Europe’s Single Market has stalled and needs a radical rethink. The European Union, needs to act rather than react if it wants to compete with China and the United States. So says Enrique Letta, author of a recent report on how to revive a stagnating Single Market. Widely well-received, the report includes a number of innovative ideas designed to boost integration and increase competitiveness. But will EU leaders muster the necessary political will for their implementation?
The problem: a single market that is still deeply fragmented, even after three decades of union. In spite of increasing levels of Europeanisation across the bloc, national interests continue to play their part, especially when it comes to taxes and capital flows. But the former Italian Prime Minister is quick to point out that his report is about empowering both national and European authorities. The idea, he says, is to “work together to consolidate and scale” in order to provide a larger single market for consumers.
The report highlights three key areas of focus – the financial industry, the energy sector and telecommunications. His logic: a stronger single market in these sectors will help finance just Green and Digital transitions. Not to mention the growing defence and security costs faced by Europe. While simultaneously boosting European competitiveness globally and improving living standards for European citizens. Too good to be true? Perhaps, but let’s dig a little deeper.
Financial union failure after Brexit
The finance sector gets the worst report card when it comes to a single capital market. Little real progress has been made on the Capital Markets Union since its launch almost a decade ago. Brexit and the share technical complexity of harmonising 27 separate capital markets have played their part. So Letta, who served as Prime Minister of Italy from 2013 to 2014, does what any good politician would; he rebrands.
More European investment products needed
The new Savings and Investment Union focuses on the consumer, explains Letta. The average European citizen sees their savings continue to gather dust in the bank while the United States offers a range of investment products that attract capital from across the globe. Letta is keen to keep these savings in Europe. But he agrees that this idea can succeed only if there are incentives to do so. The launch of a much wider, more attractive range of European investment products is needed. As is a change of mind set from a continent of net savers who are heavily reliant on pension schemes and property investment.
This is where the Green and Digital transitions come in. They, Letta hopes, will help incentivise buy-in from the typically risk-averse EU citizen, while providing growth opportunities for EU businesses across a market of over 400 million consumers. He believes the creation of “a big private pillar” of funding is the only way to get northern member states on board for the necessary complementary leg of public financing.
Where are the European champions?
But, “opening the taps of state aid” will require political will, says Vice-President of the European Parliament, Dita Charanzová. “How to create European champions?”, she asks. While President of the Internal Market section of the EU’s Economic and Social Committee, Sandra Parthie, points out that the private sector already accounts for more than 85% of investment in the Green and Digital transitions. She agrees however, that investment, particularly of the joint European variety, is key to a successful revival of the Single Market.
One of the major hurdles to greater integration of capital markets is the complexity of harmonisation. Letta’s report comes up with an innovative, if partial solution. What he terms, the 28th regime, which he describes as “a Passepartout to investment” via just one legal system. Those who want to invest in Europe would be able to select just one of the legal systems of its 27 member states to follow. This provides a possible route around the difficulty of dealing with 27 different commercial systems. It would also incentivize a general shift toward more investment-friendly regulation while buying time for the much harder work of genuine harmonisation.
Brain drain and the freedom to remain
Yet it’s not only capital that’s flowing out of Europe. Many regions are also losing some of their best and brightest minds. “Up until now, we considered the issue of brain drain in Europe as collateral damage to freedom of movement”, says Letta. In response he talks about, “the fifth freedom – the freedom to stay”. Letta stresses that we have to work to avoid, “a sort of desertification of services” and find ways to “incentivise people to come back”. He believes we are under-evaluating the impact of freedom of movement, admitting that his report’s attempt to address these issues are “not enough”.
Over regulation, under implementation
The Letta Report devotes an entire chapter to the issue of regulation. The simplification and enforcement of existing regulation, Letta argues, would help reduce the fragmentation that stills plagues the Single Market. He also calls for a move from directives to regulation at EU level. This is echoed by both Charanzová and Parthie, who agree that current regulatory frameworks are sufficient. The problem is their implementation and enforcement.
Uneven implementation and enforcement of current regulation is undermining the trust of businesses in the EU, says Charanzová. While Parthie explains it like this, “We burden our own companies with all sorts of regulations and product standards but then we find products on our shelves that clearly haven’t met these standards”. Charanzová goes so far as to suggest that Brussels create a Commissioner of Enforcement. A role dedicated to overseeing the timely and even enforcement of regulations across the bloc in order to create a more level playing field for businesses.
Finding the courage
Parthie believes that the Letta report can be, “a win-win for both national and EU interests” but warns that this will require better alignment across national governments. She also points out that the EU already has “a lot of innovative, high-quality products that can be promoted”. “It’s not only America that can be great again, we need to be more vocal!” she says. For Charanzová, it’s about finding the political courage to “follow this recipe”. “Use the Letta report, listen to it and make it happen!” she urges.