R.Griguolaitė. The EU enlargement: towards more free market or more restrictions?

Rita Griguolaite is a Policy Analyst at Lithuanian Free Market Institute and holds and LL.M in European Law. This paper is based on the presentation in the conference “Express Your Voice – Challenges and Benefits of Future EU Enlargements”, November 13th, 2012, Vilnius

The core stones of the EU have always been 4 freedoms what made the Union desirable and promising. However, the EU enlargement is not only physical – with new members joining, but also increasing in powers and regulatory fields. With Lisbon Agreement the EU evolved from an economic to ‘socio-economic’ union which caused the official shift from freedoms to more restrictions and regulation. Thus, nowadays the consequences of the enlargement depend on the chosen further direction: getting back to the promotion of 4 freedoms or expanding rigid regulation on markets.

The enlargement of EU was demanded because of possibilities to trade freely, exchange goods and services and have access to bigger markets. The enlargement is basically considered only in the context of new Member States joining (hereinafter – MS) the EU. However, nowadays with further enlargement more interests come at stake and the enlargement also determines further increase of EU powers and amount of regulation. Now the EU has 35 fields of regulation, 24 regulatory agencies while in 1994 their amount was just 4, therefore, both the regulation and bureaucracy expand. Thus, the primary 4 freedoms shifted to more restriction and obstacles to market competition and innovation. In this article, the importance of 4 EU founding freedoms will be reminded. Also, the shift towards more regulation in the Single Market will be illustrated and will argue why the EU should turn back to less regulation and more freedoms.

When the EU was for freedom to move, work and trade

The EU started with several states and now we have 27 with Croatia and other countries knocking to the door or which are eager for procedures to start negotiations. Why the EU was (is) so demanded by sovereign countries? What states look for in the Union that they agree to comply with loads of EU policies, rules in different fields and introduce EU institutional mechanisms and lose their sovereignty to the extent of EU regulatory competence?

One of the reasons was a dream to trade freely, to have free market. Implementation of free movement of goods, services, workers and capital was the main factor for EU economic growth. Those freedoms were basics for the essential principles of economic freedom for individuals and business to get involved in economic activities, create their prosperity and well-being of countries. The development of freedoms was also a condition for the growth of the Union itself.

Thus, Single market became the symbol of freedom and openness. Free market creates conditions for private economic activity, for specialization, division of work, effective use of scarce resources. Because of geographic and historic circumstances countries are good in different fields. And the Union eliminating the obstacles existing between countries for free trade allowed cooperating and freely exchanging the goods, services and experience, ensuring best prices for consumers. So, economic freedoms were the engine what made countries to devote themselves for long integration periods and partial loss of national decision making.

The competitiveness remains one of the core goals of the EU and Member States as well. Even though the competition is not easily defined category, the analyses of different agents may help to determine the influence of it to the competitiveness. World Economic Forum evaluates 12 drivers which help to measure economies of countries and assess their competitiveness. Those drivers are f. i. institutions, infrastructure, macroeconomic environment, health and primary education, goods and market efficiency, labor market efficiency, financial markets, innovation and etc.[1]

There is a strong link between economic freedoms and competition. The Heritage Foundation defines economic freedom as the independence and autonomy of the individual to pursuit livelihood. Basically, it is the “consideration of the relationship between individuals and governments or other organized groups” [2] having into account that fundamental principles of economic freedom is empowerment of the individual, non-discrimination, and open competition”.[3] Accordingly, more governmental regulation means fewer possibilities to engage in economic activity and be competitive.

The analyses of data and comparison of the mentioned Competitiveness Index and Economic Freedom Index showed the correlation which shows that the more economically free country has more competitive economy.[4]It was found that 1 percent increase in Economic Freedom Index improves the countries rating by 1, 3 percent in Competitiveness Index.[5] Therefore, as the main EU goal is declared to be the promotion of competition, the economic freedoms have to be encouraged.

When freedoms were overwhelmed with regulation and restrictions
The Union changed significantly during last decades. Due to enlargements and new directions we can notice the transformation from promotion of freedoms to insistence on more regulation. Thus, the EU has not only economic dreams, more regulatory fields, bigger institutional mechanisms and requires higher compliance costs to fulfill the regulation.

The evolution made the EU quite different in policy schedules. It has different dreams now (which are even sometimes totally incompatible) – to be “most competitive in the world”, “to be most green”, “most democratic” and etc. With Lisbon Treaty the EU officially turned to socio-economic union. Such tasks as employment, social security, gender equality, solidarity, environmental safety came at stake. That means that the EU has changed the direction and economic freedoms are not a valuable goal by itself anymore, but rather sacrificed for other ambitions and objectives.

The enlargement is not only physical but also increasing in powers and fields of competence. More new interests with Member States and the discrepancies between them bring more goals and obligations to MS. Consequently, the EU has competence in 35 fields: from transport and energy to food safety and employment.

The increasing EU competence implies decreasing national decision making power in a particular field. This is the reason of descending optimism of the membership in the EU, what is especially noticeable in older Member States like the Netherlands, United Kingdom or Belgium. EU regulation for these trading, entrepreneur and productive agriculture countries are hardly bearable in some EU competence fields, for example, social policy, where both the policy and court rulings are far reaching and cause more social problems in their own society and pressure on national budgets than economic benefits from being in the Union.

