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Mr Frits Bolkestein

Member of the European Commission in charge of the Internal Market and Taxation

"The Internal Market: facing the challenge of an enlarged EU"

Address at Budapest Economics University

Budapest, 22nd March 2002


Ladies and gentlemen, I am very pleased to be with you today to speak about the Internal Market on the eve of an enlarged Europe.

I am particularly honoured to have the opportunity to deliver this speech at the Budapest University of Economic Studies and Public Administration, which has a been a centre of reflection, teaching and research since the 18th century and which today makes a significant contribution to International and European studies. This is therefore a fitting place to consider the question of how in an enlarged Europe we can preserve and continue to further the Internal Market and the benefits of economic integration which it brings.

I have no doubt that the enlargement of the European Union is a political imperative for today's European leaders, but it is first and foremost part of our European vocation.

Europe has been an undivided notion in culture, art and literature for most of its history. It was only during the last half of the 20th century that a division as unfortunate as it was artificial was made. Now we have the opportunity to redress the situation. We must rise to this challenge which we cannot afford to fail.

We might reflect on the words of Salvador de Madariaga who once said something which, I believe, should still be the leitmotif steering our way to the future enlarged Europe.

He said:

"let us build a Europe that is at once Socratic and Christian, made of doubts and faith, of liberty and order, of diversity and unity."

It has often been said that Europe is a puzzle of languages and cultures difficult to match with any classical integration model. There is certainly some truth in this. But I strongly believe that the wealth and strength of Europe lies precisely in its diversity.

Europe's varied landscape has never been an insurmountable obstacle to various forms of cultural, economic and political integration throughout history. And today, perhaps more than ever, European culture, economy and politics are transcended by the European Union which provides living proof that integration and diversity are not mutually exclusive but rather mutually reinforcing.

But it cannot be denied that taking forward the European project with more than 25 countries will not be an easy task.

We must be realistic and conscious of the nature of the challenge ahead. Enlargement is a huge operation. Never before have so many candidate countries entered the EU at the same time. We must make sure that the achievements of integration thus far will remain intact and, if possible, be strengthened in a Union of up to twenty-five Member States or more.

We must proceed in a way that makes enlargement both manageable and sustainable. The European Union must work not only today and tomorrow but also over the next twenty years. This implies making the Union more democratic, more transparent and more efficient. The Convention on the future of the Union, which began work on 1 March, will have the task of identifying the key issues arising for the Union's future development in order to ensure these objectives are met. This should contribute to making enlargement manageable. In order to make enlargement sustainable, all Member States both old and new - will be required to make compromises to ensure that EU policies are not diluted. EU integration should not be a damage limitation exercise: lowest common denominator solutions will not do.

The Internal Market: its role in European integration

Looking back over the last past fifty years, we can see periods of doubt and faith in the European integration process and we may even criticise the lengthy and sometimes tortuous process itself. However we must recognise that the EU's achievements are enormous.

It is in this context that I should like to highlight one of the main achievements of the EU, if not the major one, the establishment of the customs union and subsequently the Internal Market in goods, services, capital and persons.

Although the creation of a single market was one of the main objectives of the original EC Treaty, the eight-year programme to foster it between 1985 and 1992 was one of the most ambitious targets the European Community had ever set itself. Thanks to this major landmark, today in Europe every citizen and business can benefit from a number of basic freedoms and enjoy on a daily basis a bundle of rights which belonged until not long ago to a utopian world. The year 1992 was not of course the end of this process since the Internal Market continues to be work in progress, a dynamic process. There is still a lot to do.

Just to take a few examples of work we now have in hand: we are creating a truly Internal Market in services, including financial services;

  • we are creating a deep and liquid market for capital, including, for example, through common rules on take-overs;

  • we are improving the tax environment for businesses across the European Union by tackling obstacles to cross border activity;

  • we are opening further public procurement contracts to goods and services coming from other Member States;

  • we are trying to create an affordable Community patent to increase the competitiveness of European research and industry.

I welcome wholeheartedly the results of the Barcelona European Council last week which led to an important break-through on energy liberalisation and urged rapid progress in all the areas which I have just mentioned. I sincerely hope that these words will be translated into action: as I have said on a number of occasions, what the EU needs is less poetry and more motion.

I think it is fair to say that the concept of the Internal Market has been the driving force of European integration. The benefits of the single market are underpinned in economic theory by three main concepts:

  • the first is the reallocation factor. Market integration allows for the more efficient use of the factors of production, labour and capital and economies of scale. This increases overall prosperity for everybody.

  • the second is the accumulation effect: through increasing productivity of the factors of production, integration can act as an incentive for investment, which in turn leads to increases in consumption and innovation.

  • and thirdly, the localisation effect: the geographic localisation of the factors of production are optimised as a result of integration, leading to specialisation and a more rational use of resources with ensuing economic gains.

Indeed the Internal Market has created a vast level playing field, which allow us to exploit the advantages of scale, which are essential for a competitive, dynamic and forward-looking economy. But also beyond the market-related considerations, it has had spill over effects by fostering further integration in many other areas. Think of the launching of the Euro, think of the prospects of a full European capital market integration, think of the enormous advantages for day-to-day life by the establishment of the Schengen space.

