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Document 52023SC0026

COMMISSION STAFF WORKING DOCUMENT 2023 Annual Single Market Report: Single Market at 30

SWD/2023/0026 final

Brussels, 31.1.2023

SWD(2023) 26 final

COMMISSION STAFF WORKING DOCUMENT

2023 Annual Single Market Report: Single Market at 30


COMMISSION STAFF WORKING DOCUMENT

2023 Annual Single Market Report: Single Market at 30

Disclaimer: This document is a European Commission staff working document. It does not represent an official position of the Commission on this issue, nor does it anticipate such a position.

Table of Contents

Introduction    

1.    Delivering growth and jobs: Single Market integration in the past 30 years and future outlook    

1.1.    Single Market integration in goods and services    

Potential for further integration in services and goods    

1.2.    Benefits of the Single Market for SMEs    

1.3.    Benefits and opportunities of the Single Market for people    

1.4.    Single Market in capital: improving financing and investment opportunities for citizens and businesses    

1.5.    Enablers of a well-functioning Single Market    

1.6.    The EU Single Market integration in international comparison    

1.7.    Projection of EU rules and standards: the “Brussels effect”    

2.    Improving the availability of goods and services, skills, technologies and investments in the Single Market vital for achieving EU strategic priorities    

2.1.    Services for consumers and businesses    

2.2.    Supply chain resilience and strategic dependencies    

2.2.1.    Better understanding strategic dependencies, monitoring supply chain challenges, and improving the EU framework to better anticipate and react in crisis    

2.2.2.    State of play of measures to mitigate strategic dependencies and develop strategic capacities    

2.2.3.    Critical raw materials and supply chain disruptions    

2.3.    Supporting availability of right skills    

2.3.1.    Skills policy    

2.3.2.    Recognition of professional qualifications    

2.3.3.    Posting of workers    

2.4.    Increasing investments    

2.5.    Transformation of the economy    

3.    Jointly managing the Single Market    

3.1.    Member States’ role in improving trust and shared management of the Single Market    

3.1.1.    Progress on enforcement of Single Market rules    

3.1.2    The Single Market Scoreboard as a tool to assess Single Market performance    

3.1.3 Role of EU agencies    

3.1.4.    Effective policy coordination and novel ways of collaboration at EU and Member State level    

3.2.    Leveraging new collaborative tools    

3.2.1.    Leveraging digital technologies at EU and MSs level to make the Single Market work better    

3.2.2.    Leveraging the potential of data, data sharing and data spaces – future-oriented outlook    

3.2.3.    Making Single Market work on the ground: example of market surveillance    



Introduction

The Single Market is without any doubt one of the EU’s greatest achievements. The Single Market is vital for EU businesses and SMEs to grow, flourish, be competitive and expand internationally. The Single Market is vital for people in the EU to prosper.

This anniversary 2023 edition of the Annual Single Market Report marking the 30 years anniversary of the Single Market, has therefore a twofold objective.

Firstly, it takes stock of the integration of the Single Market of the last thirty years, highlights the Single Market benefits and key achievements for people and businesses, and its impact on growth and jobs in the EU. Chapter 1 assesses the functioning of the Single Market by looking at the progress in the integration in goods and services, people, and capital and financial integration. It highlights important enablers such as the competition policy, standards, public procurement policy, and intellectual property rights. These all help to complete the Single Market, create a competitive business environment, allowing European companies to grow and compete internationally.

Second, the 2023 edition discusses the Single Market from a longer-term perspective through the challenges that the EU is currently facing. A well-functioning Single Market plays a key role in the EU’s competitiveness, strong economic base and open strategic autonomy. However, the environment in which the Single Market operates today is significantly different. Challenges such as increasing geopolitical tensions, global competition, climate change and risks related to strategic dependencies pose threats that were unknown or were much less pressing than thirty years ago. Work on tackling barriers continues. However, the challenges highlight the need to ensure that goods, services, skills, strategic inputs (i.e. critical raw materials and decarbonised energy), transformational technologies and investments that businesses and individuals require are available and accessible within the Single Market. Progress in these areas will boost EU’s competitiveness and productivity, strengthen the EU’s open strategic autonomy and allow companies to make the most of the green and digital transitions. Chapter 2 therefore presents considerations that are vital for the Single Market to function smoothly and deliver on the EU’s objectives. These include ensuring availability of services, tackling supply chain challenges and boosting supply chain resilience, addressing strategic dependencies, delivering on green and digital transitions and ensuring availability of right skills and funding.

The Single Market and the approach to its governance have evolved over the last 30 years. For example, a large part of the Single Market in goods has already been harmonised. This has been a key factor in developing a well-functioning Single Market for goods with an unhindered flow of goods across national borders. For the Single Market to operate smoothly, the EU and national levels need to work together better. The report therefore discusses the potential of novel approaches and partnerships, as well as collaborative tools, in improving trust among authorities and better working together in addressing persisting Single Market barriers and obstacles. The report also discusses the potential of digital technologies and user friendly e-government solutions in helping reduce the administrative burden for businesses and administrations. The Single Market Scoreboard is published in parallel to this report and complements it by providing additional data on the outcomes that the Single Market is achieving by setting up sound business framework conditions for the EU economy and reinforcing its competitiveness.



1.Delivering growth and jobs: Single Market integration in the past 30 years and future outlook 

The Single Market is one of the EU’s greatest achievements. It has spurred economic growth and made the life of European businesses and consumers easier. The Single Market today consists of almost 450 million consumers and represents 18% of world gross domestic product (GDP) 1 . Trade within the EU and with the rest of the world accounts for almost one third of total world trade 2 . The Single Market provides a springboard for EU companies to flourish and grow their markets, and it gives access to trading across borders without additional administrative costs. Single Market integration has benefitted all Member States by acting not only as a driver of exports, but more generally as a source of growth and, job creation. Member States trade more within the EU (18% of world trade) than with the rest of the world (13% of world trade). Over the past decades the Single Market has advanced the most with respect to the movement of capital and goods. Trade in services and movement of people have also seen substantial progress but less pronounced, partially due to their nature and the persistent presence of barriers. The Single Market is also a powerful job engine, facilitating mobility. For example the EU system of mutual recognition of professional qualification which facilitates professional mobility for EU citizens, has enabled over 800 000 people to establish themselves in another Member State since 1997. Chapter 1 presents an analysis of the Single Market in the past 30 years and highlights the progress and achievements in integration in goods, services, capital, benefits for citizens and the international dimension.

