Tremendous effects of the EU internal market?

Bertelsmann policy paper confirms: The gap between EU countries is becoming ever wider

by Dr iur. Marianne Wüthrich

Shortly before the EU elections, the “Bertelsmann Stiftung” has published a policy paper (a “study”, according to the German summary) that presents the effects of the EU’s internal market on the incomes of residents in the EU and EEA states, as well as in Switzerland, and comes to astonishing conclusions1, namely that, thanks to the internal market, per capita incomes are said to be rising considerably every year in all countries – admittedly not everywhere and equally strongly for everyone, but even so: “The EU internal market has not only led to the dismantling of border controls, but also basically brings Europeans a plus in their wallets. On average, EU citizens’ per capita welfare gains from the SM amount to 840 euros per year. For Germany, the annual increase in income per person amounts to 1,046 euros.”2
For many an unemployed Spaniard, a Greek pensioner or a German Hartz IV recipient, who can barely cover their minimum subsistence needs with their meagre monthly allowance, let alone take care of their families, such statements present a downright cynicism. The Bertelsmann strategy paper could therefore appear counterproductive to its hoped-for appeal to many EU voters.
In addition to the EU electorate, the study is particularly aimed at the Swiss and the British. Of all people, these two – who do not want to join the EU at all or who want to leave it again – are allegedly among the greatest profiteers of the EU’s internal market. What well-chosen bait dangled in front of us by Brussels so as to persuade us Swiss to approve the institutional framework agreement! And to make the British revoke their withdrawal decision.
What the financial blessings of participating in the EU’s internal market are all about, is to be examined here from a political point of view.

The Swiss mainstream media, at any rate, have been delighted to jump at this bait. The “St. Galler Tagblatt”, which belongs to the NZZ Group, warns under the title “We Swiss profiteers”: “Those political forces that cast doubt on our participation in the EU internal market […] must know that they are destroying prosperity. That is the price we pay when we dream of greater independence.”3
The British, on the other hand, were warned by Bertelsmann project manager and co-author of the strategy paper, Dominic Ponattu himself: “A complete withdrawal of the British from the internal market would have a severe impact, not only on Greater London but also on industrial and innovative regions in the south of the country.”4 With a focus on Great Britain, the British economist Professor Dr Giordano Mion, University of Sussex, who is also a member of the Centre for Economic Policy Research (CEPR), UK, was commissioned as the second author.5
In this context there is no place to itemise the economic model – that is difficult for laypersons to understand, or deliberately presented in a complicated manner? – used by Mion and Ponattu to “prove” the supposed, truly impressive income gains brought about by the EU single market. Let us leave aside the applied “gravity model” and the related simulation calculations, as well as estimates of how strongly the EU internal market, or its disappearance, could affect trade.6

Attempt at explaining the model to laypersons – and critical deliberations

Essentially, it is not so difficult: the authors assume that trade between companies in the internal market (e.g. an Italian and a Polish company) is financially more advantageous because of lower trade costs (elimination of customs duties and non-tariff barriers7). This has a positive effect on prices and production (consumers can afford more because of lower prices = increasing demand; therefore more can be produced = increasing supply). “On the one hand, this ensures more competition for the best products and the lowest prices; on the other hand, the internal market facilitates investment by companies within Europe […].”
Entrepreneurs on the high-price island of Switzerland, for example, are forced to stand the pace in the competition for the best products, and they often can, but they would have no chance in the struggle for low prices. More competition would, in turn, lead to further price reductions and, as a consequence, to more economic growth, so the authors. “The stronger trade integration caused by the single market will ultimately lead to a shift in economic resources (labour and capital) from the less productive to the most productive firms and to a stronger increase in overall economic productivity.”8
In plain language this means that, for example, the production of tomatoes is transferred from farmers in the Mediterranean countries (= less productive companies) to Dutch conglomerates (= most productive companies), because the latter firms’ CEOs have more practice with pro-competitive tactics. From there the tomatoes are then transported to a low-cost country in the southeast of the EU to be processed into canned food, and finally back to the Mediterranean or elsewhere for sale. It is true that this back and forth movement of raw materials, individual parts, semi-finished and finished products across the continent does pollute the air and produce congestion and noise, yet in turn it creates many low-wage jobs for truck drivers and correspondingly higher profits for large logistics groups (= the overall economic productivity can grow more strongly). This whole network of production chains in the EU’s internal market is causing prices to fall further, “which can increase consumer welfare”. Or rather the welfare or the profits of the major shareholders and managers of the multinationals? For the welfare of tomato farmers and their families, as well as of those unemployed for whom jobs could be created in potential canneries in the Mediterranean, would be many times greater if they could produce, process and consume locally (as recommended by the World Agricultural Report TAASTD).
For welfare does not necessarily mean financial prosperity, but rather the well-being of people in their families and at work, as well as an autonomous coexistence in the larger community, their physical and mental well-being, a good educational and health care system, and all the other things necessary for a decent life. The EU internal market construct has led people far away from such a life model. In a Europe of free and equal sovereign states, living and working together for the good of all could be much better organised.

