How has adoption of the euro affected economic efficiency in European companies

More than 60 years have passed since the foundations of the European Union were laid. In comparison to that, the European Single Market is relatively young, having only come into being in 1993. When we reflect on its achievements over the past few decades, we see that the Single Market has been decisively shaped by trends like the rise in digital technologies and events like the Great Recession. This year seems an appropriate time to assess the degree to which it has matured.

The prosperity of the European Union today is, among other things, the outcome of the economic integration that followed the implementation of the European Single Market. In general, a well-functioning (internal) market increases economic efficiency, e.g. by lowering transaction costs, and boosts growth. It can help to shield countries from the repercussions of economic shocks through increased cross-border mobility. There is general agreement that the economic integration of EU Member States can still be deepened, which would allow market mechanisms to unfold their full potential within a single economic area.

After a historical outline of the Single Market’s development, the article continues with a brief summary of the four freedoms and the theoretical background on the effects of economic integration. It then looks at different legal acts that have recently been finalised or are still being negotiated. Although this does not allow for predictions regarding the overall economic effects, it illustrates where progress is currently being made.

The history of the European Single Market

Figure 1
Development of GDP

The Maastricht Treaty (1992) was a big step forward and laid out the idea of an Economic and Monetary Union (EMU) with a single currency, which was officially introduced at the turn of the century. This step was not supposed to replace the Single Market, which still needed further work. In fact, there is a mutual dependency: Firstly, the EMU provides the framework for more economic integration; secondly, a stable EMU requires close economic cooperation. Nonetheless, the Single Market covers a larger number of countries than the EMU and requires specific regulations. In 1994, the Agreement on the European Economic Area (EEA) entered into force, extending the Single Market to include a total of 31 countries.

The development of the four freedoms

The Single Market possesses four unique characteristics that date back to the Treaty of Rome. They are also called the four fundamental freedoms and encompass the free movement of goods, services, capital, and labour. These four freedoms reflect European goals of economic integration, framing an ideal situation for economic growth in a free market economy. The development of these characteristics illustrates how freely the different factors move within the Single Market.

Figure 2
Development of trade

Figure 3
Trends in worker mobility in Europe

The free movement of labour as measured by the mobility of workers across borders has increased but the overall level is still relatively low compared to the overall population size. In total, the number of employees working in another Member State rose from 2.3 million to 4.1 million in the EU15 between 1995 and 2017 (see Figure 3). In 2006-2017, the number of employees from another EU Member State increased by 78% in the EU28, and now stands at 8.9 million; for the EU15, the increase in the same time period was notably lower (31%). The ERASMUS+ program encourages educational exchanges and thereby fosters the mobility of students and teachers. It was established in 1987 and has various goals, among them reducing unemployment through higher mobility and better skills. Since 1987, the number of students who study or train abroad has gradually increased, exceeding the three million mark in the 2011-2012 academic year. In the 2013-2014 academic year, 272,500 students went abroad (see Figure 4).

Figure 4
Student mobility since the start of the ERASMUS program

Effects of economic integration

It is also helpful to look at how the European population perceives European integration. Over the past few decades, the Eurobarometer has collected data on support for further integration (see Figure 5). Findings show that 61% of respondents favour the euro in 2018, up from around 50% in the 1990s. On average, support for a common foreign policy of all Member States ranks higher than support for the euro, starting with 69% in 1992 and reaching 66% in 2018. Recently added questions show that the share of people in favour of a Digital Single Market within the EU is now at 62%. An overwhelming 82% of people support the free movement of EU citizens to live, work, study and do business anywhere in the EU.

Figure 5
Support for further European integration

What is missing?

Although the European Single Market has come a long way, it should not be surprising that the Single Market is not yet completely integrated. The European Commission subsumes several areas of action under the name of the Single Market Strategy. By looking at examples of European initiatives, I will now shed light on aspects of the Single Market currently in focus and examine areas where there is still room for improvement.

