Unused potential of the EU internal market for goods

_ Harald Oberhofer, Professor of Economics,  Vienna University of Economics and Research, Research Associate, Austrian Institute for Economic Research; Michael Pfaffermayr, Professor of Economics, University of Innsbruck; Yvonne Wolfmayr, research assistant “Industrial Economics, Innovation and International Competition”, Austrian Institute for Economic Research (WIFO). Vienna, 13. February 2020. Translated into English by Yuri Kofner.

Compliance with the EU internal market rules would lead to a significant increase in intra-EU trade in goods and increase real EU-wide income by up to 0.5%. The new EU countries in particular, but also Austria and Germany, would benefit from this.

The realization of the free movement of goods in the European internal market is tied to two essential rules: the compliance of the products with the EU-wide regulations for the protection of human and animal health, the environment and consumer rights (harmonized standards and specifications), and the mutual recognition of technical product regulations of individual EU countries for products without EU-wide (harmonized) regulations. Monitoring compliance with product safety regulations is the responsibility of the market surveillance authorities in each member state. In addition, the EU requires the reporting and examination of any new draft law on technical regulations in order to rule out contradictions with internal market regulations and new trade barriers.

Still existing challenges of the EU internal market

Compliance with the internal market rules is a prerequisite for companies to exercise their rights fully and to take advantage of the internal market. Companies repeatedly encounter hurdles if, according to the Hungarian authorities, the sale of Austrian wood preservatives is only approved via a separate branch in Hungary, or if a product in the importing country has to be tested again at great expense, even if it is already marketed in another EU member state has been. Obstacles to the free movement of goods also arise when national authorities refuse market access due to non-compliance with local laws as a result of late or incorrect implementation of EU rules. They also arise from a lack of or inadequate market surveillance in individual member states, when products that do not follow EU safety regulations are more competitive as a result of circumventing costly safety or environmental regulations and thus come onto the market at a competitive disadvantage for EU-compliant products.

The EU Commission counteracts such problems with mechanisms such as the SOLVIT network for problem solving in relation to legal violations by authorities, as a quick and free alternative to legal proceedings, the rapid alert system RAPEX (Community Rapid Information System) for the detection of violations of product safety standards, the TRIS notification procedure (Technical Regulation Information System) for drafting new technical regulations through to formal infringement procedures in the internal market in more serious cases. A well-known example of an infringement procedure is the procedure initiated by Austria in 2017 against Germany, with a corresponding judgment by the ECJ (June 2018) against the German toll (“infrastructure charge”), which German citizens due to the compensation by a lower Motor vehicle tax would hardly have been charged (“indirect discrimination”). These mechanisms very often contribute to solving problematic cases, but at the same time also show where there are weaknesses in the internal market and where the member states and the Commission have to work harder. The Single Market Scoreboard (“Single Market Scoreboard”) is an important indicator and publishes deficits in implementation of the law, cases of infringement proceedings, SOLVIT cases and the number of complaints (“statements”) of the Commission on technical regulations in TRIS.

The present article presents the results of a study commissioned by the European Commission (Wolfmayr et al., 2019; Wolfmayr, 2019) on the potential for intra-EU trade and welfare that comes with a complete harmonization of technical regulations and the elimination of existing weak points could be exhausted in the implementation and enforcement of internal market rules. The results are based on a theory-compliant specification of the gravitational model (“structural gravitational model”) and selected internal market indicators as well as trade data at branch and country level from the WIOD database (World Input Output Database) for the years 2004 to 2014.

Compliance with internal market rules: positive effects for all member countries

Compliance with the internal market rules varies greatly from country to country. Most of the “red cards” were given to Italy, Spain, France and Germany, measured over a longer period of time and across all indicators. The Czech Republic, Luxembourg, Greece and Portugal do particularly poorly in terms of law enforcement. In an overall ranking of all EU member states and across all internal market indicators, Austria is at the lower end of the group of countries with a medium performance. In comparison with the EU 15, Austria does above average and well. The development of the indicators over time shows a general trend towards improvement. The TRIS indicator (notification of new technical product rules) shows Austria to be particularly active in regulation. On average, Austria reports around 50 new technical regulations per year in TRIS, making it the country with the fifth highest level of regulatory activity within the EU.

Due to the lack of implementation and enforcement of the internal market rules, not only Germany and Austria are missing out on many opportunities to take advantage of the advantages of the internal market. The study shows in some cases considerable effects of an improved implementation of the internal market for goods (see overview). Full compliance with and enforcement of the (jointly agreed) internal market rules could increase intra-EU trade in goods by up to + 7.6% and the EU’s real income by up to 0.5%.

New EU countries could benefit the most

The estimates show positive welfare effects for all sectors and all member countries in the internal market. The greatest potential could be achieved in trade with the acceding countries. Trade within the group of candidate countries and between the EU15 countries and the candidate countries could increase by up to 8.6%. EU15 intra-EU trade by 7.5%. The associated real income effects are therefore also higher for the acceding countries (1.9%) than for the EU15 (0.4%).

Austria could also realize a real income up to 0.5% higher, for Germany it would be up to 0.4% higher real income. Companies in the “wood and cork products”, “glass and ceramic products” and “furniture, toys and other products” sectors would benefit the most. The highest potentials result from the complete implementation of EU directives in national law and through correct application of EU law, i.e. in a scenario without breaches of contract.

Improved political coordination between member states is necessary

The analysis also underlines the positive effects of informal and faster solution mechanisms such as SOLVIT or the notification procedure implemented in TRIS, as a correction mechanism for possible cross-border obstacles resulting from national technical regulations. The results also show potential through more intensive information and confidence building in companies with regard to existing procedures and solution mechanisms, but also through an increase in the effectiveness of market surveillance in the member states.

However, the assumptions underlying the estimation results imply a perfect world with full compliance and enforcement of internal market rules, effective market surveillance and a functioning mutual recognition mechanism. The potential can only be realized if the political coordination between the member states were able to intensify joint efforts to comply with the regulations.

Overview: Real income effects of different alternative scenarios for the full implementation of internal market rules in a country comparison

Sources: WIFO calculations. – 1) Average general equilibrium effect on real income in% of the base scenario (“status quo”). – 2) Bulgaria, Estonia, Croatia, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, Slovenia, Czech Republic, Hungary, Cyprus. No data availability for Croatia regarding law enforcement and infringement proceedings.

Literature

Wolfmayr, Y., “Ungenutzte  Handels- und  Wohlfahrtspotentiale  des  Europäischen  Binnenmarktes für Waren”, WIFO-Monatsberichte, 2019, 92(12), S. 891-906, https://monatsberichte.wifo.ac.at/62251.

Wolfmayr, Y., Friesenbichler, K. S., Oberhofer, H., Pfaffermayr, M., Siedschlag, I., Di Ubaldo, M., Koecklin, M. T., Yan, W., The Performance of the Single Market for Goods After 25 Years, Studie von WIFO und ESRI im Auftrag der Europäischen Kommission, GD Binnenmarkt, Industrie, Unternehmertum und KMU, Brüssel, 2019, https://ec.europa.eu/growth/content/single-market-integration-and-competitiveness-2018-background-studies_is.

Source: https://www.oekonomenstimme.org/

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