The Internal Market is the result of the Treaty of Rome which created a “Common Market” aimed at economic and political integration. The Internal Market, which includes 370 million consumers, is the world’s biggest market, bringing eminent gains in the last ten years. To argue that the Single Market was a success, we will analyse the Paolo Cecchini report. We will also look at the estimates of Dennis Swann (professor of Economics in Loughborough University).
Then, we will examine the different advantages not only for businesses but also for Citizens thanks to a large survey made by the European Commission. Nevertheless, we have to recognize that the Single Market was not a full success for several reasons that we will analyse. First, we will consider the critic of the Cecchini report conducted by Merton Peck and Baldwin. After, we will investigate two obstacles which made the Internal Market a half-success: the standardization problems and the large convergence in terms of Grocery prices.
In 1985, the White paper was published after an investigation by Jacques Delors, President of the Commission. The creation of a Single Market was the first precedence for the commission. It contained 279 legislatives measures to abolish obstacles to trade and recommended a program for the creation of the Single European Market on 31 December 1992. According to the white paper, the stake will be the removal of physical, technical and fiscal barriers. However, at the end of December, the European Committee admitted that only 95% of the initials directives had been launched.
The Single European Act implanted a new item into the European Community Treaty (article 100a) with measures which established the Internal Market. This Act defined it as “an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaty”. First of all, the freedom of movement for goods dealt with the abolition of customs duties between member states from the first of July in 1968. The second point concerns the freedom of movement for persons.
In this context, the Schengen agreement supplies the creation of an “area of freedom, security and justice” without checks on persons on the internal borders of the EU, whatever their nationality. The third point deals with the freedom of movement for services. It claims the right to have the opportunity for self-employed persons and Community Business to delocalise their activity and knowledges in another Member State. Finally, the freedom of movement for capital: the treaty prohibits all limitations on capital movement (which include investments) but also all regulations on payments concerning goods and services.
On one hand, the Single Market was a success because it brought a large number of advantages in several areas and was profitable for three main economic actors: the countries, the companies and the consumers which are at the end of the economic process. Cecchini speaks about ‘consumer surplus’ concerning the substantial gain for the consumers. The choice in products increase in the same time as the quality due to the impact of open competition. This results from the law of the supply and demand inside the market: an increase of supplies stimulates rate of the demand. EL-AGRAA, 1998).
In term of macro-economy, the official Cecchini report evaluates the potential gain for the European community of 200 billion ECU as a whole in the region and at constant 1988 prices. Consequently, this would, revive economic activity by an average of 4. 5% to the European Community GPD (Gross Domestic Product). This gain will be due to the removal of the costs of barriers to intra-EC trade and to the exploitation of economies of scale which are expected to lower costs by about 2% of EC Gross Domestic Product.
Regarding the employment impact in medium-term, the report also mentions the creation of 1. 8 million new jobs. This will reduce the rate of unemployment by around 1. 5 percent. In addition, Cecchini’s report anticipates a deflation of consumer prices by an average of 6. 1%. According to Emerson (the leading economist), “the elimination of costs of non-Europe is tantamount to the removal of constraints which today prevent enterprises from being as efficient as they could be and from employing their resources to the full” (EMERSON et al. , 1988, p. 2).
The starting point for Cecchini in the whole process of economic gain is the removal of non-tariff barriers, Cecchini mentioned ‘the virtuous circle’. He explains that the downward pressure prices will inevitably stimulate the demand. Cecchini goes on to argue that the removal of non-tariff barriers will produce a more competitive environment, in which the enterprises will be able to exploit new opportunities: to increase their production, to exploit their resources better but also to step them up for European and global competition (confer to the fig 1).
First, the companies will see a significant reduction in costs due to better exploitation of economies scale in the cycle of production of the enterprises. Then, they will benefit from a rationalization of industrial structures and a setting of prices closer to production costs. Finally, he focuses on the emerging of innovations, new processes and new products which will stimulate the demand into the internal market. (CECCHINI, 1990) However, he insists on the fact that all of those aspects will not take place simultaneously.
For him, the effects of the single market can be classified into four groups: the elimination of customs delays and costs; the exposing of public markets to competition; the liberalization and integration of financial markets an significant changes in the strategic behaviour of enterprises in a new competitive environment. According to Cecchini, the challenge of building a single European Community home market, is first and foremost a challenge for Europeans. Dennis Swann made a similar approach to Cecchini. However, he did not arrive at the same results in terms of figures.
If we look at the micro-economic angle, according to Cecchini, these benefits will constitute from 4. 3 to 6. 4% of the Community total Gross Domestic Product (GDP). If we look at the macro-economic point of Cecchini view, we discover that his estimate gain achieved only 4. 5% of Community GDP. However, these beneficial results helped to reduce restriction on macro-economic management. Therefore, the most plausible percentage was evaluated at 7% of Community GDP. It also has been estimated the creation of 5 million new jobs. (SWANN, 1992).
We will now analyse the different practical advantages brought by the Internal Market. First of all, the Single market has been profitable first and foremost for the companies and as a result, for the consumers. In order to understand the direct consequences on them, we will look at a large survey conducted by the European Commission. This survey (confer to the fig 2) was made by the Brussels Commission, on the 11 of November 2002, and cover 5900 businesses and 7500 Citizens in all 15 member State. According to it, European citizens and businesses look satisfied concerning the internal market.