The mobility of goods within the Single Market is well developed. What remains to be done is the abolition of non-technical barriers to trade and other accompanying measures. These encompass improving conditions for permitting businesses from one EU Member State to establish subsidiaries in other Member States. Simplified access criteria and streamlined administrative procedures could lead to higher investment levels by making it easier for European companies to invest in other Member States and, among other things, build a European distribution system. In March 2018, the European Parliament adopted new rules for cross-border parcel delivery which should foster price transparency and further increase cross-border online shopping. To a considerable extent, the Single Market’s ability to function is also determined by tax policy. Further efforts to harmonise VAT in Europe could positively impact cross-border sales, especially for small and medium-sized enterprises. Overall, it is important to ensure fair competitive conditions for all Member States, thereby avoiding unwanted obstacles.

The mobility of capital is still a work in progress. The capital markets union has outlined a number of objectives to achieve by 2019: a) further remove barriers for cross-border investment; b) diversify the funding in the economy; and c) reduce the cost of raising capital. These goals should, in turn, support job creation and growth, e.g. by improving the opportunities for start-up financing. A more integrated financial services market would also allow the financial sector to become a better credit provider to the real economy even in times of a downturn or shock. It is also necessary to establish swift insolvency proceedings to allow for an efficient liquidation of companies. Setting up new firms requires access to seed financing and to capital for later rounds of financing. By facilitating cross-border investments, start-ups would have easier access to various sources of funding.

Although it may be difficult to determine an optimal level, the mobility of persons has not increased as much as may have been expected. The low share of other EU nationals within the Member States suggests that significant mobility obstacles still need to be eliminated. Recognising academic degrees and qualifications obtained abroad as equivalent to domestic certifcations could be made easier. This would include, in certain circumstances, relaxing the national conditions for obtaining authorisation to practice a profession. Another major obstacle to increasing mobility is language. Expanding the network of European schools (bilingual state schools) or university programs that span European countries would improve language training at an early age. In addition, language programs could be offered to EU citizens who work in another country, which is currently the case for non-EU citizens under the EU Blue Card system.

In order to make it easier to temporarily change jobs within Europe and provide incentives for “brain circulation”, the EU is working to improve the coordination of social security systems. Even though working conditions and mobility requirements have improved, the general public may still not be adequately informed about their options. This could be remedied with a targeted information campaign and easily accessible information on how to find and start work in another Member State. A potential measure would be to improve cooperation between European employment agencies. This could be used to extend Europe-wide job placement services. The recent initiative to establish a European Labour Authority may also make a contribution in this regard. Currently, the European Job Mobility Portal (EURES) already offers a platform for jobseekers and employers across Europe with a focus on applicants from the university and polytechnic sectors, and for those who have higher qualifications in general.

Conclusions

It is important to look beyond the economic effects of the Single Market and take social and environmental aspects that impact welfare into account. The challenge is not to simply to suggest more or less integration but to identify the most effective method of integration – while respecting and appreciating cultural differences. Also, in light of resurgent protectionism, the Single Market can continue to be a hallmark of the benefits of multilateralism. Success is not only a result of trade liberalisation between Member States but also of ambitious trade agreements with third countries and of the multilateral trading system advocated by the World Trade Organization.

Single Market arrangements need to be consistently assessed to see whether the full potential of integration is being achieved through the current means and how to further improve existing regulation. This also includes updating previous academic studies and investigating whether the Single Market has fulfilled expectations. At the same time, we as Europeans make up the Single Market, and the four freedoms only come to life when we take advantage of them. It is safe to say that the Single Market has matured tremendously since its foundation. However, rather than attempting to complete the Single Market, we should prepare for a process of lifelong learning.

* The author is indebted to her colleagues who provided many insightful comments. The article’s content is solely the responsibility of the author and does not necessarily represent official views of the author’s affiliations.

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