In retrospect, the merging of fifteen national markets into one single market, the open competition and an enlargement with many other countries may well be regarded as the greatest 'supply side' exercise ever in world economics, a huge exercise which stimulates production, increases competition, reduces prices and increases demand within the European Union.

The practical consequences of this for the day-to-day life of EU citizens and businesses are enormous. Let me give you a few examples: doctors can practice their profession in any other Member State without major obstacles, citizens can travel throughout the Union without border controls, consumers benefit from lower prices, construction companies can bid for contracts in other Member States, driving down the cost of public works for the taxpayer … This is what the internal market is about.

As I said the Internal Market is still work in progress and we still have some way to go if we are to meet the ambitious target set by European leaders in Lisbon in 2000 of making Europe the most competitive knowledge-based economy in the world by 2010. Personally, I have not hidden my frustrations about the slow pace of structural reform. Old protectionist reflexes have tended to block progress on a number of key files. Without structural reform to unleash the full potential of the Internal Market, we will fall well short of meeting our objective of becoming the most competitive economy in the world.

The Lisbon target represents a particular challenge for candidate countries. But this must not be used as an opportunity to introduce less ambitious objectives. An enlarged EU should in the longer-term benefit from the growth, dynamism and reforms of the candidate countries economies that still need to catch up with the EU. Indeed, the process of enlargement is likely to be a further factor for growth, investment and job creation across the Union in the second half of the decade.

As you know, candidate countries have not had to wait until accession to exploit some of the potential benefits I just mentioned. In economic terms enlargement is already largely achieved. Economic integration with the candidate countries has advanced greatly under the Association Agreements. Free trade is a reality for all imports of manufactured goods, which enter free of customs duty without any quantitative restriction. Furthermore, companies from both sides already enjoy right of establishment and the same treatment as national companies.

All candidate countries have increased their trade with the EU and in fact they are already as tied in with the EU as the EU's own Member States. The EU is now by far the most important trading partner of all candidate countries. Hungarian exports to the EU, for instance, account for 75 percent of its total exports and imports from the EU for 59 percent. The enlargement countries together are now the EU's second trading partner after the US. Direct investment by the current Member States in the candidate countries is also growing fast. Hungary is a good example of that as it attracts many investors from EU countries.

We can conclude therefore, that candidate countries are already now receiving the first economic benefits of the integration triggered by the Internal Market.

The challenge of enlargement: expanding but not diluting the Internal Market

Enlargement can open the way for an Internal Market of over 500 million consumers and to an open, border-free area where persons, goods, services and capital can circulate freely.

This will benefit existing and new Member States alike, provided that the rules and principles that we have established are respected by all members. Alignment to the single market rules therefore constitutes not just a sensible economic reform programme for the candidates countries but also a condition "sine qua non" for the proper functioning of the future enlarged Internal Market. This market is in essence a level playing field and must continue to be so if we want it to be beneficial to all players.

Only the integrity of the Internal Market can ensure the mutual benefits of enlargement and therefore we cannot have it turned into a patchwork quilt of pick and choose. For many candidate countries adopting the "acquis communautaire'' may appear to be a hard nut to crack. I fully understand that to do that in a short period of time is a huge challenge, but there is no other way of doing it. This process requires a common effort by the Union and by the candidate countries, and it serves the interests of both. Indeed the preservation of the integrity of the Internal Market is a 'must' for the continued success of an enlarged European Union.

In this context, I am fully committed, in the areas within my responsibility, to ensuring that the achievements so far will remain intact in an enlarged Union of twenty-five or more Member States. This is all the more necessary bearing in mind the Lisbon objective, being the most competitive economy in the world by 2010 and the areas in which we still have to make progress which I mentioned earlier. I am pleased to note that, generally speaking, few problems have been identified so far, and on the whole candidate countries have indicated in the negotiations that they will be able to take over the full body of customs, tax and Internal Market law by the time of accession to the EU, including the required administrative measures.

Having said this, one area where the candidate countries have put forward some quite substantial requests for transitional periods is that of reaching the Community's minimum levels in the field of VAT and excise duty rates, in particular as regards VAT reduced and zero-rates and excise duties on cigarettes.

Indirect taxation is one of the cornerstones of the functioning of the Internal Market, as it has a direct impact on the free circulation of goods and services within the EU. A minimal harmonisation of tax rates has been introduced, on the one hand to give flexibility to Member States, while on the other hand, through a system of minimum rates, protecting economic operators and national budgets against serious distortion of competition. A partial adoption of EU law without solving the underlying problems could therefore create new difficulties, which could be even more considerable for the candidate countries.

I know that Hungary has, in principle, accepted to apply excise duties on tobacco as from the date of accession and I very much welcome this. But as you know the acquis is constantly evolving and now we have a new directive on tobacco products: a new minimum level has to be introduced, besides the 57% of retail price. Member States will have to ensure that, when applying the 57% rule, the overall duty is not lower than 60 Euro per 1,000 cigarettes, to be increased to 64 Euro by 1st July 2006. I very much hope that in the same way that Hungary blazed the trail for the candidate countries thus far, it will do so again with regard to the new directive.