1.1. Single Market integration in goods and services 

The Single Market has become progressively more integrated since 1993, as businesses increasingly expanded their activities across national borders through exports or by establishing a permanent presence in other Member States 3 . Trade and cross-border establishment are two complementary means of achieving Single Market integration in both goods and services markets. Businesses often use one after the other as they expand across the Single Market: first they trade across borders (with lower investment risks), then they establish a permanent presence in the host Member State(s) involving more resources. In many cases, both means are also used together as businesses internationalise having a permanent presence in several Member States while at the same time also trading across borders with others. Therefore, integration in goods and services is therefore assessed for both trade and establishment.

Trade

The level of integration of trade in goods within the EU has doubled over the last three decades 4 . Trade in goods within the EU has increased over the last three decades not only in absolute terms but also in relation to the size of the EU economy, enabling increased integration. While in 1993 trade integration in goods for the 12 Member States composing the Single Market at the time stood at 11%, it has gradually increased to 23% in 2021 for today’s EU-27. A number of visible shocks to trade (e.g. during the global financial crisis 5 ) led only to temporary drops in integration levels. This increase in intra-EU trade integration went hand-in-hand with a steady decrease in intra-EU trade costs, which are today significantly lower than trade costs with third countries 6 . The Single Market remains the main source of trade in goods for the EU (being about 60% higher than EU trade in goods with the rest of the world), even after the withdrawal of the UK. Finally, the importance of intra-EU trade as a source of value added 7 in EU production has increased consistently: today the Single Market flows account on average for about 25% of the value of a product manufactured in the EU. 8

Figure 1: EU integration (trade vs GDP, 1993-2021) within the Single Market (intra) and with the rest of the world (extra)

Source: European Commission services, based on Eurostat. Note: the graph shows trade flows in goods and services within the EU and with the rest of the world as a share of EU GDP. The vertical dotted lines in the graph highlight breaks in the time series, due to changes in the composition of the Single Market. Trade is measured by the average of imports and exports.

Also in services, trade integration within the EU has doubled as well since 1993. While in 1993 trade integration in services stood at 3%, this had increased to 6% by 2021. Today, trade in services within the Single Market remains broadly at the same level as EU trade in services with the rest of the world. Overall, integration of trade in services within the EU continues to be below trade integration in the area of goods. This nevertheless hides a wide variety of integration levels across different services sectors. Services of a more digital nature and/or lower regulatory complexity are generally traded more within the Single Market. On the other hand, services of a less digital nature (often requiring a certain level of physical proximity between customer and supplier) and/or operate in an environment of higher regulatory complexity typically show lower levels of integration of trade within the EU.

Figure 2: Integration of trade within the EU (trade versus turnover, 2020): divergence across services sectors – examples

Source: European Commission based on Eurostat. Note: integration is calculated as trade (average imports and exports) versus turnover for 2020 (based also on the EBOPS-NACE correspondence table ). For sectors noted with an asterisk show integration levels for 2019 are given.

Establishment

In addition to trade, cross-border establishment is an important channel of achieving Single Market integration. Today, intra-EU affiliates 9 are estimated to account for about 12% of the total value added generated in the EU 10 . Intra-EU establishment is particularly important for manufacturing sectors such as basic metals (where intra-EU affiliates generate 22% of total value added), non-metallic mineral products (22%), motor vehicles (22%) and transport equipment (21%). In services, intra-EU establishment is important for sectors such as retail (14%) and electricity supply (14%). This is reflected also when looking at the perspective of industrial ecosystem, where intra-EU establishment is relatively more important for the mobility (driven e.g. by intra-EU establishment for transport and motor vehicles) and energy-renewables ecosystems.

Figure 3: Intra-EU and extra-EU establishment as source of total EU-27 value added (2019): manufacturing sectors (left), larger services sectors (right) and industrial ecosystems (bottom)

 

Source: European Commission based on Eurostat. Note: graph shows proportion of EU value added generated by domestic businesses, intra-EU affiliates and extra-EU affiliates. Data per ecosystem (bottom) includes both goods and services (see Annual Single Market Report 2021 (p. 208)). Insufficient data is available for the proximity, and social economy ecosystem. Data for the health ecosystem does not include health services (NACE_R2 Q86-88), so it mainly reflects the production of pharmaceuticals. Data for the agri-food ecosystem does not include agriculture, forestry and fishing (NACE_R2 A).

In terms of integration through trade and establishment, the services Single Market is a wide variety of sectors with very different degrees of integration. Broadly four types of services can be discerned: services mainly integrating through establishment (e.g. retail, wholesale); services mainly integrating through cross-border trade (e.g. R&D services); services integrating through both trade and establishment (e.g. telecommunications, advertising and market research, computer services); services with low Single Market integration (trade and establishment), still strongly dominated by domestic providers (e.g. construction, highly regulated professional services).

Developments in European company law since the 1960s have facilitated freedom of establishment of companies, including small to medium-sized enterprises (SMEs), while increasing transparency and legal certainty, and providing appropriate protection to shareholders, creditors and employees. The recent changes to EU company law 11 , made in response to digital developments, enabled entrepreneurs to set up new businesses or branches and to submit company information to business registers fully online, and has resulted in more company data being available free of charge (e.g. on legal representatives). The updated EU company law also sets out clear procedural rules for cross-border operations 12 to enable companies to move and reorganise in the Single Market with necessary safeguards. The initiative on upgrading digital company law 13 aims to increase transparency regarding companies in the Single Market by using digital tools, such as the Business Registers Interconnection System (BRIS). This will help reduce administrative barriers when companies and public authorities use company information in cross-border situations, for example by reducing formalities and using the once-only principle. At the same time, it will help SMEs to expand across borders 14 .

