The Trouble with the EU Single Market
Why Europe’s lost competitiveness is becoming an urgent risk to its security. And how Rishi Sunak’s Unionist bias could fuel support for a united Ireland
The prospect of a second Trump presidency has sent European political leaders into a tailspin - and with good reason. Countries that have prospered for decades under a US security umbrella are having to face up the reality that American support for Ukraine is waning before a single general election ballot has been cast and that America’s commitment to Nato can no longer be assured. As I argued here last month, this is a potentially existential crisis for the continent that will require European governments to increase their support for Ukraine, boost defence spending and shoulder more responsibility for their own security, including via deeper military integration.
Foreign policy, however, begins at home. There’s no security without a strong and resilient economy. This is something that Europeans can no longer taken for granted. The continent’s economic performance has been lacklustre for many years. In 2013, the European Union’s economy was 91 per cent of the size of the US economy in dollar terms, today it is 65 per cent; GDP per capita is 27 per cent that of the US. That gap is growing, as European growth trails the US and China. Meanwhile Europe is falling behind in the technologies of the future: America dominates digital and AI and China dominates green technology. That is hardly a basis for strategic autonomy.
The Italian Jobs
The problem is that the EU single market is not working as well as it should. A recent report by the McKinsey Global Institute lays bare the scale of the challenge. It noted that Europe’s internal market is larger than China’s and almost as big as the U.S.’s. But when it compared companies with more than $1 billion in revenue, U.S. firms between 2015 and 2022 spent 80% more on research and development, delivered 30 per cent faster revenue growth and 30% higher return on capital, and were valued by the market 2.5 times higher. No wonder EU leaders have commissioned two former Italian prime ministers to identify what has gone wrong and what to do about it: Enrico Letta will report on how to reform the single market in March; while Mario Draghi is investigating how to restore Europe’s competitiveness.
One explanation that can be immediately ruled out: that the EU is a protectionist, anti-free market cartel. As one might expect of a project championed by Margaret Thatcher, the single market was established on impeccable neo-liberal principles. The Commission was armed with formidable powers, which it has never been afraid to deploy, to preserve a level playing field by strictly policing state aid and to ensure markets remain competitive through robust merger controls. What’s more, the EU is outward-looking on trade: it is 30 per cent and 70 per cent more open than America and China respectively, according to International Monetary Fund data.
In fact, part of the EU’s problem may be an excess of free market zeal. In an interesting column from the Wall Street Journal, Greg Ip notes that one downside of the EU’s laudable determination to maintain open, competitive markets and thereby keep prices low for consumers is that this may have made it harder for European firms to achieve sufficient scale and profitability to compete with their US rivals in terms of investment and innovation. The problem arises because of a tendency to assess competition on the basis of 27 connected national markets, rather than as one single market, as one might logically expect. A case in point is telecoms:
For example, to preserve competition, European regulators have resisted mergers that leave just a handful of mobile phone carriers per market. As a result Europe now has 43 groups running 102 mobile operators serving a population of 474 million, while the U.S. has three major networks serving a population of 335 million, according to telecommunications consultant John Strand. China and India are even more concentrated.
European mobile customers as a result pay only about a third of what Americans do. But that’s why European carriers invest only half as much per customer and their networks are commensurately worse, Strand said: “Getting a 5G signal in Germany is like finding a Biden supporter at a Trump rally.” Putting European networks on a par with the U.S. would cost about $300 billion, he estimated.
Of course, the EU also suffers from an excess of regulatory zeal. While the single market may have swept away 27 different national regulatory regimes, and therefore be considered an exercise in deregulation for companies trading cross-border, many of the harmonised rules that have emerged from Brussels to replace them have been too prescriptive and come with onerous reporting requirements. A particular bugbear of business is the “precautionary principle”, whereby the EU regulates where it believes there may be a risk of harm, rather than evidence of harm.
