4. A SINGULAR MARKET

Free movement for Europe's workers, goods, services and money - if there is one thing that squabbling Europeans can always agree on it is the importance of the "single market". And rightly so. A union that has internal frontiers is both a contradiction in terms and, since more trade creates more wealth, an economic opportunity forgone.

Hence a lingering mood of celebration. From January 1st last year, Europe's internal barriers (but for a few "temporary" exceptions) have disappeared: Spanish lorry drivers who once needed 70 forms to cross a frontier can now truck oranges to Holland unhindered by customs officers and border police; German banks can open branches in Italy; Greek students can attend Danish universities as of right. From January 1st this year these same freedoms of the EU'S single market have been extended to Austria, Finland, Iceland, Norway and Sweden to form the European Economic Area (add EEA to the list of acronyms). The result is a market more populous than America's, more valuable than China's.

Fine, except that it has all taken so long; that the freedoms are not fully exploited; and that so many in the union still try to limit the market's potential.

The four freedoms of the single market are part of the 1957 Treaty of Rome, establishing what was then called the European Economic Community, with its "common market". Unhappily there remained an uncommon number of differing technical standards, incompatible taxes and laws, close relationships between governments and their national companies: even without tariffs and quotas, protectionism still flourished at the ultimate expense of consumers.

The desire to end that protectionism is enshrined in the Single European Act, agreed in 1985 with the aim of progressively establishing the internal market" over a period expiring at the end of 1992. The momentum owed much to the determination and vision of Jacques Delors, newly arrived as commission president; but also to the nitpicking efficiency of Lord Cockfield, a British commissioner who listed and relentlessly pursued 300 actions (later consolidated into 282 pieces of legislation) that had to be accomplished by member governments to establish a single market.

Has it all paid off? Up to a point, certainly. Intra-EU trade as a proportion of all EU countries'trade has risen from just over half in 1985 to around three-fifths today: take in the whole of the EEA and the proportion rises to more than two-thirds. German students now escape overcrowded lecture halls at home by attending universities in Britain; north European pensioners retire in the sunny south. Only Britain, Ireland and - at least for the moment - Denmark still insist on frontier checks on EU visitors. Cross-frontier mergers and acquisitions (a simple way of exploiting the single market) rose from 2,190 in 1987 to 4,553 in 1992.

Yet the single market has fallen disappointingly short of its original expectations. in 1988 one lot of experts convened by the European Commission was predicting that the single market in its first five or six years would lower the EU'S prices by 6%, create 2m new jobs, increase output by 4.5% and "put Europe on an upward trajectory of economic growth into the next century." There is still time for this body, the Cecchini committee, to be proved right; but in the single market's first year the EU'S GDP shrank by 0.3% and its unemployment rose to 10.5% of the workforce. Meanwhile, some of the best business users of Europe's single market have been non-Europeans - Japan's car makers and electronics companies, for example, or a whole swathe of Americans, selling everything from IBM computers to McDonalds hamburgers.

The disappointment should not really be a surprise. For Europe's smaller companies the barriers of different languages and legal systems remain daunting. So, too, does the amount of paperwork. Customs formalities may have disappeared for lorry drivers. But until 1997, when value-added tax on goods is supposed to be charged in their country of origin rather than, as now, in the country of final sale, the paperwork of VAT charges and VAT refunds remains a nightmare. And in the absence of a single currency there are still exchange-rate risks in venturing from home. Whatever the potential of an unfamiliar pan-European market, many a small company is bound to prefer to opt for the comfort of a familiar national one.

That choice is unavailable to non-Europeans, some of whom had started seeing Europe as a single market long before Mr Delors arrived in Brussels. Ford of Europe, for example, was created by joining Ford's British and German subsidiaries as long ago as 1967 (when De Gaulle was still resolutely blocking Britain's membership of the European Community). But enthusiasm on a large scale came in the late 1980s when foreign firms could suddenly foresee a Europe free of national protectionism. Japan's direct investments in Europe amounted between 1970 and 1984 to $8.8 billion; from 1985 to 1993, they totalled $74.6 billion (see chart 5).