Potential for further integration in services and goods

There is untapped potential for increased Single Market integration in services. The achievable level of integration likely varies, depending on the specific nature of the service concerned. For example, ICT services are more easily traded than personal or office support services. Still, there is unexploited potential. For instance, the Single Market Scoreboard 15  shows that, as regards services between 2017 and 2021, there has been little if any progress in the reduction of regulatory barriers for entry and exercise of professions. In some sectors where physical proximity between service provider and customer is still important (e.g. in social and proximity services) more integration through establishment is likely possible. In other areas (e.g. professional services), the potential of innovation and increasingly available digital tools, available data and platforms may drive further cross-border services trade. In fact, a growing number of services can today be performed remotely thanks to the use of smart technologies.

Recent estimates highlight the potential benefits of further action in services. Most potential likely lies in those services that are both economically important and exhibiting lower levels of integration, such as construction (6% of EU GDP), wholesale and retail (11%), professional services (7%), and tourism services (3%). Based on proxies of a country’s regulatory barriers affecting services 16 , the potential benefits of removing obstacles to free intra-EU services are estimated at between EUR 279 billion (when the gap with the Member States performers that are performing best in terms of obstacles is reduced by 50%) and EUR 457 billion (if the gap is reduced by 80%) of additional GDP per year in the long term 17 . 

The Single Market in services and goods are today strongly intertwined. Achieving further progress in the area of services thus also offers important (positive) spill-over effects for EU industry. Services are a fundamental input for manufacturing. Overall, around 38% of the overall value added embedded in the demand of manufacturing industries in the EU is generated by services. Looking at specific manufacturing sectors, services value added ranges between 22% (mining and quarrying, non-energy producing products) and 43% (food products, beverages and tobacco). The services providing the highest share of value added in the overall manufacturing sector are wholesale and retail followed by professional, scientific and technical activities and administrative and support services. This also confirms that it is important to approach the analysis of EU industries from an ecosystem perspective 18 , encompassing all players operating in a value chain from the smallest start-ups to the largest companies and taking into account the role of service providers as well as industrial manufacturing companies. Such an integrated ecosystem approach is taken, for example, in the development of the transition pathways (see Chapter 2.5).

Figure 4: Share of services’ value added in final demand of EU manufacturing sector (2018)

Source: European Commission, based on TiVA 2021 data (underlying data collected in 2018). Note: “scientific services” includes professional, scientific and technical activities, “admin services” includes administrative and support services, and “transport” includes land and pipelines.

The area of goods also holds potential for further integration. Services are often the focus of discussions around the remaining potential of the Single Market. However, obstacles in the Single Market in goods still exist 19 . 

Stakeholders generally confirm the Commission assessment of the important remaining obstacles in the Single Market in goods and services. In 2020, the Commission presented a comprehensive inventory of barriers preventing the proper functioning of the Single Market and holding back the EU economy 20 . This assessment highlighted 31 horizontal and 52 sector-specific barriers. The business community has broadly confirmed this analysis. Not all of these barriers fall within the scope of EU policy. Many relate to national regulation and administrative as well as business practices. Examples of important Single Market barriers identified in the 2020 Commission assessment and confirmed by stakeholder analyses include a lack of information and complex national procedures 21 , meeting national requirements in the area of services 22 , administrative requirements for posting workers 23 , issues related to taxation 24 , specific obstacles in the area of goods (e.g. labelling requirements 25 , problems with mutual recognition 26 ) as well as broader issues such as transport bottlenecks 27 and a lack of skilled workers and mobility 28 . Businesses have called for further action to address these obstacles 29 . The Commission is addressing these issues with Member States in order to reduce regulatory complexity and to streamline administrative procedures (See Chapter 3).

It is also important to address those Single Market obstacles which may hinder the EU’s pursuit of the twin (green and digital) transitions. Services are key to achieving the green transition but barriers to the free movement of services risk slowing the transition 30 . Lengthy and diverse national permitting criteria and procedures for renewable energy projects is one important example. Measures taken to address these and other Single Market barriers are described in Chapter 3.

1.2. Benefits of the Single Market for SMEs 

The Single Market has played a key role in boosting SMEs’ internationalisation and competitiveness. As shown in Figure 5a, the vast majority of exporting businesses are SMEs, and the Single Market is their key export destination. This is true across both goods and services. According to the 2020 Eurobarometer on SMEs, start-ups, scale-ups and entrepreneurship, 23% of all EU SMEs exported to countries within the Single Market, 9% exported to European countries outside the EU, and 4% exported to North America 31 .

Exporting SMEs trading products across the EU are a key source of integration. The number of EU micro firms exporting goods within the Single Market is almost twice the number of those exporting goods outside of the EU. In contrast with extra-EU exports, intra-EU exports are less concentrated in a few (larger) businesses, highlighting the important role of the Single Market for EU SMEs.

Figure 5a: Number of EU enterprises exporting goods by size class (2020)

Figure 5b: Concentration in goods exports by largest exporters (2020)

Source: European Commission based on Eurostat (ext_tec01, 2020). Note: columns show the number of enterprises exporting goods within the Single Market (blue) and to the rest of the world (red) by size class. Data does not cover Luxembourg.

Source: European Commission based on Eurostat (ext_tec02, 2020). Note: columns show the proportion of total goods exports captured by the top (largest) exporters in each Member States for intra-EU (blue) and extra-EU trade (red).

