Largely unnoticed by a larger public, one of the most important and most successful institutions of the European Union (EU) celebrated its 30th birthday this year: the EU internal market, which since January 1, 1993 has allowed the free movement of goods, services, capital and people between ensures the Member States. It was and is the promise of economic freedom, the engine of prosperity for the citizens of the EU and thus the main attraction for countries willing to join.
On the occasion of its birthday, the Frankfurter Allgemeine Zeitung summed up the merits of the EU internal market: “Today, 440 million consumers benefit from a larger and cheaper selection of goods, 17 million people live or work in another EU country, 24 million companies are located in the domestic market and produce 15 percent of all goods traded in the world there. Exports within the EU, i.e. from one EU country to another, have increased fivefold since the beginning of 1993.”
EU internal market falls into oblivion
The almost forgotten birthday of the EU single market is all the more astonishing. The lack of attention could perhaps be explained by the fact that the world is currently having major problems with the Ukraine war. Or it is the same with the EU internal market as with health: you only notice it when it is missing, as long as it is there it is taken for granted. But the causes lie deeper and are worrying. The idea of the market economy has lost much of its appeal and support among the governments of the EU member states and in the EU Commission itself.
The Corona years certainly contributed to this, in which enormous competence to act grew, especially at the beginning of the state level. Initially quite surprised by this and partly overwhelmed by the streamlined state structures, the executive quickly got used to the new design options, which made an unprecedented degree of governance possible in many areas. Almost as the pandemic subsided, Russian President Vladimir Putin invaded Ukraine. And of course, even in war, action by the member states dominates, and the regulatory power of the markets takes a back seat – at least temporarily.
The idea of a planned economy is less and less deterrent
The EU Commission and quite a few EU member states have not only gotten used to their role as powerful actors with the license to take executive action, they use it and no longer want to give up their far-reaching design options. Of course, overcoming the shortage of masks and vaccines in the pandemic, making decisions about school closures and mandatory testing and quarantine required government action.
And, of course, decisions about war and peace, arms deliveries and economic sanctions cannot be left to markets. However, a worrying habituation effect can be observed: quite obviously fewer and fewer politicians and, unfortunately, citizens too are put off by the idea of a light planned economy.
Almost at the same time, Federal Climate Minister Robert Habeck and Federal Housing Minister Klara Geywitz as well as the European Parliament presented plans on how to reduce the high CO2 emissions in the building sector. In Germany – based on the model of the combustion engine in road traffic – oil and gas heating systems are to be gradually banned by law. The European Parliament, on the other hand, would like to give buildings throughout the EU a binding step-by-step plan for increasing energy efficiency. Even Federal Minister Geywitz considers this to be a “disproportionate encroachment on the property rights” of the Basic Law, i.e. unconstitutional.
The EU Commission relies heavily on state regulations
And the EU Commission is relying heavily on state regulations for its Green Deal. In the future, for example, imports are to be subject to a climate tariff if the manufacturers, for example in Asia or the USA, do not pay any taxes for the emission of greenhouse gases. This is intended to prevent competitive disadvantages for the EU economy. However, there is much to suggest that Asians and Americans will react with new tariffs for EU products. The EU Commission’s response to the “Inflation Reduction Act (IRA)” with which US President Joe Biden wants to promote the green conversion of the domestic economy fits into this policy pattern.
However, there should be aid primarily for goods produced in the USA, such as electric cars. Because the EU Commission fears that productions will migrate from the EU to the USA, they now want to set up a “European IRA” (EU Commission President Ursula von der Leyen). Specifically, it is about relaxing the rules on subsidies for renewable energies and climate-friendly technologies in the Member States.
Subsidies are not the most important instrument to increase competitiveness
There are also warning voices to reason. At the beginning of the year, the Vice-President of the EU Commission, Margrethe Vestager, warned that the economy would benefit significantly more if the remaining hurdles in the EU internal market were removed than subsidies could. The Competition Commissioner also gives specific figures: 713 billion euros more by 2029.
