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Single European Market
a (still not complete) EU-wide market throughout which labour, capital, goods and services
can move freely
The EU has certainly been successful in its original central aim of ensuring European peace: countries
such as France, England, Germany, Italy and Spain who have been at war with each other on and off for
centuries now work together for mutual benefit. This has led to greater emphasis being given to the EU’s
second objective – namely prosperity – and, to this end, a desire to create a
Single European Market
(SEM) throughout which labour, capital, goods and services can move freely. As member states got rid
of obstacles to trade between themselves, it was argued, companies would start to enjoy economies
of scale as they expanded their market across Europe, just as US companies enjoy economies of scale
as they expand across American states. At the same time, inefficient firms would be exposed to more
cross-border competition, either forcing them out of business or forcing them to improve their efficiency.
The aim was to provide businesses with an environment of fair competition in which economies of
scale could be reaped and a strong consumer base developed from which they could expand into global
markets. Households, on the other hand, would benefit from lower prices, greater choice of goods and
services, and work opportunities across a wide area, while the economy in general would benefit from the
enhanced economic growth that would result.
Early steps towards the creation of the SEM included the abolition of internal EU tariff and quota
barriers in 1968 and a movement towards greater harmonization in areas such as indirect taxation, industrial
regulation, and in common EU-wide policies towards agriculture and fisheries.
Nevertheless, it proved difficult to make progress on the more intangible barriers to free movement
of goods, services, capital and labour. For example, even though internal tariffs and quotas had been
abolished in the EU, local tax systems and technical regulations on goods and services still differed
from country to country so that it was in practice often difficult to export from one country to another.
Thus, a car produced in the UK might have to satisfy a certain set of emission and safety requirements
in one European country and another set of requirements in another EU country. Or a qualified
engineer might find that her qualifications, obtained in Italy, were not recognized in Germany. The result
was that during the 1970s and early 1980s, growth in the EU member states began to lag seriously
behind that of international competitors – especially the United States and Japan. Therefore, in 1985 a
discussion document (in the jargon, a ‘White Paper’) was produced by the European Commission that
subsequently led to a European Act of Parliament – the 1986 Single European Act. This identified some
300 measures that would have to be addressed in order to complete the Single European Market and
set 31st December 1992 as the deadline for completion. The creation of the SEM was to be brought
762 PART 15 INTERNATIONAL MACROECONOMICS
about by EU Directives telling the governments of member states what changes needed to be put into
effect in order to achieve four goals:
●
The free movement of goods, services, labour and capital between EU member states.
●
The approximation of relevant laws, regulations and administrative provisions between member states.
●
A common, EU-wide competition policy, administered by the European Commission.
●
A system of common external tariffs implemented against countries who are not members of the EU.
Over 20 years on from the Single European Act, the SEM is still far from complete. In particular,
there still exist between EU members strong differences in national fiscal systems, while academic and
professional qualifications are not easily transferable and labour mobility across EU countries is generally
low. Some of the reasons for this are hard to overcome: language barriers and relative levels of economic
development hamper the movement of factors and member states continue to compete with one another
economically, at times seeking their own national interest rather than the greater good of the EU.
Nevertheless, the years between 1985 and 1992 did see some important steps in the development of
the SEM and the resulting achievements of the SEM project were not negligible: the European Commission
estimates that the SEM helped create 2.5 million new jobs and generated
€800 billion in additional wealth
in the ten years or so following 1993.
In the context of the Single European Market project, therefore, the creation of a single European
currency was seen as a final step towards ‘completing the market’, by which was meant two things:
(a) getting rid of the transaction costs from intra-EU trade that result from different national currencies (and
which act much as a tariff) and (b) removing the uncertainty and swings in national competitiveness among
members that result from exchange rate movements. Before EMU, most EU countries participated in the
Exchange Rate Mechanism (ERM), which was a system designed to limit the variability of exchange rates
between members’ currencies. However, the ERM turned out not to be a viable way of reducing volatility
in the exchange rate and, in any case, had no effect on the transaction costs arising from bank charges
associated with changing currencies when engaging in intra-EU trade.
It is clearly important, therefore, to see EMU within a broader European framework and, in particular,
the Single European Market project. Nevertheless, the benefits of adopting a single currency across a
geographical area can be analysed more generally using macroeconomic theory. Moreover, these benefits
must be weighed against the costs of joining a common currency area.
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