Blog Post

How to make the single market more inclusive after Brexit

The creation of the single market generated winners and losers. Yet redistribution remains first and foremost a competence of national governments. It is thus fair to state that a failure in national, more than European, policies and welfare systems can be partly blamed for current discontent with the EU and the single market.

By: Date: August 18, 2016 Topic: European Macroeconomics & Governance

The single market has been the cornerstone of European integration since 1957. With over 500 million consumers and €13 trillion GDP, it is considered the largest market in the world. Recent estimates suggest that EU GDP per capita would be as much as 12% lower without European integration. In addition, Mariniello et al (2015) illustrate how these benefits could be even greater, if integration were deepened in areas such as services, public procurement and free movement of workers, just to mention a few. Crucially, a complete and functioning single market would help foster productivity growth – something the EU sorely needs in order to preserve its long-term prosperity at a time of challenging demographic prospects.

Following the Brexit vote, the EU loses one of its evergreen champions of free trade, meaning that some single market initiatives might lose momentum. More importantly, the British referendum revealed an image of a country highly fractured along the lines of age, education, and geographical location. Former Commission President Jacques Delors once notoriously stated that “it is difficult to fall in love with the single market”. Nowadays, it seems like it is quite easy to be drawn into disaffection with the single market, especially when you belong to certain social cleavages.

Darvas (2016) quantitatively analysed the socio-economic characteristics of leave voters, coming to the conclusion that high inequality and poverty contributed significantly to shaping voting behaviour. Either at a personal or regional level, these leave voters are now being called the ‘losers of globalisation’.

To be sure, the single market – which is a spearhead example of globalisation – was always expected to increase overall welfare but indeed, in the process, generate winners and losers (see Terzi et al, 2015). For example, Burstein and Vogel (2016) showed how high-skilled workers are likely to disproportionately benefit from market integration. Furthermore, Egger and Kreickemeier (2009) illustrate in a theoretical model how market integration, and the consequent selection of the best firms into export status and exit of the least productive producers, might lead to an increase in wage inequality, even for workers with similar skill-sets.

The ‘harmonious development of economic activities’ was an EU objective straight from the Treaty of Rome, and in 1975 regional funds were set up in order to promote regional development. Together with cohesion policy, launched in 1988, these tools aimed to counteract some of the centrifugal forces unleashed by the creation of a single market. However, given the tiny size of the EU budget, these funds remain limited. For the period 2014-2020, overall regional policy has been allotted €351.8 billion – equivalent to 0.4% of EU GDP per year. As a matter of comparison, when Germany decided to promote regional development in the East following reunification, it introduced transfers of roughly 4% of West German GDP.

Redistribution, both across regions and between individuals, remains first and foremost a competence of national governments. Poverty and inequality played a prominent role in the Brexit referendum. It is thus fair to state that a failure in national, more than European, policies and welfare systems can be partly blamed for current discontent with the EU and the single market. This is particularly true in the UK, where territorial heterogeneity is far greater than in any other EU country. (Figure 1).

Figure 1. GDP per capita in PPP by NUTS2 region, EU28=100, 2013

Note: Regions below 75% of the EU’s GDP per capita receive funds under the Cohesion Policy, the largest programme under the EU’s Regional policy.
Source: Eurostat, Bruegel

at 18 8 16

Going forward, it is evident that more effective corrective mechanisms are needed to cushion the negative effects of the single market and, in doing so, prevent a further popular backlash against globalisation and the European Union. While many commentators are now calling for stronger redistribution, the key will be to strengthen welfare and regional support without hampering the inherent mechanics of the single market, or else do so at the expense of productivity developments, long-term growth and overall prosperity.

At the core of the single market is the concept of Schumpeterian creative destruction:  once countries open their borders to European competition, some firms (the most unproductive) will exit the market, allowing for a redistribution of resources to the most competitive. This will allow countries to develop and focus on their competitive advantages. National policies should not hamper this process, while ensuring that destruction is indeed ‘creative’ and does not merely result in long-term unemployment, permanent migration, and disinvestment.

At the national level, in order to alleviate poverty and inter-personal disparities, tax systems can surely be made more redistributive, particularly in some countries. However, this should be seen only as the first step of a wider strategy. Addressing the problem for the long term will require also significant investments in education and skills. At the same time, territorial cohesion calls for projects aimed at increasing the interconnectedness of marginalised regions, linking them to the wider European or global economy. In the 21st century, more than extending bridges and roads, this might take the shape of expanding high-speed internet connections, or widening the use of tools such as distance learning, 3D printing, or e-commerce.

At the European level, regional policy seems appropriately targeted – focussing on infrastructure, education, employment, research and innovation – but poorly funded. Because globalisation, combined with technological innovation, seems to be augmenting agglomeration effects within Europe, a case could be made for substantially expanding the funding of these instruments, while at the same time ensuring their local take-up and good use. Ultimately, if the ‘losers of globalisation’ turn against the European project, this will have repercussions for the whole Union and, as such, the heavy-lifting cannot be left only to national policies and welfare states.

