In 2004, when 10 countries from Central and Eastern Europe (+ Malta and Cyprus) joined the EU as full members, the Union’s internal market became the world’s biggest single free market. Both “older” and “newer” member states profited a great deal from this enlargement. In Central and Eastern Europe, the combination of the EU’s institutional stability and the region’s cheap labour force led to a surge of foreign direct investment. For Western Europe, the enlargement was an opportunity to expand into new markets as well as to employ foreign workers whose high qualifications were scarce in their domestic markets.
To mark the 10th anniversary of the Eastern Enlargement, the Association for International Affairs (AMO), in cooperation with the Friedrich Naumann Foundation for Freedom, organised a conference held on 27 February 2014 in Prague. The conference consisted of two panel discussions whose purpose was to evaluate this decade of participation by the Central and Eastern European countries in the single market as well as its current perspectives and challenges. Both panel discussions encompassed the views of eight distinguished guests from both old and new member states of the European Union.
Success with a caveat
Based on the simple principle of the free movement of goods, services, people and capital, the EU single market is almost unanimously called (regardless of political ideology) the cornerstone of European integration. It has been proved by many macroeconomic statistics that the freedom of people and businesses to move and trade leads to increased job creation and wealth accumulation.
According to the European Commission, this contribution by the EU’s single market amounts to roughly 2.7 million jobs between 1992 – 2008 and approximately 500 EUR of additional income per year per citizen.
Yet the single market remains largely incomplete and below its full potential. The EU enlargement story has proven to be a telling case study of a strange, paradoxical situation: The addition of the eastern countries – big advocates of further liberalisation of the single market – contributed to a certain “integration fatigue” in the West which impeded the implementation of the single market integration process.
Politics of fear
This single market enlargement brought not only the expectations of new opportunities, but also new apprehensions. It coincided with a heated debate in the EU about the liberalisation of services. The image of the Polish plumber became a symbol for tabloid media in the western countries for the threat the West was facing from the East. The fear of “wage dumping” and the race to the bottom in terms of service quality blinded the eyes of Europeans to the potential benefits of a genuine single market in services. The politics of fear helped to shoot down not only the constitutional referendums in France and the Netherlands, but also the liberal draft of the service directive created by Fritz Bolkestein.
Further examples of irrational measures were the transitional periods imposed by most of the old member states on the free movement of workers. Despite the overall low mobility of Europeans, only UK, Ireland and Sweden kept the doors open for foreigners. All other countries applied transitional periods of up to 7 years, without any significant evidence that this labour movement from other countries would cause any serious troubles. Several studies proved the very opposite. In Germany, new workers did not compete for jobs with native Germans but with previous waves of migrants. On the top of that, foreign workers became net contributors to social welfare systems. As the research paper done by Kryštof Kruliš (Association for International Affairs) shows, the temporary restrictions turned out to be a burden on the efficient reallocation of labour and hence a waste of the potential benefits of the single market.
Bigger slice or bigger cake?
In theory, completing the single market should have been the right policy answer for the EU during the crisis: creating jobs and opportunities for millions of people who would be more threatened in isolated national markets. But since the very foundations of the EU were shaken after 2008, crisis management was preferred. The role of the Council of ministers of the EU was strengthened at the expense of the European Commission. No wonder that the single market was not the highest priority, as Jürgen Zahorka puts it, “The Council of Ministers of the EU is the institutionalisation of national egoism.”
As Iliya Lingorski, Chairman of the Vrana Economic Council, said: “Member states tend to fight only for their particular slice of the cake. They want their slice either bigger or at least kept as it is. But this logic prevents them from working together to make the whole cake bigger – hence making everybody better off. Unfortunately, the financial and economic crisis made this thinking even worse.“
The financial and economic crisis exposed many weaknesses in the basic principles of the EU. The Euro zone, the most integrated part of the single market, suffered from a peculiar combination of fiscally undisciplined member states and the incomplete institutional design of the monetary union (no lender of last resort, no common treasury, and no banking union).
Fixing the weak spots
Fiscal discipline and institutional reconstruction therefore became the EU’s short-term goals. Martin Zeil, former minister of transport of Bavaria, stressed that “we need an international architecture for financial markets, national regulation is not enough.” Iliya Lingorski added that “We have to change the regulation of banks so it is both predictable and simple while risk is shared proportionately. Today the banking sector cannot lose – you can privatize your profits and socialize your loses – and that is a very wrong message. What we need in Europe is a banking union – today, not tomorrow.”
Zilvinas Silenas, president of Lithuanian Free Market Institute, voiced a gloomy prediction. The sovereign debt crisis might be just one of the phases of the bigger crisis. There is no time for a lull. Member states still have to do a lot of homework and continue their tough reforms. But even that might not be enough.
The financial crisis also revealed the fragility of the EU’s competitiveness. If the EU is looking for a source of a solid and sustainable growth in the near future, the single market cannot be omitted. Its completion must become the highest priority; otherwise the EU will struggle to cope with the challenges of high automation in many industries on one hand and with the rapidly changing demography of the workforce on the other.