Europe’s not-so common market

Published in Business Spectator (Melbourne), 1 July 2010

Throughout the euro crisis, the continent’s politicians have not shied from using strong rhetoric about the importance of economic integration. The survival of the currency was a question of war and peace, some said. Others claimed that the failure of the euro would mean the end of the European Union. Only two weeks ago, French President Nicolas Sarkozy and German Chancellor Angela Merkel called for a joint economic government for the whole union.

Between such integration rhetoric and economic reality lies a yawning gap. Despite repeated calls for greater unity, the European common market still does not work properly. Instead of opening their borders to the free movement of people, products, services and capital as required under various treaties, member states are still being caught in covert and sometimes open protectionism. This undermines their credibility about the future of the currency, too.

Europe’s politicians love to offer solemn praise of unity. It only shows that they have not travelled by train for some time. Theoretically, there should be a European railway market in which rail operators are free to offer their services wherever they like. In practice, national egotism is blocking access by foreign competitors.

For the past year, Austrian and German railway companies have been serving intercity routes in Northern Italy. Residents were pleased to have an alternative to the outdated and uncomfortable services operated by Italy’s state-owned rail company Trenitalia – Ferrovie dello Stato.

However, the Italians are trying their best to make life hard for their new competitors. For example, they blocked the Austrian-German trains from stopping at Milan’s central station which was claimed to be full. Instead, they now terminate at Milano Lambrate, outside the city centre. It also took more than a year for the Italian authorities to licence the fast locomotives the unwelcome competitors wanted to use. The difficulties in establishing a rail connection between Munich and Milan make a travesty of the common market for services.

To be clear, this is by no means an Italian peculiarity. As much as German rail company Deutsche Bahn, itself a state-owned company, complains about the devious Italians, it is not behaving any better in its own home market. For years, the Germans have been fighting attempts by France’s national railway company SNCF to run trains in Germany. Meanwhile, SNCF has been practicing such protectionism at home as well.

Last week, the European Commission declared that they have had enough of such practices and referred no fewer than 13 countries to the European Court of Justice for contravening single market rules. A further nine countries may follow soon if they cannot prove that they have taken measures to ensure contestability.

Only five EU member states (Malta, Cyprus, the Netherlands, the United Kingdom and Finland) escaped prosecution for not opening their rail markets. However, islands like Malta, Cyprus or Britain have some natural advantages in making train access from other countries a tad more difficult. In fact, Cyprus does not even have a working railway system that it could protect from foreigners.

Almost two decades after the European Union erected the so-called common market, the world’s largest single market type trade bloc, procedures for violations of its principles are filed almost on a weekly basis. This is not a problem restricted only to railways.

In a working paper for the Centre for European Politics (CEP), CEP Director Lüder Gerken and former EU Commissioner Frits Bolkestein delivered a devastating critique of the implementation of the common market. “The common market is the heart of European integration but it is no longer beating properly,” they summed up the situation.

Gerken and Bolkestein identified four main issues: a resurgence of national protectionism; the misuse of common market procedures to increase regulation; the abuse of the market to expand the welfare state; and attempts by the European Commission to grab extra powers based on alleged violations of the common market.

Among these problems, the rise of protectionism may be the most severe threat. It is visible in attempts of German federal states to block their citizens from participating in foreign online lotteries. It can be seen in discriminatory tax provisions for foreign investors in Belgium. It is happening when the Czech government does not open military procurement to EU-wide competition.

The ever growing body of EU law is testament to the fact that the single market is not really about free trade. If there had ever been the intention to guarantee freedom of movement for services, goods, capital and people, this could have been established on an A4 page bearing the signatures of 27 heads of state. That there are instead tens of thousands of pages governing the single market in all details reveals that other objectives must be at stake.

The shortcomings of Europe’s single market cannot be overlooked. It is clear that national governments are still placing their own national interests ahead the ideal of economic integration. Given this background, how would one interpret the repeated public declarations of support for the European project but with a large pinch of salt?

Behind the talk about European solidarity for the PIIGS countries may be little less than worries about entirely national issues and interests. French banks are heavily exposed to Southern European bonds. Greece is still a valued customer of the German arms industry. It should not surprise anyone that such circumstances play a role behind the scenes, even though the public is led to believe that all the rescue packages were ever about was high European ideals.

At some stage in the future, European politicians could come to the conclusion that their national interests would be better served by giving up the European common currency. At this very moment the Euro will finally break up and not even the pretence of European solidarity will save it. In such a scenario, a return to full-blown protectionism, perhaps even coupled with aggressive nationalism, remains a possibility to be feared.

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