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On 1 January 1993, the European Union launched the Single Market by abolishing border controls between EU Member States and ensuring the free movement of people, goods, services, and capital (otherwise known as the EU’s four freedoms). Thirty years later, the liberal economic principles that have driven the EU Single Market’s success are being questioned.
Prominent EU leaders have recently called for strict state aid rules to be loosened, the EU to revamp its industrial policy to compete with China’s economic subsidies and America’s Inflation Reduction Act, and European governments to include tax credit reforms to incentivize investment in the EU. In essence, policymakers believe more government intervention in the European economy is needed to keep pace with geopolitical competitors.
But before policymakers rush to implement massive policy reforms, they should remember the goals of the EU Single Market, its international limitations, and the role of tax policy.
Jacques Delors, widely considered the founding father of the EU Single Market, served as the European Commission’s President from 1985 to 1994. In a 2012 speech, Delors highlighted the goals of the Single Market: “competition that stimulates, cooperation that strengthens, and solidarity that unites.”
In other words, by guaranteeing the four freedoms, the EU Single Market would increase Member States’ economic and political reliance on each other. This reliance would naturally lead to economic growth, political cooperation, and ultimately peace on the continent.
Importantly, the EU’s four freedoms are designed to protect European citizens from discriminatory policies between Member States; they are not designed for international application between the EU and third countries.
Internationally, as Delors explained, “the missing link in the Single Market is cooperation because the EU needs an industrial policy . . . to negotiate with the world’s big boys. Furthermore, state aid policy should take the development of our industrial champions into consideration” to compete with champions in the U.S., Russia, and China.
In practice, Delors’ vision of the Single Market produces an internal European market based on rules-based free trade, strict state aid rules to ensure fair subsidy competition, and the free movement of capital to spur investment across the Union. Economically, these outcomes are relatively pro-growth in nature.
When it comes to EU relations with trading partners, however, Delors’ Single Market frequently produces protectionist EU policies. To maintain fair internal competition, the EU requires third countries to either harmonize standards with those in Europe or face EU policies that attempt to do so unilaterally.
Recent examples of this strategy are the Carbon Border Adjustment Mechanism (CBAM), the unanimous adoption of the Pillar Two implementing Directive, Member State Digital Services Taxes, and regulatory barriers like the Digital Markets Act.
This geopolitical economic strategy is a product of leaders viewing the EU as a “third economic model” between the United States and China (or the Soviet Union in Delors’ day).
The EU social market model tries to set high social and environmental standards, maintains peace through integration, and relies on multilateralism for geopolitical power. Therefore, from a strategically autonomous point of view, it is the EU’s duty to protect this “third option” from unfair outside influences on the fair competition of the Single Market.
A recent op-ed by current EU Council President, Charles Michel, confirms that the EU is still in line with Delors’ vision to this day. He points out that:
For decades, [the EU] has built a system based on free trade, while striving to ensure a level playing field for all, which meant enforcing a strict framework for state aid rules. As one of the main trading powers, we are setting global standards that reflect our values. Europe’s social market economy implies higher labor and environmental costs than elsewhere. This fundamentally changes our position in relation to our main competitors, notably the United States, which remains the largest oil and gas producer. It forces us to rethink how we protect our competitiveness . . . and how EU leaders should strengthen European sovereignty.
Furthermore, the policy reforms laid out by Competition Commissioner Margrethe Vestager to loosen state aid rules to encourage European industrial champions and European Commission President Ursula von der Leyen to create a Green Deal Industrial Plan are consistent with suggestions from the Delors’ Commission 30 years ago.
However, both the Delors Commission and today’s EU leaders are ignoring the most important aspect of European economic policy: pro-growth tax policy.
It’s true that, because of the size of the Single Market, the EU can set global standards with trading partners, influence the harmonization of third-country tax policies to access the EU market, and tempt the private sector to invest in European industry.
But this economic strategy only works if the Single Market is growing and producing positive economic results. If not, third countries don’t need to change domestic standards to meet those of the EU; the United States can pursue its own subsidy regime without consequence, and the private sector will be hesitant to invest in the EU.
The Single Market is at a crossroads and the path policymakers take will shape EU competitiveness for decades to come. As EU leaders look to “protect EU competitiveness,” they should focus less on a subsidy race with economic powers like the U.S. or China and focus more on making the EU an attractive place to do business. Principled, pro-growth tax policy should lead the way.