Commission adopts report on economic reforms of product and capital markets

IP/99/29

Brussels, 20 January 1999

Commission adopts report on economic reforms of product and capital markets

A Communication on the functioning of goods, services and capital markets, which highlights priority areas where structural weaknesses in the supply side of the European Union (EU) economy should be tackled, has been adopted by the European Commission. The Communication, prepared at the request of the June 1998 European Council in Cardiff, aims to assist the Council of Economic and Finance Ministers (ECOFIN) in the preparation and consideration of the EU's Broad Economic Policy Guidelines. In particular, the Communication examines the extent to which markets are already integrated and efficient, with a view to identifying structural reforms needed at both national and EU levels to improve their flexibility and performance. Economic reform is not an end in itself, but a tool to achieve increased prosperity, economic stability and, above all, create jobs. This analysis will contribute to the development of the Guidelines as an effective instrument of economic policy co-operation, by ensuring that the ECOFIN Council has an integrated view of macroeconomic indicators, the labour market, the functioning of the Single Market, and other structural issues. This will reinforce the Guidelines as an instrument for prompting structural change essential for the success of Economic and Monetary Union (EMU).

"Following the introduction of the euro, it is more vital than ever to improve markets' flexibility and efficiency and so ensure the success of EMU. In view of this, the Commission and the Council have established a regular monitoring of economic and structural reforms, to begin in 1999. This report is the first element of such a new process. The Single Market represents the fundamental pillar of Economic Union and therefore we must ensure it functions efficiently and all its potential benefits are exploited to the full", said Single Market Commissioner Mario Monti. "Economic reform and removing market rigidities are a means to create jobs and ensure the EU remains globally competitive. We need to establish regular monitoring by selecting the relevant indicators and by improving statistical flows. This report is fundamental to identifying policy areas where action is needed to achieve the benefits EU citizens and business expect from EMU".

The Single Market is a very useful spur to economic reform. Such reform has become all the more important in the context of EMU because, with exchange rate realignments no longer an option, market efficiency and flexibility are a crucial adjustment mechanism in the case of asymmetric shocks. Indeed, economic integration and structural reform, by increasing their diversity, render European economies more resistant to asymmetric shocks.

Moreover, the Single Market, by facilitating the integration of capital markets, can help to cushion disturbances affecting local financial systems and enhance the performance of European financial markets. The report draws attention to the role public authorities should play in enhancing the efficiency of markets by reducing administrative burdens to the minimum and by ensuring legislation (e.g. anti-trust rules) is applied effectively.

Trends in products and capital markets highlighted by the report include:

• Developments in cross-border trade and cross-border foreign investment provide some positive evidence that EU markets have become more integrated since 1992, but at a differing pace in goods, services and factor markets.

  • Intra-EU trade in goods increased considerably between 1992 and 1997, showing increased market integration through trade, although most of this was over 1992-1995.

  • There is little evidence of increased market integration through new trade in services, although there is more foreign direct investment (FDI) activity in services than in manufacturing.

  • There is evidence of increased capital mobility in the Single Market. Intra-EU FDI grew considerably between 1993 and 1997. High correlation of share prices shows a higher degree of integration in short-term capital markets too.

  • There are indications that labour mobility is increasing from a low base.

• Increased market integration and competition are having an impact on prices, which converged between 1985 and 1996 and on market performance, particularly in some service sectors such as telecommunications and air transport, where prices have dropped. However, compared to the US, EU price dispersion and levels are high, particularly in public procurement markets and heavily regulated markets, suggesting that further market integration could still yield significant benefits.

The report recommends that:

• Policies are developed to meet fresh challenges - There are clearly areas where the existing framework should be improved. These include financial services, where the euro and the globalisation of capital markets have introduced new challenges; public procurement; and operation of the principle of mutual recognition of national standards and norms. The development of electronic commerce opens up new opportunities for buying and selling goods and services across frontiers, but urgently requires the clear legal framework proposed by the Commission to be adopted by the Parliament and Council (see IP/98/999).

• Remaining barriers in the Single Market are dismantled - The benefits of the Single Market are not fully exploited in some areas as a result of policies within national competence (e.g. in the motor vehicle and pharmaceutical sectors). The risk of market distortions due to state aids still requires vigilance (see table 3). The need to deal with tax distortions will become increasingly evident as the euro increases price transparency and expectations of trouble-free transactions. In the longer run, this requires more co-operation between Member States to remove substantial tax obstacles to the optimal performance of an integrated EU economy.

• Effective enforcement of the rules is ensured - In addition to ensuring the timely and correct implementation of Single Market Directives, the Member States must ensure these rules are respected in practice. Considerable progress has been made in this respect since the launch of the June 1997 Action Plan for the Single Market, as shown by the Scoreboard (see IP/98/952). Member States must commit themselves to ensuring that all levels of their administrations are fully aware of the Single Market dimension of their work and apply Single Market rules effectively, as a matter of course, fairly and openly. The utilities sector provides examples where the success of liberalisation now depends essentially on effective enforcement of the agreed rules.

• Market developments are closely monitored - Further monitoring of the progress made on structural reform over the years implies a stepping up of the collection of relevant data (such as price dispersion data), with the active support of Member States, as well as regular stocktaking of the actual performance of the Single Market (for example, concerning public procurement).

In addition to the contribution that the report is intended to make to the Broad Economic Policy Guidelines, its findings will assist the Commission as it considers priorities for action in the Single Market, following the successful implementation of the Single Market Action Plan. The Commission will define these priorities before the June 1999 European Council in Cologne.

Table 1 - The importance of intra-EU trade in goods relative to GDP (1992-97)

* Germany, France, Italy, UK and Spain (ranked according to GDP average 92-97)

** All other Member States

Unweighted, including excise and value added taxes

Table 3 - Total amount of (non-agricultural) State Aids (1995 prices)

State aid expenditure has gradually declined since 1990 and represented 1.4% of non-agricultural GDP between 1994 and 1996, down from 1.6% between 1992 and 1994. Over the 1994-96 period, France, Germany and Italy accounted for more than 75.6% of the total amount of state aids to manufacturing in the EU, down from 81.7% over the 1992-94 period. On the other hand, Member States like Spain and the UK, which had very much lower aid volume, experienced an increase, although the UK (along with Sweden) is the Member State with the lowest aid levels when expressed as a proportion of value added.

The full text of the Communication will be available on the Commission's World Wide Web site: http://ec.europa.eu/dg15