Internationalisation of SMEs still lags behind that of large companies, but thanks to the Single Market, it has made steady progress. Since 2012, every year has seen a steady growth in the number of exporting SMEs 32 , with the exception of 2020, when pandemic-induced border restrictions and lockdowns led to a decline in the number of exporting SMEs. Even though overall shares of exporting enterprises show SMEs still lag behind large enterprises (26% of SMEs export, while 53% of large companies export 33 ), it is important to bear in mind that even non-exporting SMEs can participate indirectly in the global economy by being upstream suppliers of exporting firms. Such indirect contribution of SMEs to Member States' export performance is very significant: when indirect exports are taken into consideration, SMEs account for more than 50% of value added of exports 34 . 

This important contribution of SMEs to international value chains is clearly visible when looking at industrial ecosystems. SMEs account for more than 50% of value added in six out of the fourteen industrial ecosystems (see Figure 6). As industrial ecosystems span across national borders and rely on cross-border supply chains, SMEs have a crucial role to play in the competitiveness of industrial ecosystems by supplying larger players within the ecosystem, even when they are not exporting themselves. This includes the smallest enterprises with less than 10 employees: the differences in the value added contribution of SMEs across the various ecosystems mainly reflect differences in the value added contribution of micro- enterprises 35 . 

Figure 6: SMEs contribution per ecosystems (in value added)

Source: European Commission, based on 2022 Annual Report on European SMEs

The current economic context is highly challenging for SMEs, and it is more important than ever for them to fully benefit from the Single Market. By 2022, the SMEs have been partly recovering from the COVID-19 pandemic but their recovery is threatened once again by supply shortages and rapidly increasing prices for energy and raw materials, further exacerbated by the unprovoked and unjustified Russian invasion of Ukraine. While 2022 still saw solid employment growth in SMEs of 2.9% due to momentum from 2021 and strong growth in the first half of the year, the future outlook is decidedly reserved. The latest EU Economic Forecast expects stagnation, with only 0.3% growth in 2023, while inflation is expected to remain high with 7.0% during 2023. This will have a significant impact on SMEs, with preliminary forecasts expecting employment in SMEs to fall again by 1.3% in 2023 36 . Deterioration in the late payments by public administrations which has increased significantly compared to pre COVID – 19 period 37 , is further complicating the fragile situation. Policymakers on European, national, regional and local levels are partnering to counter this sombre outlook in order to ensure SMEs can take full benefit of the Single Market, close the gaps between the share of exporting SMEs and exporting large enterprises and thus safeguard SMEs’ resilience during yet another crisis.

1.3. Benefits and opportunities of the Single Market for people

Since its introduction 30 years ago, the Single Market created substantial benefits and opportunities for EU citizens. Thanks to the Single Market people can move around the EU almost as freely as within a single country. EU citizens can study, live, shop, work and retire in any EU country, and enjoy products and services from all over Europe. The Single Market allows citizens across the European Union to access services from the other Member States under terms and conditions similar to those originating in their home countries. Hundreds of technical, legal and bureaucratic barriers to free trade and free movement between EU Member States have been reduced or removed altogether.

The increased competition between EU companies has fuelled innovation, leading to a greater choice of goods and services for EU consumers at lower prices and better quality. Affordable cross-border parcel delivery and more choice for energy, health and banking services are other tangible benefits for EU citizens and consumers. Common high standards within the Single Market lead to safer products and services for consumers, stronger consumer protection and higher environmental sustainability and circularity. They also preserve our shared cultural heritage and diversity by protecting cultural goods and treasures.

The Single Market is also a powerful job engine. EU citizens can also make increased use of cross border mobility and employment opportunities in other Member States. Thanks to the free movement between Member States, people can work where they want, visa-free and benefit from the recognition of their professional qualifications across the Single Market.

The mobility of EU citizens enhances the cohesion of the Single Market, contributes to dissemination of knowledge and innovation and provides opportunities for upward economic and social mobility. A recent Eurobarometer confirmed that Europeans are widely supportive of labour mobility: 58% see the positive contribution to European integration and only 9% think that free movement could be negative for European integration. However, so far mobility is relatively small: only around 17% of Europeans have worked (or still work) in a different country and mobility is far more attractive for high-skilled (tertiary educated) citizens 38 . Digitalisation of the labour market and new forms of work in a digital environment, often have strong cross-border implications (platform work, cross-border telework). More than 10 million EU working-age citizens live in another EU and EFTA Member State than their country of citizenship. Additionally, there are 1.6 million workers residing in one Member State and working in another Member State.

Posting of workers is an important dimension of cross-border mobility within the Single Market. It allows businesses established in one Member State to post their own workers temporarily to provide services cross-border in another Member State, subject to certain host country provisions on working conditions and health and safety. The number of posted workers in the Single Market is continuously increasing, in particular between neighbouring countries and closely integrated economies. In 2019, there were around 2 million posted workers and 5.8 million postings in the EU 39 (see Figure 7). 

Figure 7: Share of posting notifications registered in the national declaration tools: breakdown by sending Member State (EU-27, 2019)

Source: European Commission, based on De Wispelaere, Pacolet, De Smedt (2021). Note: data covers posting notifications received by 20 Member States (no data available for IE, EL, ES, HR, LV, NL, SI). A notification by a posting undertaking to the national declaration tool of the host Member State may include several postings.

EU social security coordination rules 40  are contributing to the enabling of free movement of persons. The rules ensure that citizens preserve, or do not lose, their social security protection in cross-border situations. In 2021, almost 14 million Europeans lived in another Member State, of which about 10 million were of working age. More than 3.5 million portable documents attesting the applicable social security legislation 41 , were issued and almost 235 million European Health Insurance Cards were in circulation. Moreover, digitalisation of social security coordination 42  makes it easier for mobile citizens to exercise their social security rights and facilitates information exchange between social security authorities/institutions.

