Let’s fall in love with the single market again

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Piotr Arak. [Polish Economic Institute]

The European economy is one of the biggest in the world. We tend to forget that we have more than 500 million consumers and an economy worth 15.9 trillion euros, meaning more than China and almost as much as the US, writes Piotr Arak.

Piotr Arak is the director of the Polish Economic Institute.

The entire Brexit saga shows once more how difficult it is to leave the single market once you have been a part of it. But also how beneficial it is to be a member of the EU.

At our think tank, we asked ourselves, just before the new European Commission takes office – how to make the single market great again. We did not hear Ursula von der Leyen, the new EC president praise the single market as she did the green new deal in her opening speech.

This is where the idea for the “Letters to the New European Leadership” came about – to persuade the new Commission of the need to have the single market in the centre of the agenda.

Jacques Delors, the former head of the European Commission who championed closer integration, rightly pointed out that ‘nobody can fall in love with the single market’. We want to prove him wrong. We love it.

The success of the EU can be measured largely in the level of exchange in goods, services, people, and capital. The complete implementation of the Single Market is key.

Much remains to be done in many areas, such as the free movement of services and labour, eliminating restrictive national processes, regulations and standards, and ensuring that common legislation is applied uniformly and consistently.

As long as barriers to the four freedoms remain, European competitiveness will continue to be held back – the EU economy would be at least 10% smaller without it.

By the EU’s estimate, there are still 5,000 national regulations protecting the delivery of different types of services in the member states. That’s a big problem because services – everything from banking and cloud computing to childcare and hairdressing – now make up nearly three-quarters of EU GDP.

As a result, the importance of the single market is fading, and its capacity to boost Europe’s economy is diminishing. Despite all the grand talk of a “digital single market”, for example, about a third of European websites don’t sell to customers in other member states and two-thirds of online sales are domestic.

Ideally, member states should also try to tackle regulatory heterogeneity at business regulation level (as e.g. exemplified by the World Bank’s Doing-Business indicator). This is another costly friction for SMEs and startups that hinders them considerably, even causing some to relocate to the US (Spotify is a conspicuous example).

We believe that the fight with tax havens and money laundering should go to another level. The single market has its collateral damage, many forget. The EU member states lost €137 billion in value-added tax (VAT) revenues in 2017, according to a study by the European Commission.

Shifting profits by multinational firms to tax havens is a growing problem. Researchers from the University of California, Berkeley, and the University of Copenhagen estimate that more than $650 billion of multinational profits are shifted to tax havens each year, and 35% of the shifted profits come from EU non-haven Member States.

Countries such as Germany, France, Hungary and the United Kingdom lose over 20% of their corporate income tax revenue due to this practice.

The VAT gap, profit shifting and the overall illegal tax evasion range between EUR 750bn and €900bn. These are additional sources of developmental aid and cohesion funds for the perspective of 2020–2027.

Public procurement is the ideal ground governments can start pushing against tax haven abuse. Public procurement could be used at the EU level to protect the tax base of the Member States.

Corporate taxation must be more transparent, especially in the case of tax planning methods applied by companies. A good example is the obligation to make tax strategies public by the largest groups of undertakings operating in the United Kingdom.

Moreover, the Commission should work towards a new approach based on voluntary cooperation among member states, and the creation of a coalition of those willing to combat criminal groups involved in VAT fraud.

New Commissioners should explore how digital technologies can help close the VAT gap and simplify VAT reporting and exchange of information between European tax administrations. Business Europe promotes the idea of a portal with additional information relevant to VAT payers in different countries. This too is crucial.

Ralf Dahrendorf once wrote that “larger markets stimulate trade” and that “it is cold outside a single market”.

Those statements have never been more correct than today when we pursue a bold climate and energy agenda and increase competitiveness in the digital sphere, wanting to create European digital champions. It is not protectionism and rigidity that enabled tech giants to thrive in the US but the ease of access to the markets of each state.

The Single Market allows Europeans to travel freely, study, work, live and fall in love across borders. We loved the single market during the industrialisation of the 70s and 80s, let’s make it great again in the era of AI in the 21st century.

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