EUROPEAN COMMISSION Brussels, 5.5.2021 SWD(2021) 351 final COMMISSION STAFF WORKING DOCUMENT Annual Single Market Report 2021 Accompanying the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Updating the 2020 New Industrial Strategy: Building a stronger Single Market for Europe's recovery {COM(2021) 350 final} - {SWD(2021) 352 final} - {SWD(2021) 353 final}



COMMISSION STAFF WORKING DOCUMENT Annual Single Market Report 2021 Accompanying the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Updating the 2020 New Industrial Strategy: Building a stronger Single Market for Europe's recovery Executive Summary The COVID-19 crisis has highlighted the importance of looking at the EU’s industrial policy and the Single Market together, to better take into account the economic and social impact that disruptions to the free flow of goods, services and people - regardless of whether they are longstanding or crisis-related - have on our companies and to better understand the complex interlinkages among them across regions and sectors. This report provides the analytical elements underpinning the Communication in its response to calls from the Competitiveness Council for the Commission to assess the resilience of the Single Market by drawing lessons from the COVID-19 crisis; define and report regularly on key performance indicators on industrial strategy and competitiveness; and take stock of implementation of the March 2020 Single Market Enforcement Action Plan (SMEAP). It is the first of a planned series of yearly reports. The events of the past year have exposed the EU’s economy to an unprecedented and sustained shock, with the EU economy contracting by 6.3%. Small and medium-sized enterprises (SMEs) were especially affected. This was also caused – and aggravated - by the unilateral introduction of a number of restrictions to the free movement of goods and people, which led to severe supply chain disruptions. These came on top of existing barriers identified in the March 2020 Single Market Barriers report and the SMEAP. The crisis also confirmed the interdependence of global value chains and demonstrated the importance of a globally integrated and well-functioning Single Market. The impact of the crisis has been felt differently across the fourteen industrial ecosystems identified by Commission services. During the first three quarters of 2020, the “Tourism” ecosystem lost one fourth of its turnover while that of the “Digital” ecosystem was 5% higher. Recovering fully and sustainably means implementing a large number of initiatives at EU, national, regional and local level. Many of these were already identified in the March 2020 Industrial Strategy package but their importance and the need to deliver on them fast has increased, as has the importance of an open, integrated, competitive and fully functioning Single Market. There has been quick and substantial progress in addressing the impact of the crisis and in implementing the measures announced in the March 2020 Industry Package by deepening the Single Market; upholding a global level playing field; supporting companies and the economy in the transition towards climate-neutrality and a circular economy; helping the digital transition; supporting innovation; placing skills at the heart of the EU policy agenda; assisting investment and financing; reinforcing industrial and open strategic autonomy; and taking a new partnership approach to governance. Contents 1. Why this report is needed 2. The impact of the crisis on the Single Market Economy 3. Delivering on the ground: the implementation of the 2020 Single Market Enforcement Action Plan, Industrial and SME Strategies 4. Conclusion Annex 1 State of play of the implementation of the Single Market Enforcement Action Plan 41

Stocktaking of the implementation of the 2020 Single Market Enforcement Action Plan Annex 2 Overview of the implementation of the 2020 Industrial Policy Package Stocktaking of the implementation of the 2020 Industrial Strategy Stocktaking of the implementation of the 2020 SME Strategy Annex 3: 14 industrial ecosystem fiches 1. Aerospace and Defence Ecosystem 2. Agri-Food Ecosystem 3. Construction Ecosystem 4. Cultural and Creative Industries Ecosystem 5. Digital Ecosystem 6. Electronics Ecosystem 7. Energy-Intensive Industries Ecosystem 8. Energy – Renewables Ecosystem 9. Health Ecosystem 10. Mobility – Transport – Automotive Ecosystem 11. Proximity, Social Economy and Civil Security Ecosystem 12. Retail Ecosystem 13. Textile Ecosystem 14. Tourism Ecosystem Annex 4: Monitoring the implementation of Industrial Policy

Structure of the document Headline indicators Value added in industry and services GDP per person employed Employment EU global market share Short-term indicators Turnover Industrial production Declarations of bankruptcies and Registration of businesses Permanent, temporary and self-employment Gross fixed capital formation Economic confidence indicator Economic Resilience Net public investments Net private investments R&D expenditures STEM graduates Digital Transition Digital Economic and Society Index and its sub components

Digital skills Climate neutrality and Circular Economy GHG emission intensity Electricity prices Circular material use rate Recycling rate of municipal waste Single Market Integration Intra-EU trade Price convergence SMEs Employment in SMEs Value added in SMEs International dimension Extra-EU trade Key Performance Indicators for EU Industrial Ecosystems Headline indicators: the size and performance of ecosystems Green transition: GHG emissions Short-term indicators: Economic confidence International dimension: Trade Resilience: the dynamism of ecosystems

Resilience: Investments in tangibles Methodology for constructing the data used for the analysis of industrial ecosystems



