7.4 Towards a Single European Market
7.4.3 Achievements and Outstanding Problems
After five decades of concerted efforts, the balance of the achievements of European integration is positive. Many of the original objectives were met. The approaches adopted for managing new problems and challenges that emerged over time strengthened the goals of the founders for a European economy with mobility of productive factors and without discrimination. As new milestones were won en route to a Single European Market, European countries managed to exploit effec- tively economies of scale and scope as well as network economies, boosting their per capita income and at rates that would have been impossible for member-states acting separately. Achievements are endless. However, for several major problems in the agenda of joint efforts, the results were below expectations, whereas the ones that emerged recently in the front of the common currency require an invigorated campaign towards further integration with emphasis on the diversity, as well as the solidarity among member-states. Our purpose here is to assess the results achieved so far, to compare the performance of the European economy to that of the USA, Japan and other major economies, and, finally, to draw attention to the problems that need to be addressed.
7.4.3.1 Assessment of Achievements from an EU Perspective
The process of integration has been accompanied by strong rates on intra-European trade. For example, between 1959 and 1969, France’s trade with other member- states doubled, Italy’s increased from 30 % to 50 % and West Germany’s rose from 37 % to 52 % (Eichengreen 2007b, 178–9). Reviewing data from the six initial EEC countries, Balassa (1975) discovered conclusive evidence that the benefits from the expansion of intra EEC trade and competition far exceeded the losses from the reduction in the diversification of imports of raw materials as specified by Viner (1950). Additionally, Eichengreen and Vasquez (2000) found that integration increased the GDP of the six participating countries by at least 1/3 through (a) the rise in direct investments among member-states; (b) increased inflows of foreign direct investment that were encouraged by the prospect of substantial economies of scale and (c) intensification of competition. These findings ascertain that the net benefits gained in the first phase of integration were very significant and corroborate the validity of Smith’s theorems, as well as the arguments of other classical advocates of free international trade.
Intra-EU trade continued to grow over the following decades. In particular, trade more than tripled between 1960 and 1994 for Greece, Spain, Portugal, France and the UK and more than doubled for Germany and Italy. Among the EU-12, trade grew from 52.2 % on average during the period 1980–1984 to 58.6 % in the period 1991–1994 (Healey 1995, 11). In light of this upward trend in trade, normally one would expect that economic growth would remain robust. However, in the 1970s growth rates slowed significantly, as during the period 1973–1982 output per worker dropped by ~50 % in France and Germany, 65 % in the UK and 75 % in Italy (Eichengreen 2007b, 220–4, 252–4). Moreover, in all countries, high inflation and unemployment rates confirmed the presence of stagflation.
EU authorities responded to these developments by intensifying their efforts towards further integration. As we mentioned earlier, among many other initiatives, in 1986 they introduced the Single European Market act and in 1999 the common currency. The results of moving from a customs union to an economic union and then to a monetary union were as they would be expected in the setting of an expanding and deepening free market economy. Competition increased.15Intra-EU trade strengthened16and resource allocation and the development of cross-border businesses improved.17Additionally, between the periods 1990–1998 and 1999–
2005, most member-states reduced public expenditures as a percentage of GDP from over 50 % in the former period to 47 % in the latter (see Ferreiro et al. 2008).18 This achievement has been attributed partly to the constraints imposed by the Treaty of Maastricht and partly to an increased awareness by EU governments that world conditions required a smaller and more efficient state.
It should be noted also that not all member-states have fared equally well under the Single European Market act and the common currency. Some countries, espe- cially the ones in the North, improved their performance, while those in the South have lagged behind. For Northern countries, which incorporated in their welfare systems incentives for individuals to seek employment, took measures to enhance the mobility of workers, and substituted unemployment benefits by programmes for retraining and short period employment, the positive effects were larger than in the countries of the South, which remained trapped by special interests (see Aiginger
15According to the analysis by Alesina et al. (2010), the loss by member-states of the ability to depreciate their currencies so as to shield their non-competitive industries from international competition, led to the latters’ demise, whereas at the same time it put pressure on all other industries to find ways to increase their competitiveness. Both these trends boosted competitive- ness in the EU.
16Using various measurement techniques, Frankel (2010) found that in the period 2002–2006 trade among Eurozone member-states increased by 15 %, an increase that was less than the one predicted by other researchers. However, it was an important development because it showed that monetary integration was a process with great prospects for economic growth.
