Europe 1993: Light at the end of bureaucratic tunnel: Gains and losses

The author is Senior Research Fellow, National Institute of Economic and Social Research

THERE is no switch to be pulled tomorrow which will suddenly bathe the British economy in a pool of European light. Instead, there will be an imperceptible daily increase in brightness.

The 1992 programme is having its effect over a period of at least 15 years. If we look at any short interval during that transition it will be very difficult to disentangle specific 1992 effects from the general process of change. Some firms anticipate change while others delay compliance with new regulations to the last possible moment.

The Single Market is not a change in direction for the European Community, it is a change in pace. The Treaty of Rome intended that there should be freedom of movement of goods, services, labour and capital. The Single Market programme, aided by the easing of decision-making embodied in the Single Act of 1986, hopes to bring this much closer to reality. It compresses into six years a legislative programme which was unlikely to be completed this century on the previous rate of progress. To facilitate these freedoms the programme addresses three sorts of barriers to movement: physical barriers such as customs checks, permits to trade or to carry goods; technical barriers, such as different safety requirements in each member state, the need to retest products in each nation's laboratories; and fiscal barriers such as differences in VAT, the inability to transfer social security and retirement benefits.

The physical barriers stopped some people trading and made it more expensive for others, while the technical barriers were generally just a complication. Cutting through them has been no easy task and three general principles have been applied. The first is non-discrimination. People and products may not be discriminated against just because they come from another member state. Public purchasing must be equally open to suppliers across the whole of the EC. The second is harmonisation. Common minimum standards are agreed across the Community for matters such as health, safety and the effect on the environment, while detailed matters have been referred to the standards organisations to come up with voluntary agreements. Lastly, and in some respects most importantly, is the idea of 'mutual recognition'. This applies not just to testing procedures for product safety for something sold in one country but tested in another but to qualifications and to regulatory supervision. Thus a person who is a recognised engineer in one member state can go and work readily in another. A bank which is recognised and regulated in its own state can trade in another country without having to go through the same procedures all over again.

Will it really be a single market? It is clear that even if all the rules were implemented in full, Europe would not be a single market in the sense that the US is. This is not just because tastes will continue to differ and local customs maintained, but because many of the barriers which fragment the market are not scheduled for change. Differences in direct taxation affect cross-border activities of firms, differences in social provision affect the mobility of people. Indeed it is this last facet which keeps Europe farthest away from being a single market. Language, family and cultural linkages limit migration considerably.

How big are the benefits? You might have thought that since this is such an important question, there would be a ready answer. Unfortunately there is not. The European Commission organised a major study of the costs of the barriers which existed at the beginning of the programme. This was summarised in what is known as the Cecchini Report and suggested that removing these costs would give gains in the range of 3.5 to 6.5 per cent of Gross Domestic Product. If you read the small print, the UK is likely to be a below-average gainer because many of our non-tariff barriers are already lower. We have been more insistent on 'value for money' in public purchasing, for example.

Who will be the main beneficiaries? The answer is clearly the consumer. The 1992 programme removes a whole range of unnecessary bureaucratic costs from the process of production and distribution. In combination with the forces of increased competition this will slow the rate of increase in prices. At the same time, greater access to markets will increase the range of goods and services available and wider choice is itself a benefit. Some firms will gain while others lose, although the expansion of the market as a whole should mean that the gains outweigh the losses.

However, it is unlikely that gains and losses will be evenly spread. It is generally expected that the core regions of Europe will be the main beneficiaries, because exploiting the opportunities to reduce costs involves large firms in concentrating their activities to get the economies of large scale. It encourages suppliers of components to concentrate round its purchasers so that the benefits from low stockholding in just-in-time manufacturing can be reaped. In general this implies a bigger benefit for the South-East of England than for the rest of the country. However, there are other clusters of activity in the country, such as those related to the rapidly growing motor industry which are also benefiting disproportionately.

The worry is therefore that these benefits will not trickle down effectively to the rest of the economy. In the short run removing the barriers and cutting costs actually increases unemployment. Fewer officials are required, increasing efficiency in industry reduces the number of employees needed to produce the same level of output. Growth has to outstrip these downward forces before there is a positive impact on the labour market. The introduction of the Single Market was therefore best achieved through coincidence with a period of growth in the world economy as a whole. Coincidence with recession in the UK has exacerbated the downward effect.

In the early years of the 1992 programme there was a clear increase in structural change in the British economy. After two very slow years the idea of '1992' became a clear propaganda success in 1988. Firms may not have known the full implications but there was a surge in action. Part of it came in mergers and acquisitions but there was also real change with an increase in investment activity. It does not matter whether firms are right or wrong in expecting gains: those who earn their money from change, whether it be in the construction industry or in business services, will benefit. Experience tells us that hopes will be set too high and the market will overshoot, there will be too much capacity and a period of painful shakeout will occur. In the UK that turnaround came early as other factors, such as financial deregulation, over- stimulated growth. As much of the Single Market changes are still to come they can contribute to the recovery, aided by the boost to competitiveness from the devaluation of the pound.

There are several reasons for thinking that benefits to the UK may be relatively limited. First of all we have unilaterally reduced barriers and are rightly suspicious that some of the changes agreed will not be fully implemented or if implemented will not be effectively enforced. Hence some of the opportunities for exporters may not materialise. The UK also lies between the two extremes. It is geographically on one side of the Community, although quite large enough to have a viable market of its own, yet too well off to benefit substantially either from the structural policies or from the rapid pace of catching up, assisting countries like Spain and Portugal. The fact that major steps in strong UK industries such as financial services and pharmaceuticals do not come into force until later in the decade means that the benefits will be spread out and hence may not generate a sharp stimulus to the rest of the economy.

However, saying that a benefit is not as large as some hoped it might be does not stop it being a benefit. The task which remains is to ensure that the benefit is fairly redistributed without destroying the forces of regulatory change and competition that generate it.