How can Mario Monti square the circle? Paweł Świeboda and Marek Góra*

Mario Monti, who is putting final touches on his report on the future of the Single Market, likes to look at the issue through the prism of the new package deal which he considers necessary in Europe. In his view, if a relaunch of the EU’s most successful economic integration project in the last two decades is to happen, those who traditionally favour the deepening of the Single Market should be prepared to make concessions to those who maintain reservations, especially on social and tax policy grounds.

Filling the gaps

We have grown used to the fact that the Single Market is incomplete and this, as a result, weakens the EU’s overall competitiveness. There are at least three dimensions to it. First of them has to do with the big strategic gaps which exist in areas such as the energy market. The second has do with problems in the implementation of the four fundamental freedoms. And the third is about the new markets which have not been sufficiently regulated.

Energy is the one field where national markets have remained predominant in spite of the successive waves of EU legislation. It is now clear that without creating a single market in the area, the EU will have major problems in reaching its policy objectives, on both energy efficiency and greenhouse gas emission reductions as well as with secure and affordable energy supplies. Problems of interconnection and access are crucial. In the recovery package, the EU has for the first time spent money from the community budget on projects that will help to meet these objectives. The new task has to do with reaching the EU’s 2050 emission targets which imply a near zero-emission economy. The infrastructural needs required to deliver large scale renewables to the markets are immense. The third energy package is meant to ensure that companies that remain vertically integrated for ownership purposes run independent network operations with an incentive to invest in networks and interconnections. For progress on the infrastructural front to be real, the new European Agency for Cooperation of Energy Regulators needs to be a powerful body able to cater of the interest of the European market, rather than the selected markets of the member states. It will have to stand up to support transnational investments of shared benefit, knowing perfectly well that this will not always please national regulators.

The second dimension has to do with making sure that the four fundamental freedoms of the single market have flesh on the bones. In a recent survey, 57 percent of European entrepreneurs said that they encountered difficulties in the most fundamental area, namely free movement of goods within the EU. There is no doubt that a lot of work has to be done on that front. One example is the strenuous process by means of which certificates of conformity are issued in the member states for products such as building materials. The local institutions often withhold the process endlessly quoting lack of staff or problems with the translation of documents. There are still thousands of cases like that and the need for propped up EU policing in the area is obvious.

In addition, consumers need to be convinced of the real virtues of the single market as much as businesses do. Consumers still face enormous problems making e-commerce transactions with operators based in other member states. Then there are the new areas such as the digital economy which need to be regulated, especially in the face of increasing global competition. The US-Chinese initiatives concluded in November 2009, including the electric car initiative, make it likely that the EU’s position as a regulatory superpower will be challenged by the accelerating global competition. Relaunching the single market cannot be only about breathing new life into an old EU project. It has to be geared towards meeting the objectives of the new EU economic strategy based on open innovation systems and green, sustainable and inclusive growth.

Tackling the structural problems

A genuine relaunch of the Single Market will only be possible if key problems which determine the structural condition of the European economy are addressed. One of the most difficult among them is adjusting our economic and social institutions to the effects of population ageing. The challenge results from the need to redesign or reinvent methods to finance social expenditure. This includes issues related to the design of social systems as well as public finance transparency. Financing social expenditure is commonly hidden in the balance sheets of the public finances and taking appropriate decisions is made difficult as a result.

Facing the challenge can be left entirely to national governments or supported at the European level. The first may work in some member countries but it is hardly likely that it will do so in all of them. If the problems are not addresed, at least the most urgent and important ones, even in some member states, the European Union will not grow in line with today’s expectations. If support was to be granted at the European level, this would require an understanding of the interdependence of the situation in the social sphere in all member states and readiness to think European.

Among challenges related to social systems, there is the free movement of labour, one of the main four freedoms of the Single Market. Do we really need to tackle any challenges in this area? Unfortunately yes. Diversity of the social systems which do not easily translate onto each other anchor workers in their home countries. Although we have a mechanism for the coordination of pension systems, problems have not been solved. Labour mobility is limited due to the real problems related to participation in national pension systems as well as due to difficulties stemming from limited transparency. People know pension systems will have to be thoroughly reformed. How will that affect their situation in home countries? Whatever is the answer we know that the situation of migrants (even internal ones) will probably be more difficult than the situation of local workers who, being local voters, will be better protected.

The creation of a pan-European basic pension system would make a lot of sense but it is hardly a politically feasible option. A reform implemented in each country separately but going along common lines could be a solution. What matters most is simplifying the existing systems. Pension rights should be expressed in a way that is automatically translatable into money terms at any phase of life of the systems’ participants. Here the examples of Sweden and Poland can be analysed and possibly used as a point of reference for designing the new institutional framework for the rest of Europe.

Labour mobility is - and increasingly will be - a hostage of public finance since transparency and portability of national basic pension systems requires solving problems related to large scale hidden debts of the social systems. Those latter problems are increasingly difficult to solve, which creates also a labour mobility deadlock. There is no doubt that European challenges are complex.

The complexity partially stems from pushing integration of social systems out from the European level. It would help us to solve vital problems if that trend was reversed. "Apage, Satanas!" - say those who are afraid of the European superstate. Well, it is probably high time to rethink pros and cons of further integration covering also those areas that have been kept out of it in the past.

The wider package deal

The current reality of the European Union is that there will have to be a huge remaking of the European package deal to ensure that everybody feels continuously committed to the integration project. Supporters of the deepening of the Single Market may have to make concessions, which Mario Monti suggests, but they also have to be convinced that progress is real and contributes to leapfrog change rather than trimming around the edges. This has to do with backbone markets such as that of energy which has not been at the forefront of the Single Market in its early years, with strong policing of the four freedoms and moving fast to ensure that the Single Market functions properly in the new areas of the economy. Very often, it will be necessary to look under the surface and examine the real reasons why there are problems with the main freedoms of the Single Market such as the free flow of labour. More thorough changes will then be necessary, such as to ensure the full portability of basic national pension system rights. This is what will make the new package deal in the EU fly.

* Paweł Świeboda, President of the Board, demosEUROPA - Centre for European Strategy. Marek Góra is Professor at the Warsaw School of Economics and one of the main authors of Poland’s pension system reform.

For further information: demosEuropa