Precautionary Principle
This is hardly a new issue. I noted in this piece for the WSJ in 2015 how the EU’s chemical testing regime, which could take up to 13 years to licence a new compound, and the prohibition against gene-editing, which may soon be partially lifted, have driven significant investment and innovation offshore. Now the fear is that the EU has made the same mistake with AI with a new Digital Services Act which places onerous reporting requirements on tech firms and places restrictions on AI development for applications that have not even been invented yet.
At the same time, in too many areas, the single market has never gone deep enough, particular in services. Despite a push in 2016 to create a European professional card, which would allow qualifications to be recognised across the bloc, this has so far only been extended to six professions. The need for the EU to develop a capital markets union to enable growing firms to access alternative sources of equity and debt finance from outside the banking system has been obvious since at least the eurozone debt crisis, but the progress has stalled. The European Round Table for Industry reckons that the single market is only 75 per cent complete, while the remaining trade frictions have the effect of reducing EU GDP by five to 10 per cent.
Meanwhile the political consensus that underpins the single market risks fraying amid an explosion in state aid after the rules were suspended during the pandemic. As much as €760 billion of state aid has been authorised over the last few years, similar to the grants and subsidies made available under President Joe Biden’s Inflation Reduction Act. Of this, Germany was responsible for nearly half, France for 22 per cent and Italy for eight per cent. That inevitably stokes tensions between member states, as it undermines the level playing field, particularly for smaller countries. The suspension of rules is supposed to have ended this year. But with America and China lavishing subsidies on domestic production, this genie is not going back in its bottle.
Old Ideas Please
Draghi and Letta will be under no illusions as to what needs to be done. As multiple past reports have concluded, the priority must be to complete the single market. But that requires deeper integration, which brings difficult trade-offs. Completing the single market in services means confronting powerful lobby groups opposed to the mutual recognition of qualifications. Plans to create a capital markets union have previously foundered on the reluctance of governments to yield sovereignty over areas such as bankruptcy law. A European industrial strategy requires EU-wide state aid, which in turn requires a bigger EU budget or more common borrowing. A single market approach to competition could lead to fewer players and higher prices.
Persuading EU leaders to back deeper integration may look an even harder task now. The European Parliament elections in June seem certain to lead to significant gains for eurosceptic right-wing nationalists. Yet the history of the EU is one of dramatic leaps forward in the heat of a crisis. The creation of a eurozone bailout fund had seemed politically impossible up until the moment it was created in the midst of the eurozone crisis. Common European debt issuance had seemed like a fantasy until the Next Generation EU fund was launched in the midst of the pandemic.
There is no such thing as a new idea in Brussels, only old ideas whose time has come. Everyone who cares about Europe’s security, which should include those outside the EU such as Britain, must hope that the the time to fix the single market is now. The alternative is a Europe that becomes progressively weaker and more fragmented.
The Price of Rishi Sunak’s Northern Ireland Deal
In another week of bleak headlines for Rishi Sunak, the British prime minister did at least manage to secure some positive coverage. By apparent common consent, his success in getting the Northern Irish Assembly back up and running after a two-year boycott by the Democratic Unionist Party was a substantial personal achievement. A deal with the DUP, contained in Safeguarding the Union, a command paper published by the government, outlined further measures to eliminate border checks on goods entering Northern Ireland from Great Britain and to strengthen Northern Ireland’s place in the United Kingdom. What difference any of this makes in strict legal terms is an open question, but it was enough to get the DUP back in Stormont.
Forgive me if I am reluctant to join in the chorus of praise for Sunak over this. I’m not inclined to give any Brexiteer minister credit for solving a serious constitutional problem that they never acknowledged at the time of the referendum, in fact ignorantly and arrogantly dismissed, and for which they have never apologised. That a settlement has been reached that appears to have drawn a line under seven and a half years of turmoil and a resurgence of ugly sectarianism is to be welcomed. That it has led to the appointment of a Sinn Fein first minister at Stormont makes this a historic moment, that reaffirms the role of constitutional politics in Northern Ireland.
