On April 18^th, former Italian prime minister Enrico Letta published his long-awaited report on the future of the EU’s single market, entitled ‘Much more than a market’. Letta describes the EU single market as unsuited for a world where the EU’s share of the world economy is shrinking and where it faces competitors less willing to play by global norms. His report correctly identifies many of the EU’s most urgent problems. It has proposals on everything from the need for high-speed rail, investments in outer space, and a more unified health sector, to more quotidian efforts to improve EU law-making processes. But many of Letta’s recommendations echo ideas which have been raised repeatedly in recent years, offering something for everyone while glossing over trade-offs. This is illustrated by his somewhat quixotic call for the EU to strike “a balance between competitiveness, strategic independence and equitable global conditions, avoiding the imposition of detrimental regulations and instead fostering strategic partnerships based on well-founded policies”.

If Letta’s report is to provoke reform, member-states will have to prioritise his ideas and confront the necessary compromises head-on. Otherwise, the report will do little to move the European debate forward. This insight will look at some key aspects of Letta’s report: the capital markets union, innovation, competition as well as state aid and trade.

Capital markets union
The report’s most detailed and most important contribution is its proposals to advance the capital markets union – now branded the savings and investments union. This section of the report is also the most successful at laying out the political drivers that might persuade member-states to push the project forward: that the proposals are essential to finance the EU’s future needs, like defence, enlargement and the digital and green transitions.

Even here, however, the report’s does not fully confront the trade-offs. The report suggests, for instance, a new EU-wide auto-enrolment pension product. But there is little explanation of how this would interact with existing national pension arrangements or how it would improve firms’ access to capital across Europe. Nor is it clear whether Europe needs to encourage more savings at all. When, as the report laments, European savings flow to America that is a natural consequence of Europe’s position as a net saver with a large trade surplus and the US position as a net consumer with a deficit. Reversing this would require encouraging consumption, not savings.

The lack of detail has made it easier for many member-states to adopt their usual objections. Some countries fear being disadvantaged by increased harmonisation, in particular Ireland, Luxembourg and the Netherlands which have relatively strong capital markets for their size. These countries would benefit from integration because financial services tend to agglomerate in regions that already have an edge, but their resistance is probably driven by jitters that harmonisation would lead to them losing revenue from their aggressive tax rates. Similarly, the proposal to strengthen European-level supervision of financial markets through the European Securities and Markets Authority is welcome, but there is little new in the report to convince countries which oppose common supervision to change their minds.

The report also pushes some proposals which are sensible but would not achieve the report’s ambitions. The EU would benefit from a common European safe asset, for example. But the report recommends homogenising EU debt – so that bonds issued by the European Commission, European Investment Bank (EIB) and European Stability Mechanism (ESM) are not differentiated in the market and instead  marketed as one product. Even under the most optimistic of assumptions, however, this would not become “the main instrument of reference” for the European Central Bank. The volume and liquidity of EU debt would still be far less than that of the larger member states: the EU has currently issued €500 billion of debt (more if EIB and ESM debt are included), largely under the Next Generation EU programme, while France alone has issued more than €3 trillion. Although EU debt is set to rise over the next years, it seems unlikely to compete with national debts as a benchmark in the short to medium term, especially as any further debt issuance would be politically difficult to achieve....

 

more at CER