17For relevant data, see Buti and Giudice (2007), whereas for information regarding the countries that belonged to the former Soviet bloc, see Roje and Ferjancic (2009, 15, 40–41).
18Southern European countries made an effort initially to abide by the Maastricht criteria, but subsequently their fiscal policies got loose and started to pile up public deficits and debts at alarming rates.
and Landesmann 2008, 75–8). Unfortunately, as we saw in Chap.3, the deficit in the representation of citizen interests in these countries is larger than it is generally in the EU, and hence politically powerful minorities can more easily extract from governments concessions and privileges at the expense of all taxpayers.
To conclude, in the years since 1980 European integration accelerated and made significant progress. Despite the difficulties that emerged recently, the Single European Market and the common currency have been implemented with consid- erable success. Support programmes instituted by richer countries to assist poorer countries contributed to real convergence. The Regional Development Fund, which was first established in 1975, has provided exceedingly large amounts of financial aid to member-states like Greece, Portugal and Ireland, whose per capita income was <75 % of the EU average19; and the inflow of foreign direct investments accelerated to the extent that, for example, Ireland enjoyed an FDI amount that was three times as large as the financial assistance it received from the community (Berend 2006, 210). No doubt the results were not uniformly successful. While some member-countries directed EU assistance to productive investments to enhance their exports and economic growth potential, others directed the funds they received primarily to consumption.
7.4.3.2 Assessment of Achievements from an International Perspective The policies that were introduced under the Single European Market act exerted multiple favourable influences on the economic activity in the EU. For example, during the period from 1986 to 1992, intra-community trade increased by 3 %, foreign direct investment from the USA and Japan increased by 6 and 4 %, respectively, and mergers and acquisitions among member-states tripled.20How- ever, Total Factor Productivity (TFP) in the EU remained less than that in either the USA or Japan (van Ark and Crafts 1996, 1–2). Per capita productivity in the EU-15, which in 1995 reached 97.5 % of that in the USA, retreated to 89.7 % in 2004, while in the same year the per capita real income of Europeans was 30 % less than that in the USA.Eurosclerosisplayed a role in preventing the convergence of per capita GDP in the EU to that in the USA. But factors such as the following certainly contributed as well:21
19In 1987 the community spent 19 % of the EU budget for this purpose, while in 1999 the respective figure rose to 35 %.
20The data cited above come from Eichengreen (2007b, 346, 377). According to the findings of the empirical research by Fingleton and McCombie (1998), market liberalisation, mainly of indus- trial products, enabled businesses in many regions of the EU during the period 1979–1989 to achieve economies of scale and greater economic convergence.
21As principal sources of information for the comparisons mentioned below we used the studies by Fonseca et al. (2001), Blanchard (2004), Baily and Kirkegaard (2004), Alesina and Giavazzi (2006) and Eichengreen (2007b).
• Europeans work less than Americans.
• While Americans use their increased productivity to enlarge their income earning potential, the Europeans use it to enhance their leisure and income from rents.
• In the EU, population is ageing faster than in the USA.
• Europeans prefer more state protection, and as a result they support state structures with larger public sectors, which are characterised by lower produc- tivity in the use of human and natural resources.
• Europeans are relatively reluctant to undertake business ventures for at least three reasons: First, because companies in the EU convinced governments to shield them with greater protection from foreign competition, to provide them with various privileges and subsidies and to look the other way in cases of oligopolistic practices and monopoly power abuses. Second, because they failed to place adequate emphasis on innovation in the markets for goods or services, which have significant spill-over effects in the production and distribution of new knowledge. Finally, third, because European companies are not interconnected with universities as tightly as in the USA.
• The taxation of individuals and businesses in the EU is higher than in the USA.
Lower taxes on productive effort in the USA lead to higher productivity per worker. Higher taxes in the EU deny businesses resources that they could invest in productive activities and research and development, to increase productivity.
• European companies are subjected to complex constraints, such as direct price controls, strict opening hours of shops, and endless and costly bureaucratic procedures in their dealings with the state. For example, the bureaucratic process for closing a business is far more complex in the EU than in the USA, thus resulting in increased transaction costs and loss of flexibility for businesses.
• European businesses bear the cost of the inefficiency and overstaffing in public enterprises.
• The resolution of legal disputes on economic issues is much slower and bureau- cratic in the EU relative to the USA. For example, a company needs an average of 5 weeks to resolve an economic dispute in the USA, whereas in many EU countries it would need 1 year.
Because of these disparities, European products have lost competitiveness against those of the USA, Southeast Asia (South Korea, Taiwan, Singapore) and the emerging behemoths of China, India and Brazil.
