Gaps in the single market must be plugged – POLITICO

Antonio Manganelli is a professor Antitrust & Regulation at the LUMSA University of Rome. Andreas Schwab is a member of the European Parliament.

German Chancellor Olaf Scholz said in October that Europe’s energy crisis can only be overcome through “solidarity.” But as of late, this solidarity has been in short supply.

Member countries have lacked a unified response to soaring energy prices and runaway inflation, which has been exacerbated by Russian President Vladimir Putin’s war on Ukraine. And despite the Chancellor’s call for solidarity, a common strategy to address the energy crisis remains a long way off.

In particular, Germany’s earlier decision to go it alone with a €200 billion gas price relief fund has sparked alarm in Brussels and other European capitals. And Berlin’s protracted opposition to the cap on gas prices that many European Union countries supported meant that an eleven-hour summit in late October yielded only a blurry roadmap, rather than a decisive agreement on how to lower energy prices causing economic pain across the bloc. Finally, after long discussions, they were able to reach a political agreement on the price cap at the end of last year, which will be applied from next week, starting February 15.

Both the energy crisis and the pandemic preceding it have exposed the weakness of fragmentary management, which has hindered the development of the European single market — one of the bloc’s greatest accomplishments. Indeed, they have illustrated how, even after 30 years, the single market has significant gaps that need to be plugged if the EU is to be crisis-proof.

Since Russia’s annexation of Crimea in 2014, there have been several calls for greater integration of European electricity markets, but both practical and political obstacles have left Europe with disparate energy systems linked by insufficient interconnectors. Meanwhile many member countries’ governments remain close to their state-owned energy companies and consider energy policy a matter of national security.

However, Putin’s invasion has now shone a spotlight on the perils of such fragmentation, and the EU urgently needs both short-term measures to tackle the energy emergency — such as a financial instrument similar to the SURE plan that cushioned the pandemic’s socioeconomic impact — as well as a Europe-wide buyers’ network for natural gas and a deeper integration of the European energy market.

The EU began, in part, as an energy alliance. Yet, it has made meager progress toward an energy union, which would generate many benefits — from increased energy independence to lower prices. Thus, full harmonization of the energy sector should be a priority. And without a coordinated effort at the supranational level, the risks are clear.

The European People’s Party group has, therefore, called for an integrated energy single market, as without it, there’s distortion competition — with consumers and businesses in wealthier member countries relatively shielded and those left behind made vulnerable. This means they could be tempted to follow Hungary’s example and sign their own agreements with Gazprom, thus rendering the EU’s sanctions policy completely ineffective.

The dangers of the energy crisis risk other side-effects as well, including growing household energy poverty, the deindustrialization of entire sectors, and increasing asymmetry and fragmentation across the markets in Europe.

All this could trigger geopolitical tensions — but it could destabilize Europe’s competitiveness too. And the experience of other critical European sectors — most notably telecoms — has amply shown how market fragmentation can damage economic competitiveness and resilience.

When it comes to telecoms, the EU has, rightly, made the deployment of next-generation technologies a key priority, as achieving Brussels’ digitalization benchmarks could increase GDP per capita by over 7 percent across the EU. However, despite political will and public funding — on average, member countries have allocated 26.4 percent of their COVID-19 recovery funds toward accelerating the digital transition — the EU is still lagging dangerously behind faster-moving regions in Asia and North America.

The heart of the issue is the significant infrastructure investment required to achieve the EU’s ambitious digital objectives for 2030, and to cope with exponentially increasing demand in network traffic as well. Due to the significant pandemic-era surge in data traffic Internal Market Commissioner Thierry Breton was already forced to ask Big Tech firms to reduce the quality of their audio-visual services, so as to avoid the collapse of European networks.

It’s also quite clear by now that European telecom companies can’t afford the investment needed to meet the digital transformation targets set by Brussels — which is why large public EU and national funds have been devoted to support the deployment of high-capacity networks in most member countries.

Next to public intervention, however, it’s also necessary for each market player in the digital ecosystem play its role.

With this in mind, the Commission is soon opening a public consultation process, which will assess whether and how all the different market players contribute to the telecoms and digital infrastructure, in order to make coping with increasing user demand possible. This policy action should aim to shape an ecosystem where all play a proportionate and fair part in overcoming the infrastructure investment gap.

Furthermore, a point of particular concern is that European telecommunications companies are more financially strained than their overseas counterparts.

The core of the problem here is the fragmentation of the Continent’s telecoms market. Indeed, while the U.S. has only a few operators covering the entire telecommunication market, the EU has several dozen. For example, in the mobile sector, seven out of the nine largest European markets have at least four network-based competitors at the national level.

This unsustainable level of fragmentation has put Europe at a considerable disadvantage and has has weakened EU companies’ ability to invest. At €96.3 per capita, Europe’s telecom capital expenditure is clearly lower than what Asian giants (€115.4 in South Korea) and U.S. companies (€191.9) invest.

Moreover, this fragmentation has left EU telecom players unable to rival global digital tech companies and impeded their investment due to very intense price competition. In this regard, both competition policy — namely merger control — and ex-ante regulation should adapt to the changed circumstances.

As a similar scenario now unfolds in the energy sector, slow progress toward a fully integrated energy market has left member countries unequally vulnerable. And if we don’t seize the opportunity to plug the gaps in the single market, this disparity will only increase, the process of deindustrialization will accelerate and the EU will lag behind other major world economies.