EU: How single is the single market?

EU: How single is the single market? - Legislation has long been in place to remove the barriers to trade between the member states of the EU. All should be observing it. Many don't.

by David Smith.
Last Updated: 31 Aug 2010

Legislation has long been in place to remove the barriers to trade between the member states of the EU. All should be observing it. Many don't.

In the debate that has raged over the pros and cons of European economic and monetary union, one argument has been heard frequently. How can you have a true single market without a single currency?

There is, however, another angle, and it is one that will resonate with many businesses. This is that, far from being a single market, the European Union is still characterised by internal barriers to trade and the free movement of production, some overt, many covert.

Lord Cockfield, a former British EU Commissioner and acknowledged father of the single market, has bemoaned the fact that, in the rush to establish economic and monetary union (EMU), Brussels and the individual governments have taken their eye off the ball when it comes to completing the single market. 'You cannot have a single currency unless you have a single market on which to build it,' he says. 'You cannot have effective policies to deal with other economic problems, not least in the field of employment and welfare, unless the single market generates the wealth to support these policies.'

While most businesses agree that an imperfect single market is better than no single market at all, significant doubts remain. A third of companies in the latest Confederation of British Industry/British Chambers of Commerce survey on Europe say that the single market has failed to remove previous barriers to trade. In an Institute of Directors (IoD) survey, 38% of firms say that the single market has increased their costs. It was, of course, meant to do the opposite.

Nor is this an expression of British Euroscepticism. A survey by the European Commission found that only 12% of Portuguese firms, 17% of those in the Netherlands and 20% of French firms think that single market legislation has worked for them. The average across the EU as a whole is only 33%.

Imperfections in the single market fall into two main categories. There are those that arise because, while the legislation has long been in place and all countries should be observing it, many do not. And there are those areas of business which the single market has yet to reach, because the politicians have not agreed so far on the method of liberalisation.

Within the first category, several things stand out as particularly problematical.

First, there is state aid: subsidies given by national, regional or local government to individual firms, often with the clear purpose of helping them fight off foreign competition, are clearly against the spirit, and in many cases against the letter, of the single market. Yet such aid remains widespread. State aid in Europe is, on average, far higher than in America or Japan (but significantly lower in Britain than in the rest of Europe).

Second comes public procurement: one of the most obvious ways in which competition is restricted within the EU is in the award of public sector contracts. Despite pressure from the Commission for liberalisation in this area, domestic pressure on national and local politicians means that more than 90% of such contracts are earmarked for the businesses of the country concerned. Since public procurement amounts to around an eighth of EU GDP annually, this plainly represents a serious restriction on the single market.

Then there are the technical barriers: before the single market there were over 100,000 different technical standards within the EU's 15 member states. These have been massively whittled down but problems remain. One of the most frequent complaints from British firms selling into Europe is that countries continue to operate their own standards, providing market access only after complex and expensive re-engineering and re-testing procedures have been followed. Often, even after this process, other barriers emerge.

One survey found a small firm driven to the point of bankruptcy by having to prove compliance with the electro-magnetic compatibility directive for each of its products, while other firms had simply given up trying to penetrate the French and German markets because of technical barriers.

Progress towards harmonisation and standardisation under the Commission's so-called new approach has been slow.

Similar restrictions apply to the free movement of labour. Apart from the obvious one of language, many countries refuse to accept the educational, technical and vocational qualifications of other member states. Big differences in employee benefits can also be a serious problem for companies operating in more than one member state and wishing to transfer staff across national boundaries. These factors contribute to low levels of geographical labour mobility in the EU. A recent study by George Magnus and Paul Donovan of UBS found that labour mobility in the EU had actually declined since the mid-'70s. Even at the heart of Europe there is little mobility. A Commission survey found that more than 80% of French and German workers would never seek work elsewhere in the EU, mainly because of language differences. The Commission has put forward proposals for harmonisation in another key area, non-state pensions. It has invited responses from national governments, but, according to Ray Martin of the National Association of Pension Funds, there is a serious risk that 'these submissions will sit on a shelf to gather dust'.

