The EU’s four freedoms – goods, capital, services and people – have never been fully implemented; with economic globalisation under threat, the one thing the EU must avoid is undermining its crown jewel – the single market, writes Pieter Cleppe.
Pieter Cleppe is a Research Fellow at the Property Rights Alliance.
In early February, European Commission President Ursula von der Leyen presented the EU’s proposed response to the US Inflation Reduction Act, a piece of legislation whereby the Biden administration aims to provide companies with generous tax credits and rebates in order to stimulate green investment.
European governments and industry are deeply concerned about this, given how US support is reserved for products that are mostly manufactured in North America.
With its response, the European Commission aims to stimulate a homegrown green industry in the European Union, dubbing it a ‘Green Deal Industrial Plan’.
The approach to achieve this is unfortunately mostly protectionist, whereby the Commission is essentially fighting fire with fire – never a good idea, as the 1930s proved, with its tit-for-tat protectionism culminating in global economic misery.
State aid overhaul threatening Single Market
In practice, Brussels’ plans would change EU state aid rules, allowing governments in the EU to match the state aid offered by the United States or any other non-EU member state. To be fair, this state aid would come with conditions, but the idea is very controversial, even within the European Commission.
While presenting these proposals, Margrethe Vestager, Commission Vice-President who is also responsible for state aid, warned that this “far-reaching” change which “comes with significant risk for the integrity of the single market and for our cohesion”, stressing that the amendments are meant to be “temporary”. The question is whether anyone in the Commission remembers the warning of Nobel Prize-winning economist Milton Friedman that “nothing is so permanent as a temporary government program”.
Other changes to EU state aid rules include raising the ceilings under which member states can hand out subsidies without notifying the Commission and enlarging the scope of previous exemptions to state aid rules to “all possible renewable sources of energy.”
Since March 2022, roughly 80% of the €672 billion in state aid which the Commission approved was spent by Germany and France, proving that this kind of Single Market undermining mostly benefits well-connected companies in the EU’s two biggest economies.
It is therefore no surprise that these plans have attracted widespread opposition, from Benelux and Scandinavia to the Czech Republic, Slovakia, Estonia, Ireland, Austria and Italy.
Brussels seeking elusive compromises
To smooth opposition, the European Commission wants to create a new ‘European Sovereignty Fund’, meaning European citizens would not only suffer from less competition but would also need to burden higher taxes to pay for this new fund.
At least the Commission prefers to repurpose unused cash from other EU funds, unlike EU Council chairman Charles Michel, who is proposing to finance this with another round of joint EU loans – in other words: more debt, paid for by the grandchildren. The Fund has stirred up significant controversy, with Robert De Groot, the Dutch Permanent Representative to the EU, going so far as to criticise Michel’s idea as “Karl Marx on steroids”.
Thankfully, in its proposals, the European Commission also wants to lower the regulatory burden for innovation, a welcome return to the “better regulation” agenda. Apart from streamlining permitting processes, for example by introducing a “one-stop-shop” in member states, the EU should also look again at opening up the bloc’s capital markets, which ultimately serve to provide the financing to boost innovation.
Unlocking EU capital markets
The ongoing review of the EU’s Solvency II Directive – which imposes minimum capital threshold for insurers to ensure financial sustainability and policyholder protection – presents a major opportunity to remove a prevalent obstacle to strategic investment from the insurance sector, Europe’s largest institutional investor.
In short, the Capital Requirements Regulation’s (CRR) “Danish Compromise” has created an uneven regulatory environment between banks and insurers, as it provides banks with advantageous capital buffer rules for their insurance holdings.
As a result, insurers are being disadvantaged, an imbalance that German MEP and Solvency II rapporteur Markus Ferber should bring to the attention of the European Parliament – where the review currently sits – to correct, thereby unlocking the insurance sector’s long-term investment potential and creating the conditions for further consolidation in the financial industry.
Furthermore, the project to create a “Capital Markets Union”, a true single market for capital across member states which should help to release funding to stimulate growth and open up investment opportunities, has long been stalled.
This situation puts European investors and innovators at a great disadvantage with the United States, where deep capital markets exist, helping startups and scaleups to grow into global players. In Europe, smaller companies are having their access to capital hindered by burdensome, costly regulatory processes and fragmented capital markets.
Another measure that could do some good is the proposed EU “Listing Act”, which intends to simplify the currently burdensome requirements for public listing, whereby companies become able to raise funds on capital markets.
This is a priority for the Swedish EU Council Presidency, as it would help European companies tap more equity investment, thereby becoming less dependent on banks, again with the US investment environment as an example.
A better way forward
Such regulatory changes should be Brussels’s focus, rather than abandoning already imperfectly applied EU state aid rules.
If EU member states and the European Parliament eventually accept the Commission’s state aid proposals, the EU single market will essentially have been under a regime of loose state aid rules for almost six years, from early 2020 to the end of 2025.
Even the Spanish leftwing government – hardly a strong supporter of free market economics – has warned that the EU must “avoid distorting the European level playing field through the varying fiscal capacities across member states.”
The EU’s four freedoms – goods, capital, services and people – have never been fully implemented. With economic globalisation under threat, the one thing the EU must avoid is undermining its crown jewel – the EU single market.
More than ever, it is time to complete the single market, both to stimulate green and other investment and keep pace with global competitors.
