The strategic crossroads for the EU's single market: An interview with Enrico Letta
This article is an on-site version of Martin Sandbu's Free Lunch newsletter.
The EU's single market is often described as the jewel in the crown of EU integration. Now member states have tasked Enrico Letta, former Italian prime minister and current president of the Jacques Delors Institute thinktank, with setting out what should be the future of the single market in today's new strategic reality. I caught up with Letta in Brussels this week - read on for what hints I could get about what his report will say (it is due to be presented at a special summit of EU leaders in April).
The EU's single market is the most integrated international economy in the world. New research estimates that it boosts trade between its members by 63 per cent. But that figure varies a lot; the single market remains far from complete. While many physical goods - cars, say - largely trade frictionlessly in a homogeneous EU-wide economy, national borders still matter a lot, especially in services. (Just try to open a bank account or take out a mobile subscription in another country from the one in which you live.) The fragmentation of banking as well as capital funding makes a mockery of the free flow of capital. This is the challenge that the projects of Banking Union and Capital Markets Union are supposed to address but so far have not.
The single market is also incomplete in its political functions. It has now become commonplace to talk of a “Brussels effect” by which non-EU companies voluntarily adopt EU standards. But it has not yet become second nature for European politicians to seek to deploy the Brussels effect for the purpose of influencing others - though the new carbon border adjustment mechanism is a promising exception - or go beyond this and contest global standard-setting processes as consciously as China does. Nor does the EU show anywhere near enough interest in exploring new partial, but deep, models of integrating with the single market for non-EU members to deepen their alignment with the bloc.
There is, in other words, a lot to play for as the future of the single market is planned. So I was interested to hear what is in Letta's mind as he prepares his report for leaders on the single market's future. I started by asking how he would describe its present state. “Under pressure”, Letta told me, “for geopolitical reasons”.
As president of the Jacques Delors Institute, Letta has had a lot to do with the famed father of the single market, remaining in conversation with him until Delors' death at the end of last year. “The main point he underlined was the fact that when he launched the single market, the world was simple and Europe was simple. [Today] Europe is bigger, and the world is very complex”.
This means, Letta argues, that political choices taken at the birth of the single market no longer make sense today. Back then, as he put it, Delors' proposal for a single market was met with a series of national “yes but” objections that led to asymmetry. Letta emphasises three sectors in particular: defence, energy and telecoms were kept fragmented for reasons of (the then 12) EU members' national strategic objectives.
The cost has been reduced scale. “Take telecoms and look at the numbers”, says Letta. “The average number of clients of Chinese operators [is] 420mn, [that of] an American operator 110mn. And the European operators? Five million”.
In energy and defence, it seems like the very same strategic logic that once justified maintaining national control now calls for doing more in common. Moreover, Letta seems sympathetic to those who say the new geopolitical situation means more common spending is needed to finance European public goods so that national industrial policy does not ruin the level playing field in the European economy.
The “Holy Grail” of Letta's project, he says, is to find out “how to scale without killing the Four Freedoms”: the free movement of goods, services, capital and people that together define the single market. In part this requires more integration and common regulation - Letta points to the EU's AI Act as the sort of thing that is necessary to avoid a patchwork of 27 different sets of rules that would make it harder for tech innovators to scale up.
It also means “working on the enforcement. That is, in my view, one of the main issues of the single market”, he says. Then there is the question of how to integrate corporate law across EU member states. “It's very difficult for a [small or medium-size business] to say, OK, I work in 27 different languages, 27 [systems of] business law, 27 taxation systems . . . you don't have a legal office of 50 people allowing you to. So I'm trying to work on how to have solutions like the 28th regime”.
A “28th regime” is a bold idea. It refers to a separate layer of corporate law, legislated at EU level and available to companies to choose to incorporate under. If this were made simple, predictable and attractive, it could be a superior alternative to harmonisation of national rules, which could remain but would no longer present an obstacle to scaling. For more on this idea, read the piece I wrote in 2019, which explains why a 28th corporate law regime could be particularly helpful in driving financial integration. (There is a parallel with the US economy where state bank licensing regimes coexist with a set of federal licensing rules.)
Financial integration - or the lack of it - is another one of Letta's bugbears. “I would like to link my work on the single market to the question of how to finance the green and the digital transition in the next 10 years”. He is about to go to the US to visit the architects of the Inflation Reduction Act, which has led to huge private investments in US manufacturing capacity due to the simplicity of its tax credits. In contrast “we pay the cost of the lack of [EUlevel authority in] taxation... we need more Europe but this is complicated to sell to people”. So that means boosting the availability of private finance - “the famous Capital Markets Union, which was not successful until now”. Letta says he wants to find “the magic potion, the secret recipe” to unblock the stalemate over capital market integration.
Defence, energy, telecoms, taxation, a 28th regime of corporate law - all the signs are that Letta is not going to shy away from the thorniest issues. He no doubt has much more up his sleeve. In any case, this promises to be one of those reports that forces politicians to step up to the plate. We'll keep a close eye when it comes out.
Martin Sandbu
The Financial Times