if) those other projects are eliminated from consideration the fundamental complaints about Europe will have to be weighed against the enormous advantages that the single market represents.

At that point, Europe’s supporters will have to consider whether the internal market is any less controversial without those other distractions. The harsh reality is that it isn’t. They will also have to ask whether the internal market functions any better without other projects like the single currency and the Schengen Agreement to support it. The harsher reality is that it doesn’t – but that is a different argument.

This piece was originally published on the IISS Survival Editor’s blog.


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