EU programmes, such as the European Social Fund Plus (ESF+) 43  support the labour mobility within the Union, with a priority given to the youth employment. The ALMA (Aim, Learn, Master, Achieve) initiative 44 under the ESF+ targets disadvantaged young people aged between 18 and 29 and aims to help them find their way to the job market. Implementation of ALMA is starting, with 16 Member States having included ALMA in their national or regional programmes. Moreover, results of social innovation projects are very promising. In 2014-2020, they extended to 15 Member States and has allowed almost 7,000 individuals to acquire skills, knowledge and capacity through work-related experiences abroad.

The Single Market is also a vector of social progress and social inclusion for citizens enabling business models, rooted in social economy values, to respond with products and services to the needs of local communities and help the twin transition happen leaving no one behind 45 . Strengthening the social dimension of the Single Market, in line with the European Pillar of Social Rights is particularly relevant in the current context, with our societies deeply affected by the COVID-19 pandemic, the rocketing energy prices and inflation, and the need for fair and inclusive green and digital transitions. With 2.8 million entities in the EU, the social economy offers concrete and innovative solutions to many of these key challenges.

EU Consumer rights constitute a pillar of the Single Market. The Single Market for consumer goods and services offers a large set of harmonised rules that concern more than half of the EU GDP (the share of private spending). Consumers and retail traders across the EU benefit from the same laws that define market rules on unfair commercial prices or contract terms, and on guarantees or consumer rights relevant for e-shopping. For instance, 80% of consumers in the EU trust that retailers and service providers respect their rights 46 and a high proportion (43%) are confident buying in another EU country through e-shopping.

Ensuring that products circulating in the Single Market are safe is also key for people`s health and safety. Some products and risk categories are regulated under EU sectorial legislation, whereas the EU general product safety framework 47 provides a safety net for consumers, preserving safety of products and risks not covered by other EU legislation. In this way, EU consumers are always protected against any kind of dangerous products sold offline or online.

Benefiting from the Single Euro Payments Area (SEPA), consumers can make cashless euro payments to anywhere in the European Union, as well as in 9 non-EU countries and territories. More than 529 million people living in the SEPA area make about 146 billion electronic payments every year. Consumers experience the same ease and convenience when making euro transactions with the same payment instruments, in particular credit transfer and direct debit, as when paying within their home country.

1.4.Single Market in capital: improving financing and investment opportunities for citizens and businesses

Thirty years ago, with the Maastricht Treaty, the free movement of capital became a fully-fledged fundamental freedom, a vehicle for financial integration and a safeguard for cross-border investments in the European Union. The free movement of capital was extended to non-EU countries, making the EU one of the world’s most open investment destinations. It comes with the necessary safeguards to protect EU’s strategic assets and important public interests.

An integrated financial system is a key building block for the wider integration of markets for goods and services in the European Union, ultimately increasing financial stability and economic growth. The Single Market expands financing options for firms, channels capital where needed most, and broadens investment opportunities for savers and helps firms and households diversify risk.

Policies in the areas of free movement of capital, EU Banking Union and Capital Markets Union aim to lift barriers to intra-EU cross-border investment and integrate the EU financial markets. In the last two decades, intra-EU27 holdings of foreign direct investments (FDI) and portfolio investments (PI) kept increasing and were almost 5 times higher and 4 times higher, respectively, in the second quarter of 2021 compared to the beginning of 2002 (see Figure 8b). Financial integration also advanced significantly and, measured by the quantity-based and the price-based composite indicators 48 for the euro area in 2021, it was 8 times higher compared to 1999 (quantity-based indicator) and 11 times higher compared to 1995 (price-based indicator), as Figure 8a shows.

Figure 8a: Financial integration: quantity and price based composite indicators for the euro area (1991-2021)

Figure 8b: Intra-EU27 holdings of foreign direct investment and portfolio investment instruments, euro trillions (2002 Q1-2021 Q2)

Source: European Commission based on ECB Financial Integration and Structure indicators dataset.

Note: A value of 1 corresponds to the highest degree of integration. The price-based indicator is based on monthly data and integrates 10 indicators. The quantity-based indicator is based on quarterly data and integrates 5 indicators.

Source: European Commission based on Eurostat Balance of Payments statistics.

Between 2008 and 2011, the financial crisis and sovereign debt crisis imposed vast costs on the private and public sectors of the European Union. It slowed the integration of capital markets. Costs of capital across countries began to diverge and increase. Regulatory framework for the EU Single Market in financial services took a quantum leap and regulatory reforms undertaken 49  at EU level. These together with an improved oversight have helped restore financial stability and the financial system. The revamped regulatory framework also positively contributed to a well-functioning and stable financial sector and ultimately to resilience of financial integration and the whole economy during the COVID-19 pandemic. After an initial decline during the COVID-19 pandemic, European financial integration resumed at a substantially faster pace than in previous crisis episodes and by the end of 2021 the
price-based and quantity-based composite indicators of financial integration2 had surpassed
their levels at the immediate onset of the pandemic (Figure 8a). 50 . 

The 2008-2009 financial crisis and the consecutive European sovereign debt crisis resulted in the (re)fragmentation of the EU banking sector and the (re)emergence of dangerous interlinkages between national banking sectors and their respective governments. Following the crisis, the EU set up a Single supervisory mechanism (SSM), comprising the ECB and the national supervisory authorities, and the Single Resolution Board (SRB), responsible for common resolution actions. Their work is crucial in ensuring an effective management of banking crises in a cross-border context and thus minimise cross-border frictions and spill-overs. Completing the Banking Union is a politically complex endeavour, but progress in the coming years is essential if the EU is to be sufficiently resilient to address any future financial crises.

The Single Rulebook provides a single set of harmonised rules applicable for banks and other financial intermediaries in all EU Member States. European financial legislation was previously based on directives which left room for significant divergences between Member States’ implementations. This led to different approaches and to legal uncertainty, enabling certain market players to exploit regulatory loopholes, distorting competition, and making it burdensome for many firms and investors to operate across the Single Market. Moreover, the financial crisis has shown that in integrated financial markets, these divergences can have disruptive effects for financial stability, market integrity and investor protection. The Single Rulebook aims to address these shortcomings and lays the foundations for a more resilient, more transparent, and more efficient European financial sector.