There is also the uneven application of single market rules. One of the long-standing frustrations for British business has been the lack of a level playing field in the single market. Whereas the UK government (along with Eurosceptical Denmark) has been diligent about applying and enforcing directives, other countries have been much more laggardly. Apart from imposing a bureaucratic burden on British firms, this creates the huge frustration of having to deal with local, pre-single market rules when doing business in other member states. An IoD survey found that a fifth of firms had had their trade with the EU hampered because of these irregularities.

Firms which experience single market problems are not entirely on their own. The DTI's Action Single Market (ASM) team receives about 1,000 complaints from British business about the operation of the single market annually, a figure which has remained fairly constant since the start of the single market five years ago. Of these, most are either based on misunderstandings or lack of information, or have already been acted upon by the time the complaint is made.

This leaves a typical hard core of 60 to 70 serious complaints annually, which the ASM team takes up with the relevant European government, or with the authorities in Brussels. If, on examination - which will usually involve commercial staff in Britain's embassies in Europe - a complaint to the European Commission is found to be justified, then the Commission is required to launch a formal investigation.

Patrick Mulligan of the ASM team says that if British businesses have genuine complaints about the single market, they should not bottle them up nor try to live with their frustration. 'We want to hear about them,' he says, arguing that the task of ensuring the single market is operating properly has to be a collaborative effort between business and government.

Among its success stories, ASM lists a UK traffic cone manufacturer which found its sales to Germany were being barred by repeated changes to the technical specification for the reflective material used in the cones.

After several approaches from the British government, the German authorities agreed to publish a new and permanent standard, which the cone manufacturer had no difficulty satisfying.

In a different type of case, a UK firm of consultant ecologists won a public contract for the restoration of an Italian fresh water lake, only to be told they needed to register a company address in Italy for the contract to go through. This would not only have been expensive but, as ASM pointed out, it was against public procurement rules, and the request was dropped.

Often, the process of achieving a satisfactory result can take years, with the loss of business that entails. It took two years for the Spanish authorities to drop new restrictions on bottle sizes that would have forced a UK soft drinks manufacturer to completely change its production lines. There are also cases which Britain does not win. Even if the ASM team and local embassy staff believe a complaint is justified, the Commission, after investigation, may not agree. Firms have ultimate recourse to the European Court of Justice but many of them will have been deterred long before they have reached that point.

If trade is imperfect in the existing trade areas fully covered by the single market, an equally frustrating problem is the painfully slow progress towards liberalisation in others. These include telecommunications, where a liberalisation programme is in force (with a single market in telecommunications ostensibly coming into effect on 1 January 1998); energy, including in particular, gas markets; postal services; financial services; pharmaceuticals, where the dead hand of state procurement acts as a barrier; foodstuffs; building materials, and defence equipment.

It could take a long time; perhaps it may take at least another 40 years before there is a single market in anything other than name, and even then there may be problems over later entrants. Let us hope this is too gloomy a prediction.

Action Single Market can be contacted on 0171 215 4212, or by fax on 0171 215 4489.

Imperfections That Make A Mockery Of The Market The long and frustrating battle against unfair state aid - Sterling Tubes

Walsall-based Sterling Tubes felt it was being discriminated against unfairly in the Spanish market by the provision of state aid to Tubacex, a local, privately-owned stainless steel tube manufacturer. Bill Good, Sterling Tubes' managing director, complained and the case was investigated by the European Commission. After three years, the Commission ruled that Tubacex was getting illegal state aid in the form of the uncommercial interest rates it received on loans from state funds, and the return of this aid, with interest, was recently ordered. The Commission, however, ruled that another form of state aid to Tubacex, the waiver of the Spanish Social Security Fund's rights as a preferential creditor for the equivalent of £6 million and the cancellation of mortgages on land, to assist the company's rescue from bankruptcy, was not illegal.

