The Tenth Anniversary of the Internal Market Without Frontiers: Frequently Asked Questions

MEMO/03/2

Brussels, 7th January 2003

The tenth anniversary of the Internal Market without frontiers: frequently asked questions

When did the Internal Market begin?

Ever since its inception, the European Community had been working towards an Internal Market. A full customs union – the abolition of all tariffs on trade between Member States - was the first step, achieved in July 1968.

But the Internal Market “without frontiers” began on 1 January 1993. The Commission had put forward a blueprint in 1985, endorsed by Member States in the Single European Act of 1986, which set 31 December 1992 as the target date for removing internal frontiers within the EU, allowing people, goods and services to circulate freely. The freedom has in turn increased competition and customer choice and helped citizens and businesses to get better value for money.

Between 1986 and the target of the end of 1992, 280 new pieces of European legislation were adopted. Far from adding to the total bureaucracy that businesses and citizens had to deal with, these new laws drastically reduced it. They made it easier for people to live and work in other Member States. For many goods and services, they introduced a single European rule to replace widely varying national safety, packaging or administrative requirements. Having to comply with all those different regulations had previously raised prices unnecessarily and prevented many companies, particularly smaller ones, from exporting within the EU.

Such “harmonisation” of laws now covers about half of trade between EU countries. In many areas not covered by it, the Member States agreed to introduce the “mutual recognition” principle: in other words, any product or service which can be legally sold in one Member State can be sold in all 15.

The Internal Market is supposed to mean the free circulation of people, goods, services and capital. Has that been fully achieved?

A huge amount has been achieved. There is no comparison with the situation before 1 January 1993. The Internal Market has opened up economic and working opportunities that have massively boosted growth and transformed the lives of many millions of Europe’s citizens. To help mark the tenth anniversary of the Internal Market without Frontiers, the Commission has published a document summarising some of these gains and looking at priorities for future progress (see IP/03/7).

But building the Internal Market is inevitably a continuous process and there are still many imperfections, especially as far as services are concerned. To help make sure that Europeans continue to reap the maximum benefits from the Internal Market, the Commission will bring forward a new medium-term strategy in Spring 2003.

What have been the main benefits of the Internal Market for citizens?

The Internal Market has benefited everyone in Europe, whether or not they choose to travel or work abroad. It has meant, for example:

-€ 877 billion in increased prosperity

-the creation of 2.5 million extra jobs

-a wider choice of high quality goods and services: according to a recent Commission survey 80 per cent of EU citizens believe that the Internal Market had led to wider choice and 67 % that it has led to improved quality (see MEMO/02/231)

-in many cases, cheaper prices for goods and groceries thanks to the opening up of national markets and the resultant increase in competition

-lower telecommunications tariffs: for example, prices charged by the old national monopolies for national calls have been reduced by around 50% on average and those for international calls by around 40%

-lower airfares: a recent study estimates that the price of promotional fares fell by 41 % between 1992 and 2000[1]

-more than 15 million EU citizens have moved across borders to work or to enjoy their retirement. They enjoy proper welfare protection and can vote and stand for office where they live. This mobility has a positive knock-on effect on employment and investment by helping to allocate skills where they are most needed

-one million young people have completed part of their studies in another Member State with the help of the Erasmus programme

-shoppers have full consumer rights when shopping outside their own country

-governments have more money available to spend on things like health and education as a result of saving billions of euro as a result of more open and competitive public procurement. For example, the price of railway rolling stock has dropped by 40%.

What have been the main benefits of the Internal Market for businesses?

Trade within the EU has become much easier. The absence of border bureaucracy has cut delivery times and reduced costs. Before the frontiers came down, the tax system alone required 60 million customs clearance documents annually: these are no longer needed.

The mutual recognition principle means that in most cases, even where there is no harmonisation of technical specifications or other rules, companies need only one authorisation - from their home Member State - to provide a product or service anywhere in the EU.

A single market of over 370 million people people, soon to increase to 452 million after enlargement, has allowed larger businesses to benefit from enormous economies of scale. Meanwhile, new export markets have been opened up to small and medium-sized businesses who previously would have been prevented from exporting by the cost and hassle.

Companies are now able to bid for contracts to supply goods and services to public authorities in other Member States, thanks to the opening up of public procurement.

Both small commercial and household users have benefited from lower electricity costs in those Member States where these segments of the market have been opened up to competition.

