Who’s to Blame for the EU’s “Internal Tariffs”?
In response to US protectionism, many governments decry fragmentation in the European market — barriers they themselves enforce. A commentary by Lorenzo Bini Smaghi
When Mario Draghi published his op-ed in the Financial Times last February provocatively titled “Forget the US, Europe’s tariffs are self-imposed”, many applauded. Yet few seemed to fully grasp his message.
This is evident in the recurring calls, both political and industrial, urging European institutions to dismantle internal barriers — without ever asking what those barriers actually are and who put them in place.
The internal barriers, in fact, do exist. According to analysis by the International Monetary Fund, internal obstacles add an extra cost of 44% in the manufacturing sector and 110% in services.
In the latter, internal barriers are especially burdensome. It is no coincidence that over the past 30 years, intra-European trade in services has grown far more slowly than trade in goods and still accounts for only a small share of EU GDP — 7.5%, compared to 24% for goods.
In a global economy increasingly driven by services and technology, the absence of a properly scaled market is a major brake on productivity growth — and thus on wages and purchasing power for Europeans.
Once we accept that internal barriers exist and are damaging, we must ask: who created them, why, and what must be done to remove them?
The key point is that it’s not Europe that erected these barriers. It’s the 27 Member States themselves who are obstructing the creation of a genuine internal market with protectionist measures.
Among EU countries, Greece has the highest barriers with the other EU members, followed by Portugal, Hungary, and Italy.
There are three main ways internal barriers are erected within the EU.
The first is through the different transposition of EU directives — approved by the Council of Ministers — into national or even regional legislation. This often leads to significant divergences that prevent equal treatment and hinder competition, allegedly in the name of protecting domestic businesses or consumers.
An example from financial regulation is the discretion that national authorities retain to impose restrictions on their domestic banking systems, in particular in their cross-border activities.
The second method is to ignore or even flout European legislation, assuming that infringement procedures launched by the European Commission will be slow and unenforced. Italy, for instance, currently has 65 open procedures, 50 for violations of EU law and 15 for failure to transpose directives.
The third way of maintaining barriers is to resist the transfer of competences from the national to the European level.
One clear example is the persistence of national regulatory and supervisory structures in financial markets — the single biggest obstacle to creating an integrated financial market. This is explicitly detailed in last year’s reports by Letta and Draghi.
Such behaviour is often based on the presumed need to protect domestic consumers and savers. Household savings have even been framed as part of national security.
This is not only pointless — it is harmful. Pointless, because it is impossible to prevent citizens from investing their savings as they wish, including outside their home country.
Technology today enables savers to shift their money quickly in search of the most attractive investment options, even across borders.
Moreover, attempts to shield domestic players from consolidation ultimately limit their growth and undermine their competitiveness.
Undersized financial institutions are bound to become mere distributors of financial products created elsewhere - often by non-European institutions - and regulated and supervised under other jurisdictions.
It is no coincidence that much of the investment product sold to European citizens — even by their own domestic financial institutions — is manufactured by large US companies, supervised possibly in Ireland or Luxembourg. This is the result of European fragmentation, born of the short-sightedness of Member States.
In the end, it is European consumers and savers who bear the cost.
A first version of this article was published in the Italian daily Il Foglio
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