The digital dimension of financial services has been growing for some time and the effects of the COVID-19 pandemic have accelerated the shift towards digitalisation, including in the field of consumer financial services. The Single Market can offer benefits of scale in digital finance and allow the EU to close the gap with its main global competitors. Recent developments have, however, also shown that the innovation benefits linked to digital finance can bring significant risks to investor protection and even financial stability. The EU is currently a frontrunner in regulating digital finance, notably in the fields of payments, crypto-assets and cyber-resilience.

The EU financial system so far has proved to be resilient to the increasing geopolitical tensions and economic uncertainty and the European banking sector as a whole is well capitalised. Close coordination between relevant authorities and prudent risk management practices in the financial sector are key to addressing vulnerabilities effectively, while avoiding market fragmentation. The Commission, together with European Supervisory Authorities, European Central Bank and international regulatory bodies, continues to monitor risks, including those relating to non-bank financial intermediation and those that are prone to emerge with the increased use of decentralised finance structures. The ongoing reviews in banking, insurance and anti-money laundering will further strengthen financial sector resilience. The current economically challenging environment make these efforts even more urgent. 

The Capital Markets Union aims to develop and integrate EU capital markets in order to improve financing and investment opportunities for individuals and companies. It supports the Commission’s main political objectives such as sustainable economic growth, the green and digital transitions, macroeconomic resilience, global competitiveness of European firms and the EU’s open strategic autonomy.

The need to address the effects of climate change and environmental degradation has emerged as one of the defining challenges of our era. The EU is confirming its leadership with the Green Deal responding to this challenge. EU sustainable-finance policies 51 , based on the EU’s taxonomy, disclosure rules for non-financial and financial companies, investment tools, including benchmarks, and a proposal for a European green bond standards, support the green transition by helping to facilitate private funding to green projects and companies. Further progress is required in order to complete the implementation of the EU sustainable finance agenda, and foster usability, inclusiveness, transition finance and the resilience, as announced in the Renewed Sustainable Finance Strategy 52 .

1.5.Enablers of a well-functioning Single Market

We can assess the functioning of the Single Market by looking at its progress as regards goods and services, people and capital. However, we can also profitably analyse the Single Market from the perspective of its enablers. Competition policy, trade policy, standards, public procurement policy, intellectual property rights and transport policies all help to complete the Single Market. Barriers in these areas can help us identify potential for further progress because improving these enablers can help achieve welfare gains.

Competition policy

Competition policy, and its enforcement, is a key pillar of the Single Market. It ensures that markets remain open, competitive and dynamic. It sets predictable market conditions, enabling companies to send and receive the right price signals to make the necessary investments and offer a better choice of innovative products and services at affordable prices. It addresses behaviours that lead to fragmentation of the Single Market, helping to preserve a level playing field. It also enables strong and diversified supply chains, helping to increase the Single Market’s resilience. Competition policy and enforcement enable the EU industry to lead the green and digital transitions and foster the resilience of the Single Market. The in-built adaptive capacity of competition rules is essential to address both the ongoing crises that affect the EU and the longer-term challenges of the twin transition. 

In specific terms, it is estimated that interventions concerning mergers, cartels and antitrust generated direct customer savings in the range of EUR 12-21 billion per year in the period 2012-2021 53 . Competition enforcement also generates indirect deterrence effects and positive non-price effects on innovation, quality, and productivity which are likely to be significantly larger, but also more difficult to calculate. These effects are particularly beneficial for citizens and businesses in periods of high inflation. Recent Eurobarometer surveys 54 also highlight the value of competition policy and well-functioning markets. Among citizens, a large majority agrees that competition allows for more choice for consumers (83%), that it encourages innovation and economic growth (82%) and allows for better prices for consumers (74%). On the business side, a large majority of SMEs find that competition policy encourages innovation (89%), allows for more choice (84%) and helps EU companies become more competitive on global markets (73%).

Cohesion policy

Cohesion policy is a major contributor to the integration of EU markets. It aims to foster sustainable growth, promoting the integration of regional economies, strengthening infrastructure, fostering innovation, uptake of digital technologies and foreign direct investment flows. By promoting a balanced and sustainable development of Europe`s regions, it contributes to the wide geographical and societal dissemination of the benefits associated with the integration of EU markets. Since its inception, the financial resources for addressing economic and social imbalances at Community level have grown substantially. Originally below 4% of the Community budget, today they represents more than one third of the budget. Cohesion policy is also a major source of financing of growth and competitiveness of SMEs, and investments in human capital contribute to further integrating EU labour markets.

Standards

The EU's ambitions towards a climate neutral, circular, digital and resilient economy cannot be delivered without European standards. The fast pace of innovation, our green and digital ambitions and the implications of technological standards for our EU democratic values require an increasingly strategic approach to standardisation. The Standardisation Strategy of February 2022 outlined a new approach to standards within the Single Market, as well as globally, to ensure a stronger and globally competitive European standardisation system with the EU values at its core.

Having a strong global footprint in standardisation activities and leading the work in key international fora and institutions will be essential for the EU to remain a global standard-setter. Important actions have since been launched or implemented. The co-legislators adopted the legal amendment to Regulation 1025/2012 on European standardisation, which strengthens the integrity of the decision-making process in European standardisation organisations for harmonised standards, the Commission nominated a Chief Standardisation Officer and launched the High-Level Forum on Standardisation to bring more high-level alignment between EU policy and standardisation priorities. Important international dialogues are taking place - for example in the context of the EU-US Trade and Technology Council (TTC) - where alliances with like-minded partners on strategic standardisation matters are brokered. In the research and innovation field, a standardisation booster and code of practice for researchers on standardisation are rolled out, projects on the pre-normative needs of industrial ecosystems and education and skills aspects are being launched in 2023.  During the past decade, building blocks of the Connecting Europe Facility, such as eID, eDelivery and eSignature, promoted the adoption of open standards and technical specifications, enabling interoperability across borders and sectors.  An EU foresight on future standardisation needs for the green and digital transition, such as circular technologies 55 , is developed on the basis of research and innovation insights, in line with the Standardisation Strategy.