In the same way that provisional closure of negotiations does not mean that a country is completely prepared for membership, legislative approximation is only a first step. More importantly, adequate administrative structures with proven capacity to function must be in place. Candidate countries have demonstrated a strong political will to invest the necessary means. I know perfectly well that legal systems, enforcement and administrative structures cannot be built overnight. However, there can be no compromising on this objective. We can only accept 'first-best' enforcement.

In the light of recent events in the US, the prospect of insufficient enforcement for key areas such as financial services is unacceptable. Moreover, I should like to underline that the customs administrations of new Member States will be placed in the frontline in the fight to prevent illicit trade, smuggling and money laundering. It is therefore essential that candidate countries' customs administrations are fully operational on day one of accession to the EU, as regards the application of Community measures and protection of the Community's interests.

Hungary will have the important task of protecting the Community's physical external frontier with Croatia, Yugoslavia, Ukraine and, until it also joins the EU, Romania. The Hungarian Customs and Financial Guard (VPOP) faces considerable challenges in this regard, in particular transferring staff away from the Northern and Western frontiers. In addition, in concentrating on the new external land frontier it still needs to achieve the balance that all customs services have to strike between effective control on the one hand and facilitating legal trade on the other

As you know, the Commission is currently working together with all candidates on an Action Plan on administrative and judicial capacity building that we hope will fill the existing gaps in this area. The necessary financial resources have been allocated to that end (€ 250 million for 2002) and we must now get the most out of it. In my area of responsibility we are already working hard with peer reviews being carried out in the financial services sector, for the mutual recognition of professional qualifications and as regards data protection, but many other measures are envisaged in other key areas.

With regard to taxation, the Community is in the process of evaluating the administrative capacity of candidate countries. For the customs area, it so happens that such an exercise has been taking place in Hungary this very week, ending today (22 March). A Joint Team of Commission and Member States' customs officials has been visiting different locations in Hungary to assess the Hungarian authorities' capacity to meet the obligations that Hungary will take on as a Member State, when the measures to be applied are Community measures and the customs duties it collects, part of the Community's Own Resources.

Enlargement can only be successful if it is based on a sound and valid economic foundation, a properly working public sector and if the integrity of the Internal Market system is properly maintained. If not, the machinery that brings growth and prosperity to Europe will break down and could even lead to the rebuilding of national borders. It is therefore essential that enlargement stays a finely tuned process and that our European ambitions are matched by our ability to fulfil them.

Even if we can say today that the point of no return is already behind us and politically the enlargement process is decided, the game is far from over.

A good number of Internal Market related chapters have been provisionally closed with most candidate countries. This is something for which we can congratulate each other. But be aware that this is not the end of the road, it is the beginning. Commitments made in the context of closing chapters, for example to deliver legislation, have to be respected during the course of this year.

The consequences are real and the questions are tough. Will candidates be ready to invest the necessary resources to get the shocking level of intellectual property piracy down? Are they committed to liberalising their public procurement markets and renouncing to any kind of economic "patriotism"? Will your authorities take the necessary measures to ensure full application of transparency and non-discrimination principles in public contracts for motorway construction for instance? Are candidate countries prepared to accept the consequences derived from the application of the 'single passport' and 'home country control' principles in the financial services sector? These are questions that need a straightforward answer and a strong political will from all accession countries for the sake of the credibility of enlargement.

Concluding remarks

Negotiations on the most difficult issues agriculture and regional policy are now underway. Together these two issues account for three quarters of the EU budget, so the political bargaining over these chapters will be intense and difficult. This is a political reality, but we should never loose sight of the bigger picture. The words of the Hungarian poet Mihaly Babits come to mind: "I believe in fraternity: the colours together add up to the picture, the sounds together add up to the concert". The European project has been the phoenix rising from the ashes of the historic tragedies that devastated our continent during the 20th century.

The fact that the countries of the EU now for more than 50 years have been free of the miseries of war and armed conflicts is one of the most resounding successes of European integration. Again, this integration can be made visible by many simple things: the fact that European citizens can purchase freely products produced by other Member States, that they can travel when and where they want: all this leads to a better understanding and appreciation of their neighbours and of the European model.

This does not mean that Europeans have forgotten their history, forgotten the conflicts they once had, forgotten the pain and injustice that happened among them. But the European project has helped the current member states to come to terms with their black past. Admissions of past wrongdoings have been made. The consequence of this is that today healthy and intensive debates are possible on history, on democracy and also on further European integration.

My strong wish is that the candidate countries, their people and their political leaders will be inspired by such examples and will be able to cope with their past in the same wise manner. Similarly, much can be learnt from the experiences of democracy and the structures for sharing of political power which exist within Europe and which have been proven to produce stable governments which can deliver results on economic reform. We must not forget the mistakes of the past but our focus in enlarging the Union must be to build a common future as part of a Union of freedoms and solidarity, of trade and competition, of peace and prosperity.

Thank you for your attention.

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