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IP/01/1777

Brussels, 10th December 2001

Internal Market: Further market reforms can help fight economic slowdown

A European Commission report on the functioning of product and capital markets released today emphasises the need to strengthen economic reform to help European and world markets cope with external shocks and withstand the threat of recession. The report points to the benefits consumers and businesses have already gained from the EU's Internal Market, but warns against standing still. The conjuncture of a slowing economy with introduction of the single currency makes it especially important for the European Union and for Member States to keep to agreed reform timetables. The report takes full account of the long term strategic objective defined at the Lisbon (2000) and Stockholm (2001) European Councils, notably to make the EU the most competitive economy in the world by 2010. It is the fourth in a series of annual progress reports prepared at the request of the Cardiff European Council in 1998 and will be submitted to the March 2002 European Council in Barcelona.

Internal Market Commissioner Frits Bolkestein said " This report shows that all of our citizens already get substantial benefits from the Internal Market. But with further economic reform they can benefit much more. The risk of recession makes that reform all the more essential. We have a long way to go to reach our goal of making Europe the most competitive economy in the world and our best assets in doing that will be the Internal Market and the single currency."

Among the report's principal conclusions are:

  • retail prices of food and consumer items continue to vary widely between EU Member States. The narrowing of such price variations noted in the early 1990s has slowed down considerably in recent years

  • the cost of cross-border financial transfers continues to be a major area of concern. There is not yet a well-functioning single payments area in the Internal Market, making clear that rapid adoption of the cross-border payments Regulation is necessary

  • the Internal Market can make a substantial contribution to environmental protection and sustainable development

  • the Internal Market in manufactured goods is developing well, but better application of mutual recognition and wider use of European standards can drive further progress

  • further integration in the business services sector could boost the EU's gross domestic product by up to 4.2 %

  • Venture capital is growing fast, but more needs to be done to encourage entrepreneurs and innovators. For example, start up costs for new businesses in the EU remain nearly ten times as high as in the US.

Across the EU, price convergence is slowing

Price convergence is a good indicator of market integration. During the 1990s, prices across the EU clearly converged. However, recently the progress seems to have run out of steam.

Year

Co-efficient of variation
199021.41%
199218.24%
199517.78%
199715.43%
199814.40%
199914.56%
2000*14.69%

Source: Eurostat/OECD

Note: The table shows the co-efficient of variation in selected years for private consumption including indirect taxes. The co-efficient of variation measures the degree of variation around the average. The figure for 2000 is an estimate. There is a break in the data series in 1992 and 1999.

In supermarket goods, significant and sometimes dramatic price differences remain. For example, a cola drink bought in a Danish supermarket can cost almost twice as much as in a similar shop in Germany. Branded mineral water can be 300% more expensive in Sweden than in France.

AT

BEDKFINFRDEUKELIREITNLPTESS
Carbonated Drinks - Cola909913911278731139192881168293135
Chocolate Bars (Single)98731439585789880106142
Mineral Water1166318944859976985895176
Rte Cereals1239188112941007115211593858293
Shampoo988810711210082111126831259176
Toothpaste1019495881021261081091011017676124

Source: Commission services, based on AC. Nielsen data

Note: The table shows the price level in each of the 14 Member States covered in the survey with respect to the EU14-average, including taxes. For instance, in Austria the price of cola is ten percent below the EU-average.

In general, prices vary three to five times more across the EU than inside countries. Different countries are cheapest or most expensive depending on the product.

Co-efficient of variation across countries

Most expensive countryLeast expensive countryAverage co-efficient of variation across regions
Instant Coffee (Nescafe) 14%ITGR2%
Fresh Pasta (Rana Tortellini) 17%SAT2%
Hair Spray (Pantene) 18%UKE5%
Carbonated Drinks - Cola (Coca Cola) 19%DKD3%
Chocolate Bar (Singles) (Mars) 24%DKBE2%
Jam (Bonne Maman) 25%UKE3%
Mineral Water (Evian) 44%FINF3%

Source: Commission services based on AC. Nielsen data

Note: The table shows the co-efficient of variation for selected products across countries in the EU and across regions inside the countries, including taxes.

The report concludes that these differences cannot be explained by country specific factors such as transport costs, different wage levels or different consumption patterns. Instead, differing national regulations, company behaviour and competition problems may be combining to keep prices apart across the Community.