EU internal market does not contribute to more justice – quite the contrary

The Bertelsmann strategy paper is not about this kind of welfare of people in the local working world and in their life together, it is about money, and this is highly unfairly distributed in the well-organised market economy of the EU’s internal market. According to Aart de Geus, Chairman of the Bertelsmann Stiftung Executive Board: “The EU internal market is one of the biggest driving factors of our prosperity and works in a way similar to that of the market economy: not everyone benefits equally, but everyone wins.”9 Really everyone?
The study first compares the “economic effects of the domestic market at the country level” and comes to a less surprising conclusion: Within the countries there are large differences in the development of per capita income. According to the study, “Switzerland leads with 2,914 euros per capita in income gains, followed by Luxembourg (2,834 euros) and Ireland (1,894 euros)”. Germany and France are also among the top ten, with income gains of a good 1000 euros per capita, while Bulgaria and Romania are at the bottom of the list with 242 and 193 euros respectively, and Greece and Portugal also record small increases.
At the regional level, Zurich ranks at the top, ahead of Luxembourg, Vorarlberg and Salzburg, allegedly because of its proximity to Germany (lower costs due to short distances to major trading partners) – an absurd explanation in a time of cheap flights and when the cheapest products come from Africa, despite long distances. – The financial centre of London as well as other British economic centres are also far to the front.
From this, the study draws two by no means new conclusions: “These results show that small, open economies with a strong trade orientation and high competitiveness gain most from the internal market”. And: “… that countries in the geographical centre of Europe benefit more […]”10.
Nothing new under the sun – only that in the strategy paper, increasing per capita income is recorded as a success of the EU internal market. One could also start from the other side: Obviously, despite all levelling down by an all-pervading bureaucracy, it has not been possible to achieve more justice than this in the “Peace Project Europe” – nor is that the goal. “Not everyone benefits equally …”.

Questionable corrections of inequalities – cui bono?

We take the main findings of the Bertelsmann Strategy Paper from the English original (the German summary does not get to the heart of the matter quite so clearly): “Our results suggest that gains from the SM may further reinforce pre-existing regional differences, this way adding to the core-periphery pattern and inequality more generally.”11 We have been able to see only too well, how many people’s former hopes that accession to the EU would make them and their country enjoy more prosperity were shattered, in Greece and other countries living under the dictates of the IMF/ECB/Brussels triad.
The countermeasures proposed by the strategy paper: “Productivity-inhancing measures” in the regions concerned, i.e. “investment in (digital) infrastructure and upskilling” within the framework of the EU cohesion policy. This brings to mind all sorts of ideas: which large companies are making these investments in order to generate further profits? What are the benefits for the “recipient” states? Further debts? Wouldn’t it be to their greater advantage if they could decide for themselves, what resources they need to get their economies back on track? So that they could very pleasurably be active themselves in cooperative farms and family businesses …
“Moreover, promoting competition is vital to make sure that all countries and regions reap the benefits of the SM with respect to both higher productivity as well as lower prices.”12 Though thousandfold repeated, this construct does not work, at least not for the lower income regions: Competition is primarily of benefit to large companies, and those are already well out in front.
Finally, the strategy paper targets the services market: “Almost 75 % of EU-wide value added are based on services, yet, only about a third of all EU exports are services. Better regulation on services trade could thus allow for an even greater size of the economic pie to be achieved through the SM.”13
So should all services be entrusted to the borderless EU market? Education, health, energy, environment, as well as several other fields? No way!

Imports and exports Switzerland/EU: deficit for Switzerland
Switzerland’s foreign trade balance has been positive for decades, i.e. the value of exports in Swiss francs is greater than the value of imports (export surplus). However, this does not apply to trade with the EU states: Switzerland imports significantly more goods from the European states (the EU and some other states that are not significant in terms of numbers) than it exports. 61 % of imports in 2017 came from Europe, but only 49 % of exports went to European countries. On the other hand, exports to Asia and North America have increased in recent years.
Source: Federal Statistical Office. Switzerland’s foreign trade in 2017. The most important partners.

