Does the EU really have a "Single Market"?

 February 19, 2025 conversableeconomist

Europe’s Internal Trade Barriers: A Long Way From a Single Market

One remarkable advantage for the US economy is the large size of its internal market. US firms can make investments in new goods and services knowing that they can potentially sell, with only a few limitations rooted in state laws, to a large number of customers across a broad area.

Indeed, the openness of the US internal market is rooted in the US Constitution. Article 1, Section 8, lists the powers of Congress, and the third clause gives Congress the power to “regulate Commerce … among the several States.” By giving that power to Congress and the federal government, the Constitution blocked states from setting up barriers to trade with each other–for example, although US states can pass laws that may create indirect costs for companies buying and selling across stated, they can’t impose tariffs or quotas on goods and services imported from other US states.

A primary goal in creating the European Union was to replicate this “single market,” and thus to give European firms the incentives for innovation, investment, and expansion that result from wide-open access to a large internal market. But according to the IMF Regional Economic Outlook report on “Europe: A Recovery Short of Europe’s Full Potential,” the EU “single market” project has a long way to go (October 2024). Here’s a sample (references to text “boxes” have been cut:

Europe’s productivity gap with the global frontier can be traced back to a more limited market size, capital market constraints, skilled labor shortages, and stalled structural reforms. Firm-data analysis shows that Europe’s segmented good and services markets are keeping businesses from becoming larger, spending more on R&D, and exploiting economies of scale. Moreover, fragmented capital markets mean that firms do not draw enough on equity financing. As a result, business dynamics are dampened especially in the services sector where start-ups tend to operate with large intangible capital. …

There is widespread agreement on the sources of Europe’s growth weakness. Recently released expert studies (Letta 2024; Draghi 2024) come to a similar conclusion that Europe’s low productivity is related to lack of market depth and scale. Both reports link Europe’s lack of competitiveness to Europe’s incomplete single market in the trade of goods, services, and factors of production (capital, labor). Remaining barriers are considered to be still substantial and have resulted in less investment and innovation than necessary to accelerate growth and productivity to levels seen in other advanced regions.

A deeper and larger single market offers the potential for a resurgence in productivity growth. European integration delivered tangible growth benefits in the past and could do so again. Following the two EU enlargement waves in 1995 and 2004, EU member countries began trading more with each other (Figure 15, panel 1). As a consequence, in the decade following accession, regions in new member states saw on average GDP per capita rise by more than 30 percent relative to comparable non-accession regions and existing member states gained too.

It is important to note that regions within Europe that were better integrated through value chains and transport networks registered higher gains. However, value chain integration has stalled since the last decade … and substantial barriers to goods and trade flows remain … New IMF analysis finds that in 2020 trade costs within Europe were equivalent to a sizable ad-valorem tariff of 44 percent for the average manufacturing sector compared to 15 percent between US states, and as high as 110 percent in the case of services sectors …

Here is a figure to which the IMF is referring. The darker blue line shows intra-EU trade in goods; the lighter blue line shows intra-EU trade in services. As you can see, intra-EU trade in goods had risen substantially up to about 2008, but has only crept a little further since. Intra-EU trade in services remains less than 10% of their value, 30 years after the birth of the “single market” initiative back in 1993.

Again, the IMF estimates that remaining barriers to trade within the countries of the EU are equivalent to a 44% tariff on trade in goods, and a 110% tariff on trade in services. These high tariffs are bad for economic growth in Europe, just as similar state-level tariffs would be bad for US growth. Of course, the underlying economic reasoning also explains why a global outbreak of tariffs would be disadvantageous for both US and global growth.

Can we mine our way to growth?

 

• Andrew Orlowski

Britain cannot repeat its fracking mistake in the race for critical minerals

Whitehall must overcome its disgust at ‘dirty’ industries or risk missing out on a genuine industrial renaissance

Andrew Orlowski

Related Topics

• Mining industry, 
• Fracking, 
• Manufacturing industry, 
• Defence industry

10 March 2025 11:00am GMT

25

South Crofty mine, near Camborne, Cornwall. The south-west county is home to a plentiful supply of lithium and tin Credit: Jay Williams

Sir Humphrey has learned to hold his nose. After decades of official disgust at mining, refining and petrochemicals, Whitehall is learning to love the dirty stuff again – the very things we need to defend ourselves and grow a modern economy.