About two-fifths of those Japanese investments went to Britain: a Nissan factory in the north of England, a Toyota one in Derbyshire, a Sony plant in Wales. Why Britain? in a survey this year by the japan institute for Overseas Investment, by far the main reason given by the investors themselves was the English language, better understood by Japa~ nese managers than any other European language and familiar also from Japanese plants in America. Yet some Europeans cite another reason - Britain's willingness, with financial incentives for foreign investors, to be the "Trojan horse" by means of which Europe's rivals will invade its fortress.

Unfair competition

This accusation, with its implicit nationalism, illustrates the greatest problem for the single market: the readiness of member governments to conspire against their own creation.

At one level, this conspiracy consists of agreed delays in the single market: no free trade in insurance until July this year; none in investment services until January 1996; no compulsion to liberalise basic telephone services until 1998 (and up to five years later in poorer countries, so as to protect utilities such as Greece's from being crushed by the likes of Britain's BT or America'S AT&T).

At another level, there are convenient parliamentary delays. of the 282 measures needed to create the single market, some 222 have to be "transposed" into legislation in the member countries. The commission may boast that 87% of the necessary national laws have been passed, but only half of the 222 measures have been passed by all 12 member states. While the Danes and British have been the most active legislators, the Greeks, French, Spanish and Irish have been rather slower. The delays could, of course, be innocent. But cynics note that the worst ones are in public procurement, where by the end of 1993 only 59% of required national laws had been passed; company law (60%); intellectual and industrial property, such as designs, inventions and databases (61%); and insurance (73%).

Delays of this sort cost taxpayers dear: in public procurement, for example, which was worth some 595 billion ecus in 1990, the last year for which figures are available, the Cecchini report calculated that open competition could be saving member countries some 21 billion ecus a year. And yet the non-national share of contracts is stuck at 5% in public services and even less in public works. Worse still, few unsuccessful bidders complain, for fear that they would be ignored in future bids.

But the greatest insult to a free and single market remains the use of state aid. Provided it does not distort competition, this is allowed by the Treaty of Rome but it is perennially open to abuse-witness the loss-making survival of national airlines and state-owned makers of steel, ships and cars. What makes the abuse all the easier is that the treaty in effect condones the existence of state monopolies: telecommunications, postal services, energy and transport are all "reserved sectors".

Even in cases where monopolies have been legislated away, the market can be manipulated. From the beginning of last year Europe's airlines have been free to fly where, when and at what prices they want, save only for "cabotage" (the right to fly domestic routes in a foreign country)-and even that restriction will be gone by April 1997. Theoretically, therefore, Europe's skies are now as free and competitive as America's. And yet governments protect their national carriers both by restricting foreign airlines' access to their airports and by pressing the European Commission to approve yet more state aid for airlines that in a free market would go out of business. It is a form of blackmail: if the subsidies are not approved, then thousands will be made redundant, governments will be under pressure and life will be made very uncomfortable for independent-minded commissioners.

With suitable promises to restructure the airline so that it will supposedly never need another subsidy, the blackmail usually works. In July the commission approved $7.1 billion in state aid to Air France, TAP of Portugal and Olympic of Greece. Herman De Croo, head of a committee that had advised the commission to be stricter with subsidies and link them explicitly to privatisation, reckons that commission approval since August 1991 has added up to $10.35 billion in airline subsidies"roughly $10m a day". Against this background, advocates of a single, free-trading European market may be tempted to despair.

They should not, for three reasons. The first is that state sectors, and therefore state subsidies, are getting smaller and will get smaller still-if only because privatisation and budgetary discipline can hardly be avoided by governments attempting to meet the Maastricht treaty's criteria for economic and monetary union. The second is that rules for the single market are decided not by unanimity among Europe's governments, but by qualifiedmajority voting-so the illiberal will find it harder to defy the liberal, assuming the liberal are in a majority. The third is that market forces, once unleashed, are hard to resist. Assume success for commission plans to liberalise telecommunications and postal services and introduce competition into energy markets, and Europe as a giant zone of truly free trade will finally have arrived. The European Union's challenge, however, is to make itself into something rather bigger than that.