 


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read about event

Upcoming Event

Sep
3-4
08:30

Bruegel Annual Meetings 2018

The 2018 Annual Meetings will be held on 3-4 September and will feature sessions on European and global economic governance, as well as finance, energy and innovation.

Speakers: Maria Åsenius, Richard E. Baldwin, Carl Bildt, Maria Demertzis, Lowri Evans, Mariya Gabriel, Péter Kaderják, Joanne Kellermann, Jörg Kukies, Emmanuel Lagarrigue, Philippe Lespinard, Montserrat Mir Roca, Dominique Moïsi, Jean Pierre Mustier, Ana Palacio, Jean Pisani-Ferry, Lucrezia Reichlin, Norbert Röttgen, André Sapir, Jean-Claude Trichet, Johan Van Overtveldt, Martin Sandbu, Margrethe Vestager, Reinhilde Veugelers, Thomas Wieser, Guntram B. Wolff and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Brussels Comic Strip Museum, Rue des Sables 20, 1000 Brussels
Read article More on this topic

Opinion

Europe should avoid a no-deal Brexit

The UK government finally tabled a serious proposal for the country’s future relationship with the European Union (EU). The White Paper puts the ball in the EU court as it now has to say what kind of relationship it wants to establish with its neighbour.

By: Jean Pisani-Ferry, Norbert Röttgen, André Sapir, Paul Tucker and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: July 24, 2018
Read article

Parliamentary Testimony

European Parliament

The role of independent expertise in legislative process

Testimony before the European Parliament Committee on the Internal Market and Consumer Protection (IMCO).

By: Zsolt Darvas and J. Scott Marcus Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: July 18, 2018
Read article More on this topic More by this author

Opinion

A Brexit deal is still not achieved

The UK paper should be seriously considered. While it breaks a number of European red-lines, it is also an attempt to solve some issues. The question is whether the EU will be ready to seriously negotiate. Geostrategic considerations suggest that it is time for the EU to do so.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: July 13, 2018
Read about event More on this topic

Past Event

Past Event

Designing a new institutional framework for UK-EU relations

Finding the right way forward for the EU and the UK.

Speakers: Raphael Hogarth, Jill Rutter and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 13, 2018
Read article More on this topic More by this author

Blog Post

EU income inequality decline: Views from an income shares perspective

Over the past decade, the income share of low earners has increased in the EU while that of top earners has slightly declined. Although the upward convergence of the impoverished central European population is impressive, the southern European poor have faced a major setback while the southern European rich have hardly suffered.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: July 5, 2018
Read article

Blog Post

Trading invisibles: Exposure of countries to GDPR

This blog post identifies provisions of the EU’s General Data Protection Regulation (GDPR) that affect foreign companies, and discusses implications for trade in services with the EU. The authors provide a novel mapping of countries’ relative exposure to these regulations by a) measuring the digital maturity of their service exports to the EU; and b) the share of these exports in national GDP.

By: Sonali Chowdhry and Nicolas Moës Topic: European Macroeconomics & Governance, Global Economics & Governance Date: June 28, 2018
Read article More by this author

Parliamentary Testimony

European Parliament

The potential impact of Brexit on ICT policy

Testimony before the European Parliament's Committee on Industry, Research and Energy (ITRE).

By: J. Scott Marcus Topic: European Parliament, Innovation & Competition Policy, Testimonies Date: June 27, 2018
Read article Download PDF More on this topic More by this author

Working Paper

EU financial services policy since 2007: crisis, responses and prospects

This paper presents a holistic overview and assessment of the European Union (EU)’s financial services policy since the start of its financial crisis in mid-2007. Its emphasis is on public policy initiatives and developments at the European level, including those specific to the euro area.

By: Nicolas Véron Topic: Finance & Financial Regulation Date: June 21, 2018
Read article More on this topic

Blog Post

Understanding (the lack of) German public investment

An array of data suggests that there is a general lack of investment by all branches of the German government, despite running budget surpluses for several years. This blog post plots the progression of the public investment problem, and explores which regions, which sectors, and which levels of government have been most affected.

By: Alexander Roth and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 19, 2018
Read about event

Past Event

Past Event

Financial services after Brexit - what path for the EU27 and the UK?

How will the European financial services industry develop after Brexit?

Speakers: Dashiell Caldwell, Richard Knox and Francesco Papadia Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 30, 2018
Read article More on this topic More by this author

Opinion

La PAC n’est pas taboue

Dans cette chronique, l'auteur estime qu’une renationalisation graduelle de certaines politiques pourrait utilement contribuer à la nécessaire redéfinition du modèle agricole français..

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: May 28, 2018
Load more posts