Since September last year, Italian former Prime Minister Enrico Letta has criss-crossed the European Union. He has visited no fewer than 65 cities. He was thus able to experience first-hand the problems he was expected to report on. Especially those who travel by train will notice that the single European market is still a long way away. How far exactly, that was precisely the question Letta had to answer. The result of Letta’s work is now available. The report is called Much more than a market. The single market remains a cornerstone of the EU, but needs to be modernized because the international context has changed, Letta writes.
The report came at the request of Belgium and Spain, the current and previous presidents of the European Council. Letta was asked to investigate how the single market can function better. Mario Draghi was asked to consider European competitiveness. Draghi’s paper will be revealed in June.
Letta calls the example of the trains “symbolic of the problems facing the single European market”. He notes that the European market for high-speed rail transport does not actually exist. There are separate, national markets. There are fast trains from Paris to Marseille, from Madrid to Seville and from Milan to Rome, but not from Berlin to Paris or from Vienna to Warsaw. The line between Amsterdam, Brussels and Paris is the exception that confirms the rule.
This finding is symbolic of the problems that Letta examined. The European Union is a gigantic market in terms of population and economic size, but makes it difficult for itself because in many areas there are still 27 separate national markets, each with their own rules, their own characteristics and their own companies.
“European companies suffer from a huge size handicap compared to their global competitors, mainly from the United States and China,” Letta writes. “That inequality harms us in countless areas: innovation, productivity, employment and ultimately the security of the Union.”
One area where this is becoming very visible is telecom. In Europe, many telecom operators are active in only a limited number of countries. In those countries, the market is in turn often divided among three or more operators. A completely different situation exists in the US, where national operators serve a market of hundreds of millions of consumers. As a result, a European telecom operator has an average of 5 million subscribers, compared to an average of 107 million in the US and 467 million in China. At the same time, 104 euros per year is invested in telecom per European, compared to 110 euros in China and 150 euros in the US.
European champions
The striking thing is that the European Union has largely contributed to this fragmentation itself. At the request of Europe, the national markets were opened up and the arrival of as many new operators as possible was welcomed. Many players on the market mean a lot of competition, and that keeps prices low. Belgium, for example, is preparing for the arrival of a fourth mobile operator, partly because the impression is that weak competition keeps prices relatively high.
Letta questions that policy. “A market with more than a hundred operators that is mainly focused on encouraging new players could be detrimental to the technological transition towards advanced networks that require massive investments.” The lack of European giants slows down that kind of investment, he notes.
The Italian unequivocally advocates more concentration in Europe, while for years the policy was aimed at the opposite. In a controversial decision, European Commissioner Margrethe Vestager blocked the merger of the train divisions of Siemens and Alstom in 2019. The merger of those companies, which make high-speed trains and signaling systems, would lead to higher prices for those products. Even then there was a lot of misunderstanding about that decision. Wouldn’t the merger have created a European champion of the caliber of Airbus? The creation of such European champions was the only way Europe could respond to the competition from China, or so it was said.
Without using the term ‘European champions’, Letta advocates large European companies. “It is crucial to support large European companies in their efforts to grow bigger and remain competitive on the global market,” he writes. It is a vision that will not be welcomed everywhere. Those European champions are more likely to be of German or French origin than they are from Latvia, Portugal or Belgium.
Decision centers
We already believe that too many decision centers of Belgian companies are located in neighboring countries. That is precisely why companies considered strategic such as Proximus, Bpost, Belfius or Euroclear are anchored by the government. But Letta suggests that national strategic considerations must make way for European ones. “The finance, electronic communications and energy sectors were initially left out of the European integration process because they were too strategic to go beyond national borders. National control served strategic interests. But national markets are now a brake on growth and innovation in globally competitive sectors. If there are strategic considerations, they must shift to a European scale.”
Letta also adds nuance. Not all companies need to get bigger. In many countries, family SMEs form the backbone of the economy. Merging them all into huge multinationals is not a good idea, Letta acknowledges. “We should not imitate models that do not fit European reality. The European model is based on the essential link between large and small companies. We must keep it that way.” At the same time, the economist notes that the principle of allowing competition to prevail can lead to European markets being dominated by large foreign companies that can benefit from their large and favorably regulated domestic markets. The European Commission now shares those fears and is considering restricting the import of Chinese cars, trains and wind turbines.
Letta’s observations inevitably raise the question of what role the government has to play. He is also quite outspoken there. State aid should not be a taboo, he believes. The current situation, in which the strict rules have been temporarily suspended, can create an uneven playing field, Letta acknowledges. But this can be solved by placing the support mechanisms more in the hands of Europe and less in those of national governments. “More specifically, you could consider an obligation to spend part of the national budgets on pan-European initiatives and investments.” That sounds very different from the age-old paradigm that state aid is only acceptable if it does not distort competition.
Capital market
In addition to telecom, the energy and capital markets are also areas where the single market can be improved, Letta writes. The latter is an old pain. Although the free movement of capital is in theory part of the single market, capital markets remain much more fragmented than in the United States. As a result, European companies are increasingly turning to bank loans instead of bond issues.
The stock markets are also highly fragmented. There are two leading stock exchanges in the US, and in Europe each country has its own stock exchange with its own national index. Despite the merger of many of those stock exchanges into Euronext, there is no question of one large European stock market. “Although the EU is an economic powerhouse on a global scale, the issuance of shares and bonds is disproportionate to the size of the economy.”
Four concrete proposals from the Letta report
1. Letta proposes to set up something similar for secondary school students, in addition to the Erasmus exchange program for university students. According to it Erasmus High School Initiative exchange should even be mandatory. It must become an integral part of secondary education throughout Europe. “In this way, mobility is not a privilege for a small group, but a fundamental right for everyone, creating a common sense of European identity and solidarity.” The plan is part of strengthening the single market for knowledge and science.
2. The report recommends a pan-European stock exchange for technology companies to bring into existence. This should prevent companies with a large capital requirement but a high risk profile from seeking refuge on an American stock exchange. This now happens frequently, because there is much more venture capital available in the US than in Europe, and because the market there is not fragmented. An attempt was already made in the 1990s to set up such a fair. Easdaq was the European answer to Nasdaq, but that stock exchange did not survive the dotcom crash.
3. Letta suggests one European company law to be created, in addition to the 27 existing national codes. This patchwork of different rules on, for example, bankruptcy and protection against creditors, prevents SMEs from becoming active outside their home country. Large multinationals have the resources to tackle bureaucracy, but small businesses do not.
4. Another proposal from the report is not to carry out the purchase of certain medicines at national level, but to leave it to the EU. The group purchasing of Covid-19 vaccines serves as a model. The size of the common European market should make it possible to conclude favorable deals with the pharmaceutical industry, especially for expensive, innovative therapies. Small countries now have a disadvantage in the negotiations because they purchase smaller volumes. This week, Belgian Minister of Health Frank Vandenbroucke (Vooruit) also suggested that Europe can play a role in negotiations on expensive medicines. Now the details of such deals are forced to remain secret because the suppliers do not want the prices to be public.
