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This is a critical moment for the EU economy. At the start of a new European Commission mandate, the EU’s competitiveness and growth record are in sharp focus. Landmark reports from Enrico Letta and Mario Draghi have re-diagnosed the EU’s competitiveness challenges and proposed ambitious solutions – among them, reinvigorating the process of integration under the Single Market. Commission President Ursula von der Leyen has committed pushing this agenda forward, launching a Competitiveness Compass initiative. Why is Single Market integration so important? Because the potential gains from reinvigorating this process are so large. The high ambition scenario in our new report could add up to €335 billion a year to EU-wide GDP. That in turn could yield up to €136 billion a year in additional tax revenue, which, if channelled to public investment, could help to close around a sixth of the €800 billion investment gap identified in the Draghi report.
As the EU institutions begin a new five-year mandate, the EU is at a critical juncture in making policy decisions that will determine its position in the global economy for decades to come. The incoming Commission will take office amid growing political recognition of the EU’s declining economic competitiveness compared with other major economies. This takes place against a backdrop where geopolitical and economic competition is increasing between large economies over establishing primacy in the industries of the future; countries are increasingly conscious of the security of supply for critical minerals; and market access barriers have increased through the more active use of an industrial policy and the imposition of tariffs.
A 2021 survey of members of the European Round Table for Industry reported the Single Market as being around 75% complete, with less development in areas like the Digital Single Market. If anything, the Single Market has become more fragmented in recent years. In the wake of the energy crisis triggered by Russia’s invasion of Ukraine, individual Member States intervened to secure energy supplies and support supply chains in domestic markets, enabled through the ‘temporary crisis and transition framework’ that permitted greater use of national state aid. Competition between Member States in pursuit of foreign investment in ‘strategic’ industries for the green and digital transition such as semiconductors and batteries has also intensified.
The need to address the challenges facing the Single Market was captured in two landmark reports published this year: the first, from Enrico Letta, described the Single Market as the EU’s “most valuable asset”, whereas the second, from Mario Draghi, lamented the fact that the EU has “left our Single Market fragmented for decades, which has a cascading effect on our competitiveness”.
These issues have long been recognised and have led to multiple proposals aimed at pooling strategic industry support at the EU level, while completing the Single Market in areas where it remains fragmented. In 2022, Commission President von der Leyen proposed an ‘EU Sovereignty Fund’, which is now planned to lead to an ‘EU Competitiveness Fund’ in the context of the EU’s post-2027 budget – its Multiannual Financial Framework.
The Letta report outlines ways to strengthen and reinvigorate the Single Market, emphasising its role in fostering economic growth, innovation, and social cohesion, and in increasing resilience in the face of an evolving global landscape characterised by demographic shifts, technological advancements, and geopolitical tensions. Letta’s recommendations cover research, innovation and education, where he calls for introducing a “fifth freedom”; finance, where he outlines a strategy for establishing a Savings and Investments Union; energy and defence, where he lays out proposals to establish a true common market; and other areas such as health and transportation.
The Draghi report emphasises the importance of strengthening the Single Market to boost competitiveness and innovation, but also economic resilience. It highlights how Single Market fragmentation, trade barriers, and divergent state-aid practices undermine these goals. Draghi also highlights a significant investment gap in the EU, estimated at up to €800 billion a year, for energy, transport, digital, security, and innovation. He also discusses the causes underlying that gap, which include high regulatory burdens, fragmented financial and insolvency regulations, high energy costs from the lack of a unified approach to energy infrastructure, and competition from the Inflation Reduction Act, which has drawn investment away from Europe.
There are significant economic benefits that could be unlocked by removing the remaining sources of Single Market fragmentation. These gains could be particularly large for newer Member States, where these frictions can be relatively more onerous, and for the EU’s 24 million SMEs, for whom the burden of such frictions can be particularly challenging.
Official estimates produced for the European Parliament suggest that several hundred billion euros of potential GDP gains are being missed through continuing Single Market fragmentation. The Draghi report goes further, arguing that “remaining trade frictions in the EU mean that Europe is leaving around 10% of potential GDP on the table”. Meanwhile, a significant new study presented in the IMF’s latest Regional Economic Outlook for Europe estimates that reducing intra-EU trade barriers to levels consistent with those between US states could boost productivity (and GDP by extension) by 6.7%, the equivalent to more than €1 trillion a year.
The European Centre for International Political Economy (EPICE) has examined the economic costs of Single Market fragmentation stemming from ‘strategic autonomy’ policies, such as reshoring supply chains and restricting trade and investment flows, expanding state aid and subsidies to build up ‘strategic’ industries and companies, and imposing new regulatory requirements related to security objectives. It estimates that such policies could reduce EU GDP in the longer run by as much as ½ to ¾% of GDP (equivalent to costs of between €85 and 127 billion a year).
Our new report presents three scenarios for potential future gains from closing the integration gaps in the Single Market for both goods and digital to varying extents.
The potential gains in annual GDP across the EU amount to:
The results of our scenarios – and the even higher estimates from some studies of theoretical maximum gains from integration – strongly support the importance of deepening Single Market integration to boost the EU’s economic competitiveness. Securing gains at the top of the range in our scenarios could generate as much as €136 billion a year of additional tax revenue across the EU – a potentially significant contribution to help close the €800 billion a year investment gap identified in the Draghi report.
These measures will be a central policy priority for the new Commission if it is, as laid out by Commission President Ursula von der Leyen in her 27 November European Parliament speech, to realise the ambitions contained in the Competitiveness Compass initiative. As the President laid out in her letter to Stéphane Séjourné, the Commissioner responsible for the Single Market, this should include a horizontal Single Market Strategy aimed at promoting the cross-border movement of goods and services, a Single Market Barriers Prevention Act and, importantly, a determined effort to deepen the Single Market and simplify the regulatory environment for SMEs, in particular through a dedicated SME passport.
These announcements show that European policymakers understand the importance and urgency of completing the Single Market – as underlined by the Letta and Draghi reports, and confirmed in our modelling. The task now is to make it happen.
This blog draws on Flint’s first public economic impact report. Andy King, who was previously one of three members of the Office for Budget Responsibility’s (OBR) executive ‘Budget Responsibility Committee’ that is responsible for producing the UK Government’s official economic and fiscal forecasts, is a Specialist Partner and leads Flint’s economic modelling service to clients. He is supported by a team that includes Director Surjinder Johal, who previously led the OBR’s policy costing process, and Director Jaz Sansoye, who previously worked as the Financial Conduct Authority’s head of strategy. Flint is well-placed to provide your organisation with economic modelling support, so get in touch if this is of interest.