Why the EU’s Internal Market Needs Further Integration If It Is to Survive in Its Current Depth

The European Union is today the world’s most closely integrated economic region. This interconnectedness has been a huge factor in Europe’s prosperity. Without the European Single Market in its contemporary form, which allows production and marketing without heed to internal borders, Europe would never have become home to some of the world’s largest car manufacturers. And operating as a major bloc in international trade negotiations wins the EU outcomes that would be beyond the reach of even Germany, its largest member state.

The EU is an economic superpower. In contrast, even its largest member states are at best second-tier in the global context – as the United Kingdom learned the hard way when it tried to negotiate free trade agreements with third states after leaving the EU.

Benefits of EU membership are taken for granted

Many people take European integration so thoroughly for granted that they do not even realise that the benefits depend on EU membership. So it is unsurprising that the advantages tend to get “forgotten”. Ever fewer Germans have adult memories of routine border controls and customs checks between Germany and France, for example.

Despite the EU’s undeniable successes, certain aspects of European Integration regularly draw massive public criticism. The success of anti-European parties in almost all the member states underlines the critical stance of a growing minority – as did the outcome of the British Brexit referendum.

The package of economic measures implemented to overcome the post-2010 euro crisis was a turning point in many countries. Many citizens – especially in the euro crisis states of southern Europe – were unhappy over the EU’s imposition of austerity-driven fiscal rules. The northern member states, at the same time, saw growing disgruntlement over the succession of exorbitant rescue packages they were required to guarantee.

The idea that one could resolve these issues by turning back individual elements of economic and political integration is often floated, even in progressive quarters. For example it is occasionally suggested that the monetary union could be scaled back in a controlled fashion by permitting Italy or Greece to reintroduce their own currency, or to restrict the free movement of labour. The hope behind at least some of these ideas is to secure the benefits of European integration while rolling back elements that are currently working less well.

No mileage in partial reversal

Unfortunately that would appear to be a road to nowhere. The current state of European integration is the outcome of a complex and delicate balancing process, where benefits for the different member states come from different policy areas, and rolling back the integration in any of them would lead to uneven losses.

Under a common internal market certain regions are bound to benefit more than others. Agglomeration effects, where businesses in a particular sector seek geographical proximity, lead industries to cluster in particular countries. Where economies of scale exist, it is quite conceivable for entire countries – or at least regions – to end up without any relevant manufacturing industry. Both monetary integration and free movement of labour can be seen as attempts to cushion the impact of agglomeration effects. The monetary union secures lower interest rates, and thus lower financing costs for its members. Free movement of labour is crucial for countries like Bulgaria and Romania, where entire regions depend on their citizens working abroad and sending a proportion of their earnings home as remittances.

If integration were simply to be reversed in these areas and hence benefits disappear, the negative consequences of the internal market for individual countries would be revealed even more clearly. The foreseeable consequence would likely be ever louder calls to curtail trade integration, for example by permitting state support for national enterprises – or even pressure to leave the EU, following the British example.

Covid-19 exposes weaknesses in the EU’s architecture

At the same time, the Covid-19 crisis has revealed glaring weaknesses in the EU’s economic architecture. It has impacted the euro countries asymmetrically: Italy, France and Spain have experienced a deeper economic collapse than Germany or Austria, not least on account of differences in their fiscal space. Highly indebted nations like Italy and Spain had to respond more cautiously, because it was not clear that they could depend on the European Central Bank (ECB) to fend off market speculation about future (il)liquidity of member states. Germany, on the other hand, was able to operate with little concern for the financial markets. Ultimately, this asymmetrical response to the Covid-19 crisis threatens to accelerate agglomerative tendencies in the monetary union.

Simply continuing as before therefore threatens to undermine support for the EU. Or, put another way: the current constellation of progress on integration across different policy areas is not sustainable. In certain areas (especially cross-border division of labour) integration has progressed to a point where it cannot be maintained in the longer term without further integration in other fields.

Strategic expansion of integration offers a perspective

The solution is a strategic expansion of integration that tackles the weaknesses of Europeanisation in order to secure the existing benefits of the EU. In the case of the monetary union, the ad-hoc responses to the post-2010 euro crisis need to be superseded by sustainable solutions. The ECB played an absolutely central role in tackling the crisis but – in part on account of objections from the German Constitutional Court – there are recurring doubts over the limits to its powers. Here, a collective guarantee of at least a part of the member states’ debts would be useful.

In order to enable the member states to tackle asymmetrical shocks, there is a case for insurance-based solutions – such as the long-discussed unemployment (re)insurance for the euro states – to support individual states in the event of a sharp rise in unemployment. The EU’s fiscal rules have often generated counterproductive pro-cyclical policies at the national level and also need to be reformed.

If Europe is to compete with China and the United States in the high-tech sphere, it will need a strategic industrial policy that supports enterprises in key sectors and keeps them in Europe, promoting promising developments without heed to particular national interests. Rather than spoon-feeding individual “national champions”, this means establishing and securing central technological capacities in Europe.

Free movement of labour needs to be backed up by a stronger European social pillar, in order to prevent the EU’s fundamental principles from subverting its central objective of promoting prosperity for all.

The provision of European public goods could also help disadvantaged regions to participate more fully in prosperity. European projects in the areas of healthcare, ambitious high-speed rail and transnational hydrogen networks offer promising openings. European funding and organisation of defence projects, border security and development projects in poorer countries could both save money and highlight the added value of European cooperation.

Reconstruction fund is a good start

Fortunately the EU Commission has set the right course in the coronavirus crisis, with measures proposed and in some cases already agreed. The SURE Fund (Temporary Scheme to Mitigate Unemployment Risks in an Emergency) offers loans to member states to fund national short-time work schemes to mitigate the effects of the pandemic. It would be predestined to serve as the template for a permanent European unemployment reinsurance scheme.

The 750 billion euros recovery package proposed by the EU Commission creates a significant funding instrument, introducing collective EU borrowing for the first time. Experience gained in this context could be useful at a later stage, in connection with collective Eurozone borrowing. Integrating the recovery package into the EU budget has broken the taboo that the budget must not significantly exceed one percent of the Union’s GDP. Postponing the issue of servicing and repayment creates an opening for introducing real European taxes that could be used as required to service the loans or fund new European investment projects.

The challenge now is to move swiftly from words to deeds. The EU forecasts that Italy’s GDP in 2021 will drop to a level last seen more than twenty years ago – before the introduction of the euro – and almost 10 percent lower than in 2007. The left-behind economies could see growing dissatisfaction over existing structures and the lack of economic perspectives. Growing rejection of Europe, in turn, would make constructive integration steps increasingly difficult. If Europe’s citizens do not quickly see concrete benefits from membership it could soon be too late to save the internal market in the form, geographical extent and depth we know today.

(Translated from the German)
 

The views expressed in this article are not necessarily those of Friedrich-Ebert-Stiftung.