The vibe shift is palpable in Westminster and reflected in the booming share prices of mining and defence companies. And about time, too. In a collective spasm of shame, we stopped digging up and working with the most vital materials of the modern world.

Our policy class considered these industries to be filthy, and at Davos, the elite toasted itself for its high standards of moral hygiene by making a new, cleaner, “weightless” world. But we were becoming strategically dependent on China for the basics of modern life.

“China has realised they can dominate the world,” says Jeremy Wrathall of Cornish Lithium, which opened a £15m demonstration plant last autumn, producing battery-grade lithium hydroxide for batteries as a by-product.

“Most of the West has been asleep at the wheel and China is now laughing all the way to the bank.”

Today, China controls the supply chains for many of these critical minerals, and in December, the PRC turned the screws further. “So, you want to hurt our semiconductor industry?” asked Beijing. “Well, get a load of this”.

It promptly blocked the United States from receiving any antimony, gallium or germanium. The message was clear: we can hurt you far more than you can hurt us, because only we have what you need, and you don’t.

Donald Trump’s indulgence of Vladimir Putin may look craven in European capitals, but it’s an entirely rational strategic response to China’s critical minerals monopolies.

The US can secure supplies from mineral-rich Russia and Ukraine to buy time for its own domestic refining to grow. If this peels Russia away from its alliance of convenience with Trump’s real enemy, China, then that’s a bonus.

But the British minerals story remains largely unappreciated. There’s lithium and tin in Cornwall, copper and gold in Northern Ireland, and nickel, cobalt and rare earths in Scotland.

“For modern warfare, you need metals such as lithium, caesium and rubidium for atomic clocks and night goggles,” says Wrathall. “We will be producing them in Cornwall as a by-product of what we do.”

Not long ago, Whitehall had one official dealing with critical minerals, now there are 50 across five departments. The paybacks for tiny strategic investments are huge: one £15m scheme captured £170m of investment.

“We’re starting to see the green shoots of an industrial foundation for which we can build a strong critical minerals supply chain,” says Jeff Townsend of the Critical Minerals Association. With an integrated petrochemicals centre and freeport on Teesside, the parts are falling into place.

Sky-high industrial energy prices need to come down, but what’s really missing is a wider sense of the genuine industrial renaissance before us.

We can not only dig the stuff up but apply science to it to create a higher-value product: what’s called “midstream processing”. And we can also start exploiting the resources that we think are there, but haven’t bothered to look for since the Macmillan era.

Re-shoring makes us more secure and enables us to apply scientific innovation to add value.

The UK Critical Mineral Intelligence Centre at the British Geological Survey has just published its critical assessments. Gavin Mudd, its director, explains how we export 2,000 tonnes a year of tungsten, a metal vital to our defence industry.

But we could export 15,000 tonnes thanks to ingenious new recovery techniques: that’s about 20pc of the world’s production.

Most tantalising of all are the untapped riches under our soil. We’re pretty sure they are there but haven’t had to look for them for decades.

“The last national geophysical surveys were done in the 1950s and 1960s,” explains Mudd.

Wratham has unearthed archives that even the British Geological Survey (BGS) didn’t know it had. And the strategic and commercial imperative is now urgent.

For example, monazite is an ore that is described as a “pathfinder” to rare earths, yielding cerium, lanthanum, and neodymium. It is incredibly expensive, and Wales is full of it. (It’s a common misconception that rare earth metals are rare.)

Wales is full of monazite, an ore described as a ‘pathfinder’ to rare earths

But we haven’t tried to assess those monazite resource deposits for more than 30 years. Resourcing the geologists at the BGS could be the smartest investment any government makes, for who knows what else they will find.

So many times, this column often rues, the UK has found itself with a winning lottery ticket only to throw it away.

For example, in 2013 fracking was popular across the country, particularly in communities that stood to benefit from it. However, a campaign was then launched equating the process to “tiny explosions”, a highly misleading description of spraying rocks with water.

This activated the environmentalists, and politicians got nervous. The Colvile-Wolf authored Conservative Manifesto of 2019 killed shale gas for a decade.

The revulsion against mining and industry culminated in Boris Johnson’s speech to the United Nations in 2021, which talked about the derangement of the “natural order”.

We can’t afford to make that mistake again – to capitulate to wild, bourgeoisie fears of getting dirty, and using our natural riches.

What we have is better than gold.