It is evaluated that 80% of citizens have the feeling that the Internal Market has increased the choice of products available. Three-quarters of them greet the increased competition in many areas (such as transportation, telecommunication, banking or insurance services) and two-thirds believe they have been able to travel to other Member States easier than before. Companies from smaller Member States are more positive than the larger, especially Ireland and Greece.
The least enthusiastic is the UK and the most is Italy. 0% of the respondents believe that the range of products are better ; 67% judge that the quality has widely increased but only 41% of them think that the prices have declined. The prices in Finland and Sweden are higher. The percentage in the UK can be explained by the strength of the sterling pound. The country which has the more negative view is Ireland; this result can be explained by the high inflation rate inside the euro zone. We will consider the point of view of the businesses according to this survey (confer to the fig 3). It shows that 46% of EU companies believe the Internal Market has had a positive impact on their businesses.
On the other hand, 11% feel the contrary. The benefit for the companies is to create new opportunities on the markets. However, 42% of businesses do not feel consequences of the Internal Market. This figure can be explained by a lack of information, especially to small and medium-sized businesses who are not aware of the opportunities that are opening up. To conclude, 83% of smaller companies, 90% of medium-sized companies and more than 92% of larger companies believe that improving the process of the Internal Market should be a major priority for the European Union.
We analysed the different keys of success concerning the Internal Market; a economic success for the Member States. Nevertheless, a large range of problems persist and we will focus on the problems met by companies and consumers. These estimates were strongly criticized by Merton Peck. He claims that this report was over evaluated because gains depended on the rules of the game. This means the member states have to be aware of the discrimination due to the free competition.
Merton Peck focuses on the role of the commission, who has to reinforce the rules of competition to avoid abuses of the Single Market. (SWANN, 1992). We notice three main reservations about the Cecchini estimates: first of all, his calculations are based upon recognized standard financial products and comparing each country’s prices with the average of lowest prices for the product, making a comparison with a criterion that no consumer is actually paying. That means, practically, products can not be standardized and so distinction is not made exactly for the same products.
In the critique of the Cecchini study, the second point is to say that there are other aspects more than the absence of competition or financial integration which may explain the difference in prices. According to Dennis Swann, it will be a mistake to attribute differences in prices of specific products or services, or to believe that competition would generate an equalization of prices between member countries. The third critique will be to say that Liberalization does not necessarily enlarge competition enough to force price in balance, and does not certify competitive positions will be similar between member states.
The Baldwin approach differs a little bit from the Cecchini belief. The Cecchini theory illustrates that countries become wealthier because of technological change and that the removal of barriers to trade and increasing the size of markets will not permanently raise the rate of technological progress. Baldwin’s claim that this traditional approach underestimates the gains rests on two distinct arguments: first, he argues that if savings and investments stay as constant percentages of national income, they will both rise in absolute terms.
Baldwin concludes that the gains from the Internal Market will be in the region of 3,5-9%, as against the 2. 5-7% predicted by Cecchini. Even if the European has made progress in standardization, serious problems, especially in machinery sector stay unsolved. Businesses are still unsatisfied. Less than 10% of the standards needed to make the Internal Market work, have been adopted. As with regard to the machinery sector, less than half of the required standards have been solved. The average time for adopting a harmonised standard now reach eight years!
Standardization and product conformity are fundamental for the growth of the internal market and without this process, a large number of European companies will be met by more difficulties to launch their products on the market. The price comparisons are a key indicator for the economic integration and market performance. Commissioner Bolkestein commented: “We need to pin down the causes of these significant price variations, whether they are bottlenecks in competition or obstacles in distribution and marketing, and tackle them urgently.
European citizens have a right to expect the benefits of competitive prices from the Internal Market”. A major Commission-sponsored survey mentioned that significant price differences persist across Europe especially concerning grocery and household items. For instance, the price of a Mars chocolate bar in the most expensive country (Denmark) is double the price of the cheapest country (Belgium). Similarly, a bottle of Coca-Cola is twice as expensive in Denmark compared to Germany (confer to the fig 4). The survey defines that there is not a single factor which can fully explain these price gaps.
Nevertheless, it seems that these disparities depend on the type of culture, the climate, the local preferences and transport costs of the country. The second hypotheses is that the producers tend to exploit market fragmentation by operating policies in national markets. The Internal Market is one of the European Union’s greatest achievements. It has been a direct and growing impact on citizens and businesses in terms of increased employment and commercial opportunities, wider choice of goods and services, lower prices, work mobility and international competitiveness. (OWEN and DYNES, 1992).
I believe that it was a real success in terms of Economic, Politic and Finance. In addition, the Euro, which has substituted ten national currencies, was a major key of success of the integration process. Even if the citizens are still worried about cultural identity and economic competition, those changes were for most of them a success. (DINAN,1994). However, a large number of difficulties stay, especially in the harmonization process. According to the Commission, only 63% of the Internal Market Strategy’s target actions due by the end of 2001 were achieved on time.
This is better than 2000, but still disappointing. A number of crucially important proposals identified by the Lisbon European Council were suggested but are slowly implemented. Two factors have to be considerate as decisive, concerning the success of the Single Market: the level and quality of Member State but also the Commission’s resistant, concerning the new trade barriers. “The Single market is not an isolated event which happened in January 1993, but a continental process” (MONTI, 1996, p11).