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Brussels, 23rd December 2002

Internal Market: EU needs to step up economic reform to reach its competitiveness objectives

The European Commission's latest report on the functioning of product and capital markets provides additional evidence that the Internal Market has delivered significant benefits for Europeans, not least lower prices for many consumer products. But there is still much untapped potential for gains in several areas of the economy, especially services (in particular financial services) and public procurement. The EU can still meet the objective set by the Lisbon European Council in 2000 of becoming the most competitive economy in the world by 2010. But there must be no further delays to the adoption of legislative proposals and Member States must significantly improve their performance in implementing EU law on time. Simpler and better regulation at all levels is also required. The report warns that unless the EU delivers further rapid economic reform the US economy may outperform the European economy during the downturn just as it did during the late 1990s expansion. The report is the fifth 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 2003 European Council. The report aims primarily to assess recent developments and highlight priority areas for further action. It will be followed in early January 2003 by a Commission analysis of overall progress since internal EU frontiers were dismantled a decade ago. That analysis will include a new economic impact assessment.

Internal Market Commissioner Frits Bolkestein said "We need further economic reforms, in line with the "Lisbon agenda", to boost competitiveness, and we need them quickly. That is the only way to release the full growth and job creation potential of the Internal Market. It is also the best treatment to help the EU fight off the current global economic downturn and the right preventive medicine to boost our defences against future instability. It means developing the Internal Market for services, completing the Financial Services Action Plan on time and staying on track with reforms of energy, transport and telecommunications markets. It requires Member States to end the squabbling over the Community Patent and to move quickly adopt the public procurement package. All this is a tall order. But the economic prize is immense more prosperity for the citizens of an enlarged Europe."

In line with recent Competitiveness Council conclusions, the report this year focuses on a more limited number of issues than previously. It includes an annex assessing Member States' responses to questionnaires on two topics: measures to eliminate barriers to the cross-border provision of services and measures to simplify regulation and reduce the regulatory burden on business.

The principal conclusions of the report are as follows:

The Internal Market has led to lower prices

Price convergence has significantly benefited consumers. For many goods accounting for at least 25 % of consumer spending price convergence has been accompanied by low price increases. In other words, prices have tended to converge towards price levels in less expensive countries. But price convergence is stagnant since 1997-98.

But it still holds a large economic potential

Some of the benefits of the Internal Market are being squandered due to the poor performance of the services sector. Services account for 70% of EU GDP and employment. Continuing barriers to their free circulation in the Internal Market are hurting the whole economy. Price convergence has been limited for services. Independent action by Member States is necessary, but not sufficient for making significant progress in this area.

Completing work in the financial services sector is particularly important because it will boost the competitiveness of all sectors. However, significant progress can be reported in the introduction of reforms in this sector.

Delays to further public procurement reforms mean the European economy continues to be deprived of the full benefits that could accrue from the integration of such a large and important economic sector.

Significant efforts on reducing the regulatory burden on small and medium-sized businesses and start-ups should be complemented with the full and effective implementation of the action plan for better and simpler regulation.

Growth in trade can continue to boost jobs and growth

Intra-EU trade in goods grew faster than GDP between 1996 and 2000, but it lost momentum in 2001, a year when world trade fell for the first time in two decades. There are still further benefits to be had from a better application of the principle of the free movement of goods (notably better application of the mutual recognition principle - see IP/02/1153). Trade in services remains well behind trade in goods.

Intra-EU trade has not been created at the expense of trade with the rest of the world. On the contrary, the EU has become more open to trade in recent years.

Foreign direct investment between EU countries remains the leading driver of cross border activity especially in services but it was severely hit by the economic downturn in 2001 and fell below 1999 levels.

Avoiding delays to reform is crucial

The EU can still meet the schedule of economic reforms needed to achieve the competitiveness objectives established by the Lisbon European Council, but only if adoption of proposals currently under consideration is not further delayed and if Member States implement Directives on time.

Only in a minority of cases is the adoption record of Internal Market policies clearly unsatisfactory. But these include major planks of economic reform, notably the new legislative package for public procurement and the Community Patent, both of which have yet to be adopted.

For a more detailed summary of the report, see MEMO/02/303. Full details of the report and statistical tables will be available on the Europa website:

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