|
|
The significance of the single market
[...] the single market has not only provided a foundation for growth, but also for sustaining open markets. As we are seeing today at the global level, markets cannot stay open for long if not all participants are perceived to be playing by the same rules, or if the benefits are seen to be shared unfairly. The single market has survived, in large part, because Europe has built a unique model for managing those challenges.
Deepening the market in Europe has entailed building common institutions to protect citizens from unfair competition or discrimination from abroad – namely the common regulatory framework enforced by the European Court of Justice. Safeguards central to the European social model have been progressively embedded in European law, notably the Charter of Fundamental Rights, to provide protection for the most vulnerable.
And Europe has forged the first redistribution system across countries to help prevent persistent regional inequalities. [...]
No one would claim this system of rules, safeguards and redistribution has been perfect. We know that some feel it improves their lives too little, and others that it intrudes into their lives too much. But what we have built in Europe is a model for sustainable openness – one that can reap its gains while mitigating its unwanted effects. So if we see problems, our challenge is to nurture and improve that model, not to turn it back.
Because that would not only mean less wealth for our continent. It would also mean less political security for our citizens. We should not forget that besides being an engine for growth, the single market has brought vital political benefits as well.
The first is that it has provided a motor for binding political integration among the states of Europe.
As I just described, a single market can only be sustained if there is a common system of laws overseen by a common judiciary – the ECJ. And if there is a judiciary, there must be a legislature to write the law, which in Europe is provided by the EU Council and the European Parliament. And there must be an executive to enforce the decisions of the legislature and judiciary, which in our case is the role of the European Commission. The single market, in other words, creates by its very nature a closer political union.
This is a dynamic we have also seen in the US as its own internal market has developed. As is well-known, the short “Commerce Clause” of the US constitution – which grants Congress the power to regulate commerce among the states – has led over time to a substantial expansion of the role of the federal government in economic affairs.
The second political benefit has been to enhance Europe’s influence in the world.
Trade policy decided in common gives Europe real sway in global negotiations, both in the deals it can extract bilaterally, and in the setting of multilateral rules in the WTO. A large market has leverage over large multinational firms, allowing Europe to protect what it deems important, such as privacy on the internet. It also permits Europe to use trade sanctions to counter hostility from unfriendly countries, and thereby enhances military security too. And if Europe wants now to integrate further in other areas – such as defence and foreign policy – it will need the economic foundation the single market provides.
Thus for all these reasons, we should be proud of what we have gained from integration. That does not mean we should be blind to its challenges, nor to the disappointing performance of recent years. We need to restart the single market as a growth agent and do better in compensating the losers it creates. But we should also be clear: we would be worse off today, both economically and politically, if we had not followed this path.
From the single market to the euro
But the single market also had a further effect: it led directly to the euro. Once Europe decided to embark towards a fully integrated market, a single currency was desirable, if not essential. Hence the euro was set in motion at the Hanover summit in 1988, immediately in the wake of the decision to achieve a true single market.
Today some people question this link between market and currency, and ask whether retaining national currencies might have been better for Europe. But one has to remember that the single currency did not appear out of thin air. It was rather a consequence of Europe’s long and unsatisfactory experience with different exchange rate regimes since the war. It was also, in other words, both an idealistic and a pragmatic decision. [...]
The conditions for success in EMU
However, the case for the euro was always based on a trade-off. By reinforcing the single market in this way, it would lock-in the gains of economic integration and thereby benefit the whole Union. But it would also deprive individual countries of adjustment tools for short-term shocks, notably their own exchange rate. Thus for the trade-off to be beneficial, it was essential that those short-term costs were reduced as much as possible.
This depended on certain conditions being fulfilled, which were established by Mundell and later authors as part of the theory of optimum currency areas. They included: trade integration, to reduce the incidence of asymmetric shocks; factor mobility and wage and price flexibility, to accelerate adjustment when shocks did hit; and a system of risk-sharing, to reduce the costs of that adjustment process for individual members. But, in the euro area, it was clear that the importance attached to each of those conditions would not be the same.
Large-scale labour mobility was always unlikely, given cultural and linguistic barriers. It was also improbable that fiscal risk-sharing would reach U.S. levels, not least owing to the relatively larger role for national budgets as fiscal stabilisers. Hence it was essential that euro area countries substituted for lower integration in these areas with stronger commitments in others. This meant four things in particular.
The first was avoiding policy mistakes, such as boom-bust cycles emanating from weak prudential supervision. The second was building resilience to shocks through structural reforms and the continued deepening of the single market. The third was sound fiscal policies to provide sufficient fiscal buffers over the cycle. And the fourth was a strong financial union, with diversified asset holdings and hence real private risk-sharing.
In this way, countries would be able to reduce the severity of local slumps, since asymmetric shocks would be tempered by trade linkages and sound financial policies. When shocks did occur, wages and prices would be able to adjust more quickly, and resources would reallocate faster in response, limiting the employment cost of adjustment. Fiscal policies would be available at the national level to stabilise the economy during the transition. And losses would be shared across the Union through integrated financial markets.
There was no secret about this. It was known to all in 1999 that these were the conditions for success. This was why we agreed the Stability and Growth Pact for fiscal policies. It is why there was an “E” in EMU: it was clear that structural convergence had to occur. And it is why there has always been a strong emphasis on the need for sustainable financial integration.
We know the history that followed: the slowing down of structural reforms, the watering-down of the Pact, the fragility of financial integration, and the underlying divergence between countries that ensued. But we need to be very clear that it was not the euro as a currency that was to blame for this. National authorities knew what they had to do. The currency could not protect them from their own policy decisions. [...]
There are some today who believe that Europe would be better off if we did not have the single currency and could devalue our exchange rates instead. But as we have seen, countries that have implemented reforms do not depend on a flexible exchange rate to achieve sustainable growth. And for those that have not reformed, one has to ask how beneficial a flexible exchange rate would really be. After all, if a country has low productivity growth because of deep-rooted structural problems, the exchange rate cannot be the answer.
Still, it is important to ask, if some governments did not follow the right policies to succeed in EMU, why did they not? The euro area relied heavily on the notion that the integration process would itself create the incentives for sound policies. Faced with stronger competition through the single market and an inability to devalue, governments would be forced to address long-term structural problems and ensure fiscal sustainability.
That this did not happen was in part because the single market process stalled. But it was also because we lacked some key institutions at the euro area level. We did not have a common system of banking oversight to monitor financial flows, which in some countries allowed mounting competitiveness losses to be masked by unsustainable finance-driven growth. And we had only weak common decision-making for fiscal and economic policies.
Several important steps have now been taken to address these issues, most notably the establishment of Banking Union. But that project is still unfinished. And as has been laid out in the Five Presidents’ report, we still remain some way short of a complete monetary union – which is to say, one where countries take collective responsibility for the euro area within common institutions. [...]