But what interests me is less the substance of Sunak’s achievement but the manner in which it was achieved. A paper by Katy Howard, an academic at Queen’s University, Belfast, for the Constitutional Society raises important issues. She notes that “the deal secured from the UK Government by the DUP runs roughshod over principles that have formed the bedrock for the peace process for over thirty years”. Chief among these was the commitment by the British government under the Good Friday Agreement to act at all times with “rigorous impartiality”.
It makes legislative changes and governmental commitments which have been designed, written and approved with just one party in mind… [a party] for whom 79 per cent of the electorate did not give a first preference vote.
The command paper proudly claims that Brexit, with the Windsor Framework, ‘could, in time, result in considerable divergence between Northern Ireland and Ireland of a scale not seen for decades.’ During the Troubles, security forces blew up bridges across the Irish border; 30 years on from the ceasefires, the UK Government has decided to make a virtue of blowing up metaphorical ones.
In this respect, Sunak is simply following in the footsteps of recent Tory prime ministers. Ever since Theresa May became beholden to the DUP via the confidence and supply agreement that enabled her to remain as prime minister after the 2017 election, the Tories have allowed their entire approach towards Northern Ireland to be shaped by the DUP. The DUP has been able to dictate policy on Brexit, even to the point where the government threatened to renege on a treaty that it had only signed and to break international law, albeit in a “specific and limited way”.
No Selfish Strategic Interest
What’s more, this growing Tory identification with the DUP fits into a wider shift in Tory attitudes towards Northern Ireland. At the heart of the peace process was a statement by Peter Brooke, the then Northern Ireland secretary, that Britain had no selfish strategic interest in Northern Ireland. This sentiment has underpinned all subsequent treaties between Britain and Ireland, including the Good Friday Agreement and its commitment to impartiality. Yet this sentiment appears to have almost entirely vanished from Tory discourse. Some senior Tories including Jacob Rees-Mogg now disavow the claim that Britain has no selfish strategic interest.
Sunak himself, like most of his colleagues, while paying lip service to the idea that Northern Ireland’s constitutional future is for the people of Ireland to decide, has declared himself a passionate unionist. The command paper makes clear that the British government’s aim is to “copper-fasten Northern Ireland’s political and constitutional place in the Union”. Meanwhile a new paper by Policy Exchange, right-wing think-tank in London, says that Britain does in fact have a very strategic interest in Northern Ireland. It calls for the remilitarisation of the province as a base from which to defend submarine cables and other infrastructure from Russian sabotage, a task too sensitive apparently to be entrusted to the unreliable Irish. Thus has Ulster been elevated into a new Gibraltar, a rock to be defended at all costs.
Of course, Sunak’s display of partiality may not matter too much, and perhaps less so when set against the wider imperative of restoring power-sharing at Stormont, which is pehaps why Sinn Fein have not said anything about it. But others have noticed, both in Northern Ireland and the Republic, where it has been met with consternation. They are concerned where this partiality might lead, particularly given that as part of the deal with the DUP the government is proposing to remove all references to the “All-Ireland economy from the UK statute book. That on the face of it looks like an attempt to weaken North-South cooperation, a core part of the Good Friday Agreement, which also included specific commitments to an all-Ireland economy.
Revealed Preference
This would be extremely unwise by Sunak. The constitutional position is clear: the future of Northern Ireland is for the people of the province to decide and the secretary of state must call a referendum when polls suggest a majority would vote to change their status. That point may seem a long way off at the moment, whatever Michelle O’Neil may say about a border poll by 2030. But the revealed preference of the overwhelming majority of Northern Ireland voters in every electoral test is that they prize strong North-South cooperation and an open border above all else.
Just as Sinn Fein’s challenge is to convince Unionists that they would enjoy parity of esteem and benefit from rigorous impartiality in a united Ireland, any British government that wants to preserve the union needs to convince the majority of Northern Ireland’s citizens that it will not do anything to undermine North-South cooperation and put the all-Ireland economy at risk. That will require a far greater commitment to rigorous impartiality than was on display in the command paper.