Cross border payments still too expensive

Last year's report singled out cross border transfers as an area of major concern for citizens, but progress since then has been very limited. As the table below shows, average charges for a € 100 credit transfer remain very high (see table below).

Sender Country

Total transfer costs
EL47.24
Ire35.99
UK28.47
P27.87
IT27.38
S27.2
F25.33
E24.59
EU Av23.92
A22.27
Fin21.26
DK21.23
D14.73
B12.84
NL11.9
Lux9.79
Euro zone Average23.49
Non-euro zone Average24.65

Source: RBR. Study on the Verification of a Common and Coherent Application of Directive 97/5/EC on Cross-Border Credit Transfers in the 15 Member States. Report for the European Commission (see also IP/01/1293 and MEMO/01/294)

Note: the table shows costs of a credit transfer of €100 by sender country, with EU, eurozone and non-eurozone averages

With euro bills and coins about to be introduced, the Commission has proposed a Regulation (see IP/01/1668) establishing the principle of equality of charges for domestic payments and cross border payments in euros.This draft Regulation is part of the Financial Services Action Plan, a comprehensive programme to create a fully integrated EU market in Retail Financial Services by 2005. This will provide a double dividend: more reliable and efficient payments and lowered financial costs of trade, leading to increased competition and lower product and service prices.

The Internal Market and the Environment

The latest report published notes increasing industry awareness of environmental issues. For example, the number of ISO certificates of sound environmental management and enterprise performance granted to European firms in 2000 was four times higher than the 1996-98 average.

The report concludes that:

  • increasing awareness of environmental objectives and regulations in this respect have not significantly impeded the working of the Internal Market

  • the Internal Market can make an active contribution to sustainable development, through for example market instruments for the trading of emission allowances, the further application of the "polluter pays" principle and more systematic assessment of the environmental impact of public policy proposals.

Cross-border trade

Cross-border manufacturing trade inside the EU is growing faster than GDP, the report notes, subjecting national markets to competitive pressures and offering consumers greater choice and lower prices. However, there remain problems with mutual recognition in several sectors, for example construction products and professional qualifications.

Even wider use of European standards 80 % of standardisation now takes place at European or international level compared to 80 % at national level in 1986 - and faster definition of new standards could further boost the European market.

Cross-border direct investment

Direct investment by EU based companies in other Member States has grown rapidly. The Commission intends to investigate the reasons why the importance of such investment varies so widely by Member State.

EU 15

BLEUDKDELSFIrlItNLAPFSUK
FDI inflows extra-EU0.8%2.6%1.1%0.3%0.1%0.3%0.4%4.5%0.1%2.2%0.1%0.4%0.0%1.9%1.8%
FDI inflows intra-EU1.6%5.9%0.9%0.8%0.5%0.7%0.8%3.7%0.5%4.5%1.1%0.9%2.3%6.3%2.9%

Source: Commission services with Eurostat data

Note: these figures show how important foreign investment inflows are to each Member State by comparing the average size of each Member State's inflows between 1995 and 1999 with the average size of its domestic economy (as measured by GDP) over the same period.

Further integration in the business services sector is a priority

Services continue to be the most important engine of employment growth in the EU, but the Internal Market in some business services remains rather weak. This is particularly true of services covered by widely divergent national regulations, such as accountancy, auditing and technical testing. The Commission estimates that eliminating barriers to cross-border trade in business services alone they represent only a third of all services - would increase current EU GDP by up to 4.2%.

Encouraging entrepreneurs and innovators

The financial environment for firms has improved substantially in recent years. Venture capital is growing fast, especially for start ups. But despite the improving environment for entrepreneurs, Europe has a mountain to climb to catch up with the US. For example; a recent Austrian study estimates that for an identical company, start up costs would be €171 in the US compared to the EU average of € 1,625.(1)

Further legislation and mechanisms to protect and enforce industrial and intellectual property rights notably the adoption of the Community Patent Regulation - is also needed to provide extra incentives for innovation.

Details of the report are available on the Europa website:

http://ec.europa.eu/internal_market/en/update/economicreform/index.htm

(1) Source: Lettmayr, C. F. /Mandl, I./Gruber, E. (2001): Gründungskosten neuer Unternehmen in Österreich und Policy-Benchmarking im Bereich der Unternehmensgründung. Vienna: Austrian Institute for Small Business Research.


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