With the European Union preparing for the United Kingdom’s departure, looking at how we got to this agreement is important in understanding what might happen when the UK leaves. The EU Single Market is an agreement far along the scale of free trade agreements and further than most, so in many senses it is an interesting yet well-thought-out experiment in free market economics.
A single market is a trade bloc where almost all trade barriers have been lost, such as restrictions on the mobility on goods, services, capital and labour. The process of becoming a single market was lengthy with many hindrances which needed to be overcome by the politicians of the time.
The European Union was first established after the end of World War II with the aim of establishing peace among the six founding members: Belgium, France, Germany, Italy, Luxembourg and the Netherlands with Denmark and the UK joining in 1973. In July 1968, the members came to form a customs union, which is when countries agree to free trade between them and the same levels of protectionism to outside countries.
The single market was achieved in 1993 despite the aim being established in the Treaty of Rome signed on 25 March 1957. Even though the single market hadn’t been achieved by the late 1980s, there was gradual liberalisation, partially due to the fact that the European Coal and Steel Community had begun to unite the European countries economically and politically.
Progress was being made until the oil crisis of 1973 and the subsequent recessions across the European countries. This led to the emergence and adoption of more nationalist and protectionist policies, such as increased tariffs on traded goods and the implementation of quotas. Another obstacle was the effect of the differences in tax legislation between the European Union member states.
Countries with lower corporate taxes gave the companies which produced there a competitive advantage over those from countries with higher corporate taxes due to their lower operating costs. By the 1980s, there was little progress being made towards the objective of a single market and even some movement away from it because of the contemporary economic climate.
Establishing a single market
In the 1980s, the European Economic Community had just started to fall behind the rest of the developed world in terms of economic growth. Margaret Thatcher, the prime minister of the United Kingdom from 1979 to 1990, decided that the European Community should focus once again on the goal of a single market.
She sent the Baron Arthur Cockfield to the Delors Commission, the European Commission under the administration of the President Jacques Delors, who wrote a White Paper in 1985 pinpointing three hundred measures he deemed necessary to reach a single market. This White Paper led to the adoption of the Single European Act in 1986: a six-year programme aimed at sorting out the issues with free trade across borders, fundamentally reforming the decision-making process and setting a deadline on the goal.
In the process of moving towards a single market, individual freedom of movement went from being just for employed workers and businessmen to including students, pensioners and those on annuities. Customs formalities were eliminated on 1 January 1993 as well as product manufacturing norms being established recognising the basic health and safety standards necessary.
Although free trade in goods happened relatively quickly, services took a lot longer which was an especially significant obstacle considering the service sector was often the largest in these developed economies. Competition policy was strengthened to prevent issues across member states: there was the monitoring of mergers, prohibiting worrying agreements and forbidding state aid. However, there were still tax disparities which led to members reducing taxes just to attract businesses.
The Picture Today
In theory, the movement towards a single market and free trade in general can have a multitude of benefits. Free trade in goods and services led to business being exposed to more competition means that companies are more likely to operate at lower prices and more efficiently, which can only be good for the consumer as real incomes would increase.
They may also benefit from economies of scale from producing a higher quantity of goods leading to lower production costs. However, if companies aren’t as competitive or efficient as overseas competitors, this may lead to them producing a lower quantity or going out of business. Freer mobility of labour may cause lower unemployment overall as areas with an excess supply of workers can move to areas with an excess demand.
Free movement of capital allows for cross-country business alliances and ventures, increasing dynamic efficiency and competitiveness. Intra-EU trade is clearly important, as it accounts for 17-28% of the world trade in goods and services, suggesting that free trade may be beneficial.
There are, as to be expected, issues with a single market. The EU is in a semi-permanent recession as many countries have persistent slow growth with high levels of national debt and fiscal austerity. There is also a severe jobs crisis which many believe has partially resulted from the single market.
Even with these issues, a study by Kommerskollegium found that there was been a generally positive effect on GDP primarily through the free movement of goods and services but there are no signs of increased competition in the service sector, which may become more of a problem in the future as more countries increase their reliance on services.
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