Despite the increase in economic growth and the improvement in many critical indicators that integration brought about, the European economy could not outper- form its competitors. Economic convergence with the USA was not attained, while innovation in modern technologies (e.g. telecommunications, information technol- ogy) boosted GDP growth in the EU only by half of the corresponding rate in the USA (van Ark and Smits 2008, 41). This explains why during the Lisbon Conven- tion in 2000, the EU authorities set “knowledge innovation”, as top priority, calling for increased investments in related infrastructures and greater diffusion of infor- mation technologies. Yet the results, to date, have not been encouraging.
Institutional rigidities have inhibited the substitution of labour with new informa- tion technologies, and the reduced mobility of workers has led to delays in the quick assimilation of new technologies (van Ark and Smits 2008, 58–9).
The policies of the Single European Market act and the common currency increased the material well-being of European citizens, but not at a high enough rate to close the gap with the USA. The observed hysteresis is due to three groups of factors, namely those that promote Eurosclerosis, which is deeply rooted in the social democratic attitudes and practices that prevailed in the EU after the war;
those that sustain the large state sectors; and those that emanate from the short- comings of the representative democracy. According to Zahariadis (2008), the extent of patronization is much higher among political parties in the EU than in the USA. As a result, the “democratic deficit” is wider in the EU than in the USA and leads to higher costs for the European economy in terms of economic efficiency.
7.4.3.3 Outstanding Issues and Problems
The Euro was established as one of the strong reserve currencies in the world. This implies that the monetary policies set by the European Central Bank (ECB) have been successful. The policies helped maintain price stability within margins regarded as necessary for the smooth operation of the European economy and, given the inherent volatility of foreign exchange markets, the exchange rates of the Euro have not experienced unexpected gyrations. As long as the ECB remains committed to these objectives, we believe that the outstanding issues and problems generated by the debt crisis in Greece and a few other EU member-states are manageable under certain conditions.
These conditions relate to the existing lack of an integrated fiscal policy at the EU level. Due to this institutional vacuum and the relaxing of the Maastricht criteria, public expenditures have started to fall increasingly short of public revenues and as a result, fiscal deficits have widened and the ratio of debt to GDP increased during the past decade. This trend was witnessed especially in member- states with populist governments. In the countries of the Mediterranean South, for example, fiscal imbalances became unsustainable, as in Greece. We believe that if a mechanism had been in place to coordinate and closely monitor the budgetary policies of member-states, Greece would not have reached a state of bankruptcy.
Consequently, until fiscal policies are fully integrated, the need for an intermediate mechanism is urgent.
The degree of its urgency is reflected in the magnitude of the imbalances that are associated with the fiscal policies of member-states. One such example is the social security system. As the population ages and birth rates decline, the problem of funding retirement and health services becomes ever more difficult to confront. To maintain the retirement age and the pensions at their present levels, member-states would have to increase public expenditures to the tune of 5–10 % of GDP (see Bernholz 2004, 37–9). However, given the accumulation of huge public debts, such
a sizable increase in public expenditures is prohibitive. For this reason, almost all countries have attempted to reform pension policies in recent years, by extending the number of working years and reducing the contributions from public budgets.
Two other areas with dire problems are the State-Owned Enterprises and Organi- sations and the Civil Service at the central and regional levels. In various member- states from the post-war period on, these groups have been plagued by political patronage. Hence, en route to fiscal integration, state monopolies must be opened up to competition, public employment must be reduced as much as possible and productivity in the civil service must increase at all levels.
To conclude, in the near and in the foreseeable future, the main problem of the EU is the lack of fiscal consolidation. The politicians in the various member-states, more or less, try to solve the acute fiscal imbalances they face by borrowing, instead of raising taxes or reducing spending. This is an incurable weakness of representa- tive democracy and in the case of the countries of Southern Europe is proving currently quite painful. Given that monetary policy is determined centrally and the European Structural Funds are not intended to serve as mechanisms for confronting cyclical and asymmetric shocks, the present regime in which every member-state pursues an independent fiscal policy is unsustainable and puts the unity of the EU into question. Hence, regardless of any short-term turbulence that it will cause,22 the process of integration should proceed speedily to the next phase of fiscal consolidation. The objective should be the establishment of a framework, where the central European government sets the goals and has the means to enforce a federal fiscal policy, while governments in individual countries pursue fiscal policies that are in harmony with those decided at the federal level.