Good believes he obtained at best a partial victory. 'The ruling on social security opens a whole can of worms as far as the UK is concerned,' he says. Good is also sceptical about whether illegal state aid can ever be eliminated from the single market. 'State aid for companies is still going on, but governments may be a bit more subtle about it,' he says. 'The European Commission is taking a very soft line. They treat national governments with kid gloves. I got only some of what I wanted. Much of what goes on is disgraceful from a UK perspective.'

Breaking down the technical barriers - Marshall Rescue Beacons

Marshall Rescue Beacons is a Hull-based SME which manufactures and sells personal rescue beacons for use at sea. After obtaining European-wide approval for its product, it ran into difficulty in the German market when the authorities repeatedly refused to recognise its technical standard.

Each time Marshall thought it had surmounted the barriers, fresh objections were raised. Eventually, after a four-year battle (and with the help of the UK government's Action Single Market division), the German authorities abandoned their objections and Marshall was able to gain access to the market. The story has a happy ending - Marshall went into partnership in the German market with one of its local competitors and the relationship is proving fruitful.

'I think this shows that once you get the bureaucratic nonsense out of the way, business will get on with it,' says chairman David Marshall. 'The Germans are renowned for being pretty awkward about these things but now we have a very good relationship. We needed to have access, and now we have a very successful joint partnership.'

Marshall cannot report a similarly happy ending in the French market, however, where his battle to gain access has been going on as long, but so far without progress, and the matter has now been taken up by the European Commission. 'In France the problem seems to be pinning down who is responsible,' he says. 'It is all a bit of a nonsense.'

Labour mobility falls foul of bureaucracy

German pension rules

A single market for labour requires pensions to be easily transferable between member states, otherwise free movement of workers is severely restricted. Any EU national taking a job in Germany quickly finds, however, that different rules apply. Under German 'vesting rights', anyone leaving a job in Germany after less than 10 years, or while they are still under the age of 35, does so without any occupational pension entitlement.

'Anyone thinking of taking up a job in, say, Frankfurt, has to think very seriously about the consequences of this,' says Bill Birmingham, manager of benefit services at the National Association of Pension Funds.

'This has significant implications for mobility.'

German vesting rights are not the only pensions problem within the single market. A UK employer who wants to second staff to divisions elsewhere in the EU soon comes up against another hurdle. In most other member states, employee contributions to the firm's occupational pension scheme will be taken from after-tax, rather than pre-tax, income. Typically, this means that the employer will be forced to meet this cost to make the secondment attractive to the employee.

'Each member state has its own idiosyncratic rules - it is just not possible to simplify the arrangements into a single scheme,' says Birmingham. 'If a multinational has a plant or unit in a number of different EU countries it will, in most cases, be forced to have different pension schemes for each of them.'

Germany and France exercise import bans as they think fit - ICI Fertilisers

ICI Fertilisers, currently in the process of becoming Terra Nitrogen (UK), discovered it had a problem selling ammonium nitrate to France.

The French government prohibited bulk imports of the fertiliser on the grounds of safety and chose to extend this ban to bagged imports, which directly hit ICI Fertilisers. The company had to enlist the help of the DTI to help it track down who was responsible for the ban.

'Part of the problem,' says commercial manager Stuart Beer, 'was that regional governments are more powerful in France and, even when central government said the ban was wrong, as it did, it was not easy to get the regional government to agree.'

The matter was eventually resolved, and ICI/Terra is exporting bagged ammonium nitrate to France, while making concessions to the particular fear of the French authorities - the danger of contamination in the fertiliser from bulk shipped imports of grain.

Germany, however, is proving a tougher nut to crack. It has an outright ban on imports of ammonium nitrate, with little indication that it is going to be lifted.

'It is supposed to be a single market but there are different rules on the use of products in different countries,' says Beer. 'Being a sceptic I cannot help thinking that the fact that Germany does not itself produce ammonium nitrate might have something to do with it. And if this sort of thing is happening for basic products, what is happening within the EU about more complex products?'.

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