She believes that the idea that “subsidies are the most important instrument for increasing competitiveness” is a mistake. And rightly so, because in the long run only companies that manufacture globally competitive products survive in international competition, and not those that have specialized in skimming off subsidies and otherwise rely on protective tariffs.
Market economy goes under the wheels
Nevertheless, the idea of the market economy is getting a little more under the wheels every day. The EU and/or its member states not only specify the goals, but also the ways to get there. They always provide new programs worth billions: either to promote investment or to compensate for the negative consequences of this policy. As a result, national debts rise, companies take refuge under protective shields instead of proving themselves in competition, and inflation worsens.
The National Academy of Sciences Leopoldina counters: Openness to technology, hydrogen research, consistent network expansion and CO2 pricing are important. What is meant is that the state should confine itself to providing a framework for the economy and leaving the rest to the market.
Science supports turning away from the market and towards the state
The turning away from the market and towards the state finds prominent supporters in science. The Italian-American economist at London University College, Mariana Mazzucato, is one of the most influential voices and, last but not least, has the ear of Federal Economics Minister Habeck. Her postulate: “We have to rethink: the state has to recreate entire markets. He has to shape them, not just regulate them when they fail.” Because: “In order to start the green revolution and tackle climate change, we need an active state again”.
One of her writings has the landmark title, The Entrepreneurial State. Gas fracking in the USA does add value, but this form of value creation is “morally wrong”. That was before the Ukraine war. Today, the federal government spends a lot of tax money just to bring this fracking gas to Germany. A gas that should no longer exist according to the will of green state economics.
“The Mother of All Problems”
I am convinced that the EU Commission is throwing itself into the formation of a European state economy because it is currently unable to provide a solution to the EU’s main problem: the European Union’s lack of ability to govern as a result of the principle of Unanimity. Too many EU member states are still unwilling to relinquish power in favor of the EU being more able to act and thus more sustainable.
I had already identified this governance crisis at this point in June 2022 as the “mother of all problems”, without which it would not be possible to come to terms with other big players such as China or the USA. The principle of unanimity continues to apply to the issues of foreign and security policy, external borders, and budget/currency. It is therefore not surprising that the EU has more or less failed in the eyes of the citizens in the major crises of the past – Ukraine, refugees/asylum/ and the euro.
Transition to majority decisions?
There is no knowledge deficit within the EU, but a massive deficit in action. In May of last year, French President Emmanuel Macron called for institutional reforms at the conclusion of the Strasbourg “Conference on the Future of Europe” and specifically questioned the principle of unanimity. If the EU wants to develop faster, this principle no longer makes sense. In fact: 27 states can usually only agree on the small common denominator, if at all.
Current example: More refugees than ever are pouring into the EU – across the Mediterranean, mainly from Ukraine. But the EU fails to agree on a joint effort to evenly share the resulting burdens. Federal Chancellor Olaf Scholz also addressed the problem in his Prague speech in August 2022: He suggested that “in the common foreign policy, but also in other areas such as tax policy, there should be a gradual transition to majority decisions.”
Unfortunately, the momentum of summer 2022 has completely ebbed. Instead, the activism described above can be observed above all on the part of the EU Commission in the areas of climate and industrial policy – a state-controlled ecological agenda with an industrial policy tinge. Many people in Brussels would prefer to build the battery and chip factories that are considered necessary themselves, instead of “just” doing them with massive subsidies.
Perverse incentives can lead to EU internal market failure
This is where a threatening vicious circle is created in the EU: the inability to improve one’s own ability to govern gives rise to false actionism in the areas of climate and industrial policy with interventions in the core principles of the market economy. The resulting high financial need for subsidies for companies and social benefits for citizens will drive up debt and make the EU single market less attractive for investors.
The false incentives of this planned economy light could lead to a failure of the EU internal market with considerable upheavals in the EU member states, which would exacerbate the crisis of confidence among citizens in the EU. In a word: Anyone who weakens or undermines the EU internal market is laying hands on the European Union’s promise of freedom, economic advancement and social security. The EU internal market was and is the engine of European integration. Whoever chokes it off chokes off the future of the EU.
