The power of the market - How to strengthen the EU single market for the next 30 years

On the occasion of the 20th anniversary of Slovakia's EU membership, it is worth recalling what is the most economically important part of EU membership. It is the access of Slovak entrepreneurs to the duty-free single market

The single market was introduced based on assumptions that economic science has been teaching for hundreds of years. Free trade, free of tariffs and disparate barriers, increases the welfare of all its participants.

In our latest study, Market Force - Revitalising the Single Market for the next 30 years (link), we not only assess the impact of access to the Single Market from Slovakia's perspective, but also propose measures to make it more effective.

The economic benefits of the single market are many times greater than the amount of money received from the European budget, which we describe in detail in the first chapter. Thanks to free trade, the long-term level of GDP is 15-19% higher than it would have been if Slovakia had been outside the free market. This is due to the fact that Slovakia is an open economy with large exports and imports, 80% of which end or originate in the EU.

Chart 1: Estimated decline in GDP in the scenario with reintroduced tariffs and non-tariff barriers

Source: in 't Veld (2019)

By comparison, the Slovak Republic received a cumulative €37 billion from EU budgets during the membership period. If we subtract the €11.5 billion paid in levies to the EU budget, the net position amounts to €25.5 billion, an average of €1.3 billion per year (1.1% of GDP). This is incomparably less than the positive impact of the Single Market on the Slovak economy.

The full realisation of the single market without any obstacles will probably never be possible, among other things because of the considerable linguistic, cultural or geographical differences between the Member States. However, there are many areas in the functioning of the Single Market where unnecessary bureaucratic barriers, various requirements for obtaining permits and licences, as well as directives that hinder the development of many sectors of the economy, continue to prevent the movement of entrepreneurs, workers and capital. The second chapter of the study is devoted to these barriers.

In the third chapter, we make recommendations to strengthen and improve the EU Single Market in order to further increase the benefits for EU Member States and their citizens.

Single Market rules are "written" in Brussels, but representatives of all Member States contribute to their formulation. Our recommendations are therefore addressed not only to the European Commission, but also to the Slovak government, parliament and relevant public administration. These recommendations can be summarised as follows:

• The positive benefits of the Single Market will only go as far as the Member States allow. Slovakia benefits most from the Single Market and should therefore exert the greatest pressure in the EU to improve Single Market conditions. Free trade and the movement of goods and people should be a political priority for the Slovak government.
• Building the single market starts at home. Abolishing unnecessary regulations, removing unnecessary licences, reducing bureaucratic burdens, or consistently preventing gold-plating. These tools are in the hands of government and parliament.
• Economic growth is not created by politicians, ambitious targets and strategic materials, but by entrepreneurs and hard-working people. State aid and protectionism by Member States may bring short-term benefits, but in the long term it raises prices for everyone.
• European Union legislation is built on the premise that comprehensive regulation creates the conditions for good business. However, it ignores the fact that all regulation stifles innovation. The Union's faltering economic growth is proof that being a world leader in regulation does not mean being a leader in digital technologies and new services. Overemphasis on consumer or worker protection reduces consumer welfare. Innovation needs freedom, not a precisely tailored straitjacket.
• The single market's weakest points are the free movement of services and capital. Member States' markets need to be opened up to competition. European stock exchanges are four times smaller than the US. The lack of available capital is holding back investment by European firms.
• The EU single market should not end at the borders of peripheral Member States. As many countries in the world as possible should be included in the free market through trade agreements.

This publication was produced in cooperation with the Epicenter Network, a network of Europe's leading economic think tanks. The collaboration produced Market Force: Revitalising the Single Market for the next 30 years, which assesses the benefits and challenges of the Single Market from the perspective of the CEE region.