Further benefits for business will accrue from the completion of the Financial Services Action Plan, which will mean cheaper finance for businesses of all sizes and will liberate listed companies from having to comply with 15 divergent sets of national rules when they want to raise money.

What have been the main macro-economic effects of the Internal Market?

The economic benefits of the Internal Market – its remaining imperfections notwithstanding - have been enormous.

The Commission’s economic modelling estimates that:

-EU GDP in 2002 is 1.8 percentage points or € 164.5 billion higher thanks to the Internal Market

-about 2.5 million jobs have been created in the EU since 1992 that would not have been created without the opening up of frontiers

-extra prosperity to the value of €877 billion - calculated by adding together the additional annual GDP generated by the Internal Market since 1992 - has been created. That means €5,700 per household on average.

These figures probably underestimate the full impact of the Internal Market as they do not take account of the Internal Market’s impact on service sectors, other than network industries such as utilities, transport and telecommunications.

Meanwhile, both trade between EU countries and cross-border investment between EU countries have grown faster than EU GDP, illustrating the increasing integration of EU markets.

The Internal Market has enhanced the ability of EU firms to compete in global markets. EU exports to third countries have increased from € 415 billion in 1992 to € 985 billion in 2001 and over the same period EU investment in those countries increased exponentially, from € 18 billion to € 206 billion..

The Internal Market has made Europe a much more attractive location for foreign investors as by investing in a single EU Member State, they gain access to a much larger market. New inflows of foreign direct investment (FDI) into the European Union were four times higher in 2001 than they were in 1992, despite the fact that 2001 was a weak year for FDI.

Since 1992, there has been considerable convergence between prices in different Member States, most of it downwards. However, some very pronounced price differences remain between Member States and convergence has been far stronger for goods - especially foodstuffs - than for services.

In 1990 the “co-efficient of variation” - degree of variation between average EU prices for private final consumption and prices in the least and/or most expensive country - was 21.4 %. This had fallen to 14.4 % by 1998, though it has since stabilised around that mark. The introduction of euro notes and coins may well boost convergence further in the medium-term by allowing easier price comparison.

But one would not expect prices to be exactly the same everywhere. They are affected by issues such as differing rates of corporate and sales tax, transport costs, economies of scale at retail level, advertising budgets, branding etc.

Is the Commission satisfied with progress?

Overall, yes. However, there is absolutely no cause for complacency as the job is far from finished. Serious flaws in the Internal Market, especially in services, remain and must be tackled. But it would not be realistic to expect to create a perfect Internal Market in just a few years.

What are the Commission’s Internal Market priorities for the next ten years?

Improving the way the Internal Market works is crucial if the EU is to meet its goal of becoming the most competitive economy in the world by 2010.

More progress is needed in all areas, but most of all in services which make up 70 % of the EU’s GDP and employment. A Commission report published in July 2002 (see IP/02/1180) concluded that there are many remaining barriers which still prevent the proper functioning of the Internal Market in services, that services are much more prone to being hindered than goods and that this holds back the European economy as a whole.

The Commission is now drawing up measures to tackle the relevant legal and other barriers identified in the report. Legal barriers will as far as possible be tackled by a framework Directive covering all sectors.

There is huge untapped potential in financial services, which are a particular priority as financial integration will boost all other sectors of the economy. A recent report estimated the macroeconomic impact of financial integration at 1.1 % of EU GDP at 2002 prices, with a rise in employment of 0.5 %.

Integrating Europe’s financial markets will not only mean cheaper finance for businesses. It will in the end make mortgages, insurance and other consumer financial products cheaper. It can help Europe cope better with the economic effects of having an ageing population, by boosting the efficiency of pension funds. Those are key reasons why the Commission is urging swift adoption of the remaining measures in the Financial Services Action Plan, by the 2005 deadline (see
IP/02/1785).

The further opening up of public procurement markets, in particular through the adoption of a new legislative package streamlining award procedures and encouraging electronic procurement, is also a priority, in order to provide better value for money for taxpayers and new opportunities for companies. Public procurement accounts for 16.2 % of EU GDP. The last available estimate for the value of cross-border procurement as a proportion of all public procurement is 10 %[2], in 1998, compared to 6%[3] in 1987. This includes both direct cross-border procurement - where contracts are awarded to contractors based in other countries - and procurement through affiliates of companies from other Member States established in the country where the contract is let.