Public procurement

Given the vast size of the public procurement market, estimated at some 14% of EU GDP, public procurement is an important enabler of a well-functioning Single Market. Public Procurement Directives make it easier for companies to bid cross-border, allow for joint-cross border procurement which involves buyers from two or more Member States. The current rules make it less complex for SMEs to access public procurement market, giving them more possibilities to participate in public contracts.

Intellectual Property

Intellectual property (IP) plays a key role in ensuring that the Single Market can deploy its full potential and lead its green and digital transformation. Intellectual property rights create the necessary incentives to support innovative companies and SMEs to scale up. It is essential to accelerate the uptake of innovative solutions and to develop new technologies, products, and services to address the societal challenges 56 . They do not only enable them to exploit the benefits of the Single Market but also to compete globally on a level playing field, for example with the new EU scheme protecting geographical indications for craft and industrial products. The IP rights also play an essential role in supporting European companies in their efforts to reduce dependencies on critical innovations and technologies, for example by promoting transparency and EU high standards, facilitating licensing to share IP, encouraging the development and increasing the technological uptake of standard essential patents, promoting data sharing and improving tools to cope with crisis situations like compulsory licenses.  

The Commission has been working to ensure that EU innovators have access to fast, effective and affordable protection tools through the future Unitary patent planned for 2023, modernising EU legislation on industrial designs, and revamping legislation on patents. Taking into account that companies that own intellectual property rights have 55% higher revenue per employee than firms which do not, as well as a higher chances to succeed and better access to finance, the Commission is rolling out, jointly with the EUIPO, a SME Fund to boost the uptake of intellectual property rights by European innovating SMEs with “IP vouchers”. The goal is to ensure that EU SMEs protect their products, services and innovations in the Single Market and beyond, with registered trademarks, designs, patents and, soon, plant varieties rights.

Single Market Programme

With EUR 4.2 billion over the period of 2021-2027, the Single Market Programme provides an integrated package to support actions that strengthen the Single Market. The Programme provides funding to improve market surveillance, problem-solving support to citizens and business, enhanced competition policy, support SMEs competitiveness and sustainability, ensure food safety, consumer protection, support consumer and end-users in financial services, specific activities in the field of financial reporting and auditing standards, and European statistics.

1.6. The EU Single Market integration in international comparison  

The EU Single Market has not only integrated previously distinct national markets by removing barriers to trade but also by setting common regulations to establish a level-playing field based on common competition policy.  Figure 9 highlights that the EU can be considered highly integrated overall in the area of goods, both in terms of total trade as well as trade compared to the size of the specific economic bloc concerned 57 . Interestingly, this is confirmed by recent research showing that over the past decades the EU has become more integrated than the US from a regulatory standpoint with stricter requirements in the EU for Member States to accept internal flows of goods and services than exist in the US internal market 58 . In addition, intra-EU trade costs in goods are estimated to be lower than trade costs faced when trading products across US federal states 59 .

Figure 9: Trade integration (goods) of the EU versus other economic blocs (2019)

Source: European Commission analysis based on Eurostat, UN Comtrade, WorldBank and US Freight Analysis Framework

The Single Market has progressed beyond the original lifting of trade barriers and competition dimensions, having achieved a notable degree of monetary and fiscal integration with the establishment of a single monetary authority (the European Central Bank) and currency (the euro) among some member states. This has in turn supported the principal objectives of the Single Market by facilitating trade, easing labour and capital mobility, reducing transaction costs, facilitating price stability and increasing resilience to economic shocks.

The EU is a sui generis political and institutional system, with an unparalleled level of integration, particularly with regards to its social and cultural aspects. Compared to other regional integration blocs, which predominantly focus on free movement of goods, the EU Single Market also promotes the equally important dimension of free movement of people. This is reflected in initiatives such as ERASMUS+ programme for mobility of students, and the Erasmus programme for entrepreneurs 60 , the Bologna Process bringing more coherence to higher education systems across Europe 61 , and abolishing roaming surcharges within the EU.

Compared with the EU, a number of a regional groups focus largely on economic integration and do not seek comparable levels of integration on political, fiscal or monetary policies. For example, the Agreement between the United States of America, the United Mexican States, and Canada (USMCA) 62  is a Free Trade Zone in North American primarily seeking economic cooperation by reducing tariffs on goods and services in order to facilitate trade. In USMCA, while trade of goods and services is relatively free, movement/mobility of people is not facilitated (with all three members having separate strict immigration policies), and more extensive policy measures such as those used to facilitate intra-EU trade (common currency and competition policy) are not sought under the Free Trade Agreement.

Other ‘supranational’ political and economic projects fall short of the EU’s ambitions. This is for instance the case of ASEAN 63 , which to some extent similarly to the EU, is an ‘intergovernmental’ association (although without similar supranational institutional structures), between states in East and South-East Asia.  Currently, ASEAN provides only an economic framework to facilitate bilateral cooperation between Asian countries, but it does not have an aspiration to become a fully integrated ‘Asian Union’.

An example of a more ambitious intergovernmental organisation focused on economic cooperation is the Southern Common Market, also known as MERCOSUR. MERCOSUR has 4 full members (Argentina, Uruguay, Paraguay and Brazil) and several associate countries 64 . Participating countries of MERCOSUR have the ambition to eliminate non-tariff barriers and have a common competition policy to complete its internal market, in a similar way to the EU. On the other hand, MERCOSUR members do not wish to institutionalise MERCOSUR into a supranational political body promoting further economic and political integration. Despite having a MERCOSUR Parliament, all country members prefer little political integration with minimal regional bureaucracy and limited common policies.