Stability of Swiss economy is not EU merit

As far as Switzerland is concerned, it had a place among the three countries with the highest per capita income (worldwide) long before the bilateral agreements with the EU. Small economies have always had to be “open” in order to prosper, i.e. to trade with all countries and peoples and to cultivate cultural exchange. This is especially the case if, like Switzerland, they have few raw materials of their own. The good condition of Switzerland as a business location is by no means due solely to its financial centre, which generates only a small share of GDP (6–8 per cent) and has moreover been under pressure for years from its more powerful competitors – including the EU! On the contrary, around 99 per cent of companies based in Switzerland are SMEs active in a wide variety of sectors, many of them training apprentices and doing business primarily in Switzerland.
Another internal factor is Switzerland’s dual vocational training. In addition to grammar schools and universities, it is of central importance for the well-being of the Swiss population and for the low unemployment rate, especially among the younger generation. It requires a good primary school education, a high level of motivation and reliability, as well as the ability to cooperate – “many hands make light work”. (A warning to the school reformers who are unfortunately in control today: beware of sawing off the branch we are all sitting on!)
But the fact that the Swiss are doing well also has to do with the fact that they “keep order in their own house”: thanks to their direct democratic rights, their small-scale economy and the rights of the cantons, which are still strong in the federalist state, and – this is particularly important! – thanks to their armed neutrality. Countries that do not wage wars and need their army only for defence not only save a lot of money, but have energy left to utilise for much more meaningful things in the world.14
The prosperity of Switzerland or any other country has little to do with its participation in the EU internal market, as Bertelsmann confirm in the above conclusion of their study. We have been doing business with companies in other European countries for a long time, long before there was an EU, and will hopefully continue to do so for a long time to come. Tailor-made free trade agreements, such as the 1972 one still in force today between Switzerland (and the other EFTA states) and the EC, are far more suitable instruments for a sovereign state than political integration into a centralist bureaucracy colossus.    •

1    “Estimating economic benefits of the Single Market for European countries and regions. Policy Paper”. Bertelsmann Stiftung 2019. German short version: “Ökonomische Effekte des EU-Binnenmarktes in Europas Ländern und Regionen. Zusammenfassung der Studie” (www.bertelsmann-stiftung.de/fileadmin/files/BSt/Publikationen/GrauePublikationen/EZ_Study_SingleMarket.pdf)
2    Title page Bertelsmann Stiftung of 8 May 2019 (www.bertelsmann-stiftung.de/de/themen/aktuelle-meldungen/2019/mai/eu-binnenmarkt-erhoeht-pro-kopf-einkommen-der-deutschen-um-1000-euro-jaehrlich/) (in German)
3    St. Galler Tagblatt of 8 May 2019
4    Title page Bertelsmann Stiftung of 8 May 2019 (www.bertelsmann-stiftung.de/de/themen/aktuelle-meldungen/2019/mai/eu-binnenmarkt-erhoeht-pro-kopf-einkommen-der-deutschen-um-1000-euro-jaehrlich/) (in German)
5    According to wikipedia the CEPR has no connection with the US-American Center for Economic and Policy Research, which uses the same abbreviation.
6    “Estimating economic benefits of the Single Market for European countries and regions. Policy Paper”. Bertelsmann Stiftung 2019. German short version, p. 7. According to the footnote on p. 3, a detailed theoretical derivation of the model is available on demand.
7    Tariff barriers to trade are primarily tariffs. Non-tariff trade barriers are all other measures to protect domestic production and make imports more difficult, for example technical regulations, registration formalities for imports, quality requirements for products, import bans or restrictions, etc. (German version taken from Gabler Wirtschaftslexikon. wirtschaftslexikon.gabler.de/definition/non-tarifaere-Trade Barriers-37062)
8    “Economic effects of the EU internal market in Europe‘s countries and regions. Summary of the study”, p. 4
9    Cover page Bertelsmann Stiftung, 8 May 2019
10    “Economic effects of the EU internal market in Europe’s countries and regions. Summary of the study”, p. 4
11    Estimating economic benefits of the Single Market for European countries and regions. Policy Paper”. Bertelsmann Foundation 2019 Conclusion, p. 23
12    Conclusion, p. 23
13    Conclusion, p. 23
14    Thus the Swiss offer of good services is more likely to be used, if the Federal Council behaves absolutely impartially in conflicts: For this reason, Switzerland was recently asked once again by the US government to assume its consular representation in its dealings with Venezuela.