How “SuperMario” can revive EU market

October 21, 2009

European Commission President Jose Manuel Barroso has made a smart move in mandating Mario Monti to recommend ways to relaunch the European Union’s vital single market.

The cornerstone of Europe’s prosperity has come under attack since the financial crisis broke as countries have used public money to mitigate the effects of the recession on key sectors and prop up employment. State aid has seeped out beyond the banking sector.

Large countries such as Germany and France have propped up domestic car makers, for instance. Last week Berlin offered support to the country’s largest shipping line.

This threatens to undermine the EU’s level playing field for business by drawing member states into a subsidy war at high cost to the taxpayer, in which weaker and smaller countries would fare worst.

If anyone can find ways to shore up and deepen the single market, it is the subtle Italian economist who held the two toughest and most powerful jobs in Brussels in 1995-2004 — internal market and competition commissioner.

In commissioning an impressively credentialed European elder statesman to produce a roadmap for future reform, Barroso is using a similar tactic to the one he employed when he tasked former IMF managing-director Jacques de Larosiere to produce a study on the integration of financial regulation across the EU. It is a clever way to short-circuit resistance from member states and get around the unpopularity or limitations of the incumbent commissioner.

De Larosiere made proposals which outgoing Internal Market Commissioner Charlie McCreevy opposed in better times and was too unpopular to initiate when the crisis struck. Likewise, Monti will set the agenda for whomever Barroso appoints as internal market chief, a post France covets for Michel Barnier.

He also has the personal authority to convince policy elites of the dramatic costs and consequences to Europe if the single market is eroded and starts to disintegrate.

Judging from recent comments, Monti thinks the key is to rebuild political support for the single market by incorporating elements of French and German “social market economy” thinking in the “Anglo-Saxon” free market mindset prevalent in Brussels.

His thesis is that France and Germany, the key founders of European integration and of the single currency, have become brakes rather than engines of the single market because they see a threat to their industrial and social models. They fret that cheap labour and tax competition from new member states are undercutting their job protection and welfare systems.

Partly as a result, the French and Germans emasculated the last two major drives to open new areas of market integration — removing barriers to takeovers and liberalising the market for cross-border services.

Introducing elements of a pro-active industrial policy, making clearer that member states are free to pursue their own social models and promoting agreement on a common corporate tax base could help all boost wider acceptance, he believes.

That doesn’t mean handing out more subsidies or creating European industrial champions through state intervention. But it should involve targeting EU resources and regulatory policies to promote research, innovation, higher education and training.

Nor does it mean harmonising tax rates, which is politically impossible in the EU, where tax policy is subject to unanimous decision. But it could entail agreeing at least to avoid an erosion of the tax base through voluntary coordination.

Despite a swing to the centre-right in this year’s elections, there is little appetite in the European Parliament for further market liberalisation. But if Monti can find ways to advance the single market under the mantle of a “green growth” industrial policy and a more “social Europe”, he may be able to create a more receptive mood over time.

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