The Single Market has also inspired other regional groupings through its global outreach regional partnerships and governance systems. For example the African Union bases the framework of its economic partnership agreement to a large extent on the Single Market. Equally, its governance structure appears to be mirroring the institutional makeup of the EU.

1.7.Projection of EU rules and standards: the “Brussels effect”  

The scale of the Single Market together with the EU regulatory leadership, the ability to shape international standards and project EU standards and values, provide a vital tool for Europe to project its interests, in a time of big geopolitical challenges. The European Union and its stakeholders promote work in international standards-setting bodies to develop global standards in line with EU values, interests and legislation. When this is not possible, the European Commission promotes elaboration of world-class European standards with international relevance. Because of the economic importance of the Single Market, the impact and relevance of the EU’s rules and values, such as its high standards on safety, environmental and data protection are enhanced and create an important economic leverage and clout internationally, a phenomenon referred to in academia as the ’Brussels effect 65 .

According to Bradford (2012), the Brussels Effect is “the EU’s unilateral power to regulate global markets 66 , which is contingent on the EU’s market power. The “Brussels effect” is measured through the use of five key factors 67 :

1.Market size: The extent of any state’s market power depends on the attractiveness of its consumer market compared to alternative markets available 68 . Because of the attractiveness of the Single Market producers throughout the world adjust their production standards to meet EU regulatory requirements to ensure continued access to the European market and its large and affluent customer base.

2.Regulatory capacity: The EU’s ability to design rules and enforce them, including under the supervision of European regulatory authorities affords it significant leverage in imposing regulatory requirements and sanctions to companies in case of non-compliance, via its competition, market surveillance, or trade defence instruments frameworks, among others.

3.Stringent standards: Due to the force of its Single Market, the EU has the ability to impose stringent and convincing standards (notably social standards), hence fostering a ‘race to the top’.

4.Inelastic targets: With nearly 450 million customers in the Single Market 69 which do not need to travel to other countries to buy their products, firms need to comply with EU standards to guarantee that their goods are sold in the EU. Therefore, EU regulatory standards can be imposed on global companies seeking to access the lucrative EU market.

5.Non-divisibility of production/supply: by imposing its regulatory requirements within its own borders the EU can encourage the adoption of EU norms globally. Instead of producing and exporting different products with different national/regional regulatory standards to different countries, firms may align themselves to the Single Market and EU regulations, in order not to split their productions lines.

Certain sectors see a particularly important uptake of EU-style regulations by third countries 70 . Figure 10 shows the share of EU-style regulations in the total number of regulations adopted by 83 third countries in a given sector over the 2009-2019 period. A regulation is defined as the combination between a detailed measure (either sanitary and phytosanitary measures or technical product requirements) and the product it applies to. It is considered to be “EU-style” if the EU has a similar measure in place on the same product adopted at most five years before. Considering the period 2009-2019, the sectors with the highest uptake of EU-style regulations are Vegetable products, Prepared foodstuffs & Beverages, Animal products, Precision & medical instruments and Textiles, where more than one third of all regulations adopted in the sector in question are similar to the EU. In the sectors corresponding to Mechanical appliances; electrical equipment and Footwears & gears between 20% and 30% of all regulations are similar to the EU. Finally, sectors such as Products of the chemical or allied industries, Transport equipment, Base metals & articles of base metal, and Miscellaneous (including toys) have an uptake of EU-style regulations of more than 10%.

Figure 10: Share of EU-style regulations in the total number of regulations adopted by third countries within a sector over 2009-2019

Source: European Commission calculations (paper forthcoming) based on the Non-Tariff Measures data from TRAINS-UNCTAD, including detailed information on Sanitary and Phytosanitary (SPS) Measures and Technical Barriers to Trade (TBTs) for 83 countries. In this context, a regulation refers to a combination of a specific non-tariff measure (either SPS or TBT) and the product to which it is associated. For instance, storage transport conditions for oranges and storage and transport conditions for orange juice are considered as two different regulations.

Besides mandatory regulations, third countries also voluntarily adopt EU standards, mainly in sectors such as Construction activities, Transport and vehicle standards and Electrotechnology standards. According to Christen et al. (2022) 71 and as shown in the figure below, the highest number of adopted standards by third countries in 2021 refer to construction activities (16% of all active standards adopted by third countries), transport and vehicle standards (14%), and electrotechnology standards (13%). Many of these standards are also equivalent to International Standard Organization (ISO) or the International Electrotechnical Commission (IEC) standards. This reflects not only the EU’s good track record in translating international standards to European standards, but also its capacity (the Brussels effect) to speed up the adoption process of these standards in third countries. The sector corresponding to household appliances and Heating, ventilation, and air conditioning (HVAC) is characterized by the highest adoption by third countries of EU standards with an underlying EU directive in 2021 (69%). Other sectors with an important rate of adoption by third countries of EU standards following an EU directive are healthcare and health & safety standards sector (60%), and the mechanical and machinery sector (59%).

Figure 11: Sectoral distribution of standards adopted by third countries in 2021

Source: CEN and CENELEC (2021). Extracted from the report “The Brussels Effect 2.0. How the EU Sets Global Standards with its Trade Policy” by Christen et al. (2022).

When focusing on a particular example, that of the EU Regulation on Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH), Figure 12 below shows the number of REACH related standards developed by CEN (the European Committee for Standardization) and adopted by other countries. According to Christen et al. (2022), the REACH related CEN standards the EU have been adopted as national standards by the standard setting bodies of Albania, Bosnia and Herzegovina and Morocco. The most adopted CEN standard is relevant for the determination of certain restricted substances used for the coloration of textiles. The Chinese standard setting organization (SAC) also adapted a REACH-associated CEN standard relevant for demonstrating the conformity of articles with the restriction on nickel (a substance which may cause allergic reactions).

Figure 12: Number of adopted standards driven by the EU REACH Regulation over time