Finally, economies only keep pace with change if there are strong incentives for innovation. It is therefore essential that Member States reach agreement on the Commission’s proposal for a Community Patent, which would give inventors the option of obtaining a single patent legally valid throughout the European Union. Currently, a typical patent valid in eight Member States costs three to five as much as Japanese or US patents.

Is the Commission optimistic that there will be further gains over the next decade?

Very much so. If national governments, European institutions, businesses and the public and voluntary sectors continue to work together successfully then the Internal Market can deliver even more in the enlarged EU over the next decade than it has delivered since the frontiers between EU countries were first thrown open in 1993. That will mean:

-more wealth, better education and training and more mobility between EU countries;

-more and better jobs

-even lower utility costs

-a wider and better range of goods and services for consumers

-more efficient capital markets triggering faster economic growth and creating jobs

-less red tape for small businesses.

Over 1500 Internal Market infringement cases remain open. In many cases, this is because Member States have not implemented EU laws. Does that not make a mockery of the Internal Market, if the rules are so often flouted?

This figure is a matter for serious concern and reducing the number of infringements must be a priority. But we also need to look at things in perspective. The vast majority of Internal Market legislation has been correctly implemented and applied in most or all Member States. On average, the percentage of European Internal Market laws in force that remain unimplemented is 2.1 % per Member State, compared to 21.4 % in 1992.

The number of infringement cases remains stubbornly high, though it has at least stopped rising in recent years. The vast majority of infringement cases are settled before they reach the European Court of Justice.

Twice annually, the Commission publishes its “Internal Market Scoreboard” with a comparative evaluation of Member States’ performance in implementing Internal Market law correctly. This is an effective tool. Following the most recent Scoreboard (see IP/02/1644), for instance, France promised swift measures to reduce the number of infringement cases against it.

The Commission is also putting increasing emphasis on other ways of ensuring Member States comply with the EU law they have themselves agreed. For example, the SOLVIT network (see IP/02/1110) helps citizens or businesses who feel they have suffered from incorrect application of EU law by national authorities to get redress without litigation.

Does not the Internal Market leave Europe’s weaker economies vulnerable?

Far from it. The previously less wealthy countries have in most years since 1992 enjoyed some of the highest growth rates in the EU.

Is enlargement a threat to the coherence of the Internal Market?

Enlargement is a marvellous opportunity both for existing Member States – whose businesses will have easier access to at least another 70 million customers - and for those who will be joining the EU. Membership of the EU and in particular of the Internal Market gives the accession countries a golden chance to boost the economic progress they have already made.

But the bigger the Internal Market gets, the greater will be the cost of continuing barriers to its proper operation. The Commission will do everything it can to ensure that both existing and new Member States apply Internal Market rules properly. The value and effectiveness of those rules are confirmed by the millions of transactions that take place every day in the Internal Market, which has made Europe a very different place than in 1992.

Is not the Internal Market just a “businessmen’s club”? Doesn’t the extra competition just destroy jobs and drive wages down?

The Internal Market benefits everyone in Europe. Far from being a ”businessmen’s club” it forces businesses to act more in the interests of their customers, by making markets more competitive and giving those customers more options to go elsewhere.

And far from destroying jobs, it creates them: an estimated 2.5 million since 1992. Even within sectors previously dominated by cosy national monopolies, liberalisation has led to a growth in employment. For example, total employment in the partially liberalised postal sector grew overall by 4.3% between 1995 and 2000 (see IP/02/1735).

How can the EU interest businesses and the general public more in the Internal Market?

Primarily through even better results. Some individual Internal Market measures are complex. But the underlying truth could not be simpler. The Internal Market has already put more money in the pockets of all Europeans, created more, sustainable jobs, improved consumer choice and made it easier to work study and retire in other countries. It has provided unprecedented opportunities for businesses. If we can make it work even better, it will create even more prosperity.

There is some evidence that these messages are getting across. For example, a recent survey (see MEMO/02/231) showed that

-80% of Europeans believe that the Internal Market has had a positive impact on the range of available products, 67% on product quality and 41% on prices

-76% of citizens welcome the increased competition which the Internal Market has introduced

- 76% of companies exporting to more than five EU countries rated the impact of the Internal Market on their business as positive

-very few businesses (11%) perceive a negative impact

-more than 80 % of companies believe that improving the functioning of the Internal Market should be a key priority for the European Union in the future.