All the third country nationals enjoy same rights as EU citizens if they are family members. European Court of Justice’s rulings approved their enjoyable rights in many cases and treats it as the condition to ensure and promote free movement of workers. MS have no more full rights on their boarder control what cause huge immigration rates from Middle East and Eastern European countries both increase criminality rates and pressure on national budgets because of big social expenses. It has to be noted, that in this case, freedom to move is now a background and excuse for more regulation and restriction on Member States.
What is more, the expansion of competence requires more institutions and staff to monitor, supervise, implement and etc. all the policies. Therefore, we see that since 1994 the number of EU regulatory agencies increased 5 times (from 4 to 26). Also, with every new Member State the number of Members of European Parliament and assistant staff increase as well. Obviously, the maintenance of large public sector requires more expenditure and national tax payers’ money.

Thus every present or potential Member State has to be aware that the enlargement implies more and more requirements and financial and administrative burden to members. The EU regulation is so complex that companies are forced to establish special positions to deal with compliance matters. The cost of implementation of MIFID (Markets in Financial Instruments Directive) for asset managers was almost 2 million euros, while banks had to spend for it over 8 million euros.[6]

The other point of concern is nowadays competition policy of EU. Even though, the promotion of competition is declared, the generous system of grants, subsidies and state aid create conditions for businesses to compete not in market, but in privileges. For example, the European automobile sector suffers huge losses; however, instead of allowing reforms in it, the EU and governments prefer subsidies and promise over 10 billion euros of financial aid. So, when there is a need for structural decisions for the sake of competitiveness, the EU enters as a player into the market.

If a company gets the EU financial aid under a particular scheme, it requires agreeing with EU rules and conditions. Thus, business depends on what EU allows and entrepreneurs have less decision making power which reduces individual economic freedom, competitiveness in general and may lead even to bankruptcy. Such exchange of market competition to subsidies endangers economic freedoms and impedes economic growth.

Next factor which should be discussed in this context of enlargements and obstacles to competition is the trap of subsidiarity principle. The subsidiarity principle requires that the actions should be made at the most efficient level and should assure the effectiveness of policy implementation. However, we witness the total incapability of making decisions and taking actions.

In the light of current European financial situation everybody requires and advices for reforms which would create jobs and prosperity. But the reforms stuck. Italy, Portugal and Greece have nice reform packages. Nevertheless, already for 2-3 years they are staying in paper. Basically, the EU institutions urge and give agenda, governments wait decisions from there, but nothing exactly, apart political meetings, goes on. As there are many Member States and interests involved long meetings, discussions and compromises are unavoidable and real actions are postponed. That means that nobody gets what exactly is needed at the right moment. Markets require dynamism and quickly made solutions while the existing political decision making in economic matters cannot offer it.

What are more, new initiatives to harmonize taxes and seek for fiscal consolidation also tend to infringe the essence of the subsidiarity principle. Tax policies, except excise duties, are the discretion of Member States. Different taxation systems and tax rates promote competition between countries what is advantageous for private economic activity and economic freedoms. It also deters countries from misusing the taxation for public sectors’ ambitions. Therefore, eagerness for higher fiscal consolidation and tax harmonization both eliminate the competition and prevent from efficient implementation of other EU policy goals.

All in all, the craziest EU dreams and initiatives made at the EU level will have to be implemented by local level. And the consequences of a particular regulation will be felt by ordinary citizens. For example, implementation of A++ energy efficiency standard will be extremely costly while some companies may even close their producing lines as goods will be in different standard of energy consumption. Similarly, packaging rules are made for consumer protection, but in the end of the day it increases prices of goods and services and freedom of choice. Obviously, every regulation has its price and it is paid by private companies, consumers and citizens what, in this case, makes the EU a very powerful mechanism to press MS and their business of citizens.

Vision for the EU: enabling individuals to conduct economic activity
“Europe’s future is essentially about each European. It is about the French farmer, German engineer, the Greek restaurant owner, the Polish plumber, the British investor, the Swedish industry worker, the Dutch nurse and all the young people. It is to ensure individual opportunities that we need to choose the right path.” [7]

In ambitious political goals, procedural rules the private economic activities and trade issues were abandoned. Legendary EU freedoms degenerated and we notice more emphasis on regulation and supervision than giving efficient conditions to act, to work and to create. The consequences are less competition, free market, innovation. Also, we suffer more financial and administrative burden because of larger public sector and this price is paid by that French or Lithuanian farmer, Polish or Swedish engineer, and Estonian or German investor, i.e. they have fewer possibilities to engage in economic activities and take care of their own well-being but rather becoming more dependent on political decision making.

Therefore current and potential Member States and their representatives have to be aware of the consequences of every regulation they planned to establish or decision to make. The enlargement now is compliance with all 35 EU policy fields and presumably 27 different interests. Thus, with the prospective of continuing enlargement there is a vital need to get back to basics – to enable individuals to conduct economic activities which implies getting back to the track of economic freedoms to ensure competition and growth.

[1] More information on the competitiveness index and methodology can be found at the official website of the World Economic Forum < www.weforum.org >
[2] The Heritage Foundation [ retrieved: 10th Nov, 2012] from [ http://www.heritage.org/index/book/chapter-1]
[3] Idem.
[4] V. Zukauskas, Lietuva vidaus rinkoje ir Lietuvos konkurencingumas// Lietuva Europos Sąjungoje, Yearbook, Eugrimas, Vilnius, 2009, pp. 73-75.
[5] Idem.
[6] Data from the Study on the Cost of Compliance with Selected FSAP Measures, Final Report by Europe Economics, 5 January 2009
[7] S. Fölster, J. Munjhammar, Yes, Europe can!, European Enterprise Institute, 2009, p.11