1.Why this report is needed The events of the past year have exposed the EU’s economy to an unprecedented and sustained shock, with the EU economy contracting by 6.3%. This shock was not only caused by national public health measures to limit social contact: it was also caused – and aggravated – by the unilateral introduction of a number of restrictions to the free movement of goods and workers by Member States, with intra-EU trade falling by 24% alone in May-June 2020. This not only limited the ability of businesses to supply their goods and services, but also led to severe supply chain disruptions. Compounding the issue, the restrictions were adjusted frequently and unpredictably, triggering national stockpiling. And these restrictions came on top of existing barriers to businesses within the Single Market as detailed in the Commission’s Staff Working Document of 10th March 2020 on addressing barriers to the Single Market. All businesses suffered, but smaller ones most of all. Preliminary estimates show that the number of small and medium-sized enterprises (SMEs) fell by 1.3% with over 60% of SMEs reporting a fall in turnover. The impact of the crisis varied across regions and Member States, and most of all across ecosystems, with tourism suffering the most. Swift action was taken and is being taken by the EU – both the Commission and Member States – to address these negative socio-economic impacts and to put Europe’s businesses and wider economy on a more stable and sustainable footing. Investments and reforms under the Recovery and Resilience Facility (RRF) and Next Generation EU will most notably provide key support for the recovery. The State Aid Temporary Framework has also helped. Many of the reforms needed had already been identified in the March 2020 Single Market Enforcement Action Plan, Industrial Strategy and SME Strategy adopted before the full impact of the crisis was felt. Rather than being made redundant, their importance and the need for a twin transition to environmental sustainability including climate neutrality and digital leadership has been increased. But more fundamentally, the crisis has underlined that the Single Market does not stand in isolation. It is the basis of all the EU’s efforts to support the recovery of its industry, make it more resilient, and facilitate the green and digital transitions. It has underlined the importance of an open, competitive and fully functioning Single Market to enable businesses to grow to the scale needed to compete globally. This can only be achieved through effective implementation and enforcement. In this context, competition rules have an essential role to play. Competitive markets improve conditions for companies of all sizes to have a level playing field and unlock their full potential. This also contributes to a quicker, stronger and more sustainable recovery and increased resilience of Europe’s industry. This report therefore looks at these two dimensions – Single Market and industry – together. Both the Council and the European Parliament have recognised that it is not enough to commit to a seamless Single Market and twin transition: it must be followed up with specific actions and actively monitored. This will allow the EU to identify and tackle remaining barriers and shortcomings. Specifically, in September 2020, the Competitiveness Council called on the Commission to: ·“take stock of the state of implementation of the 2020 Enforcement Action Plan and progress in addressing barriers in the Single Market, including through measures of the recovery plan, taking into account the work of [the Single Market Enforcement Taskforce] (SMET); ·assess the resilience of the Single Market, by first drawing lessons from the COVID-19 crisis and evaluating the robustness of existing procedures; and

·analyse on this basis the need for further regulatory and non-regulatory actions. Moreover, the Competitiveness Council conclusions from 16 November 2020 that: ·call on the Commission to define key performance indicators for monitoring the industrial strategy and competitiveness by the end of March 2021 […] including taking into account investment trends, and comparing those to other world regions; ·Ask for a regular reporting on the key performance indicators in the form of a brief written report and a statement for discussion in the Competitiveness Council; ·Call also for the objectives of the EU's industrial policy to be reflected in sound indicators, in particular concerning industrial competitiveness, industry's contribution to the green and digital transition and the Union's resilience and strategic autonomy while preserving an open economy;”. This report provides the analytical elements underpinning the Commission response to these requests presented in the Communication “Updating the 2020 New Industrial Strategy: Building a stronger Single Market for Europe’s recovery” (“the Industrial Strategy Update Communication”. Section 2 of this report assesses the impact of the crisis on the Single Market and on European companies, including as part of industrial ecosystems and SMEs. Together with the analysis of key persistent obstacles in the Single Market, it will allow lessons to be drawn from the crisis and assess the resilience of the Single Market Section 3 presents progress in the implementation of the 2020 Industrial Policy Package, including the Single Market Enforcement Action Plan, the Industrial Strategy, and the SME Strategy. 2.The impact of the crisis on the Single Market Economy Key messages The impact on businesses and the economy of national public health measures to limit social contact was aggravated by new unilateral restrictions on the Single Market, often subject to frequent adjustments exacerbating legal uncertainty and triggering national stockpiling. These also affected the mobility of workers and service providers. These restrictions caused major disruptions to the free flow of goods, services and people, profoundly affecting value chains, economic activity and employment. Despite the actions of the European Commission, the ability of industry to quickly introduce and scale up production in critical areas was seriously constrained. As a result, the EU economy contracted by 6.3% in 2020, with major turnover losses and decline in employment, and investment. The economy is expected to start recovering in 2021 and grow by 3.7%. The Commission services have further developed the ‘industrial ecosystems approach’ set out in the 2020 Industrial Strategy as a lens to look at Europe’s economy. This analysis shows that the impact of the crisis was uneven among ecosystems with tourism, cultural and creative industries, textiles and mobility-automotive all among the worst hit. Other ecosystems were less heavily hit, or even experienced a turnover increase during the crisis, such as the digital ecosystem. SMEs were especially affected with over 60% of SMEs reporting a fall in turnover and two thirds reporting that they have delayed investment decisions or downsized investments . They were particularly affected by supply chain disruptions, employee absences and temporary shutdowns. These new barriers came on top of a number of existing barriers to companies operating within the Single Market. The crisis has underlined not only the fundamental importance of the Single Market but also the need to make it more resilient and create appropriate tools to face future crises. 1. 2.

2.1.Impact of the COVID-19 crisis and restrictions to the Single Market The containment measures applied by national authorities to limit social contact and the spread of the COVID-19 virus inevitably caused an economic contraction and hit a large number of businesses. The measures led to physical constraints on economic activity and a sudden stop of production. First, the partial or full shut down of entire sectors severely disrupted domestic production in most countries. Second, the propagation of such disruptions along global value chains weakened the functioning of the Single Market and of extra-EU supply chains. As a result, during the second and third quarter of 2020, intra-EU trade fell by 24%, while GDP by 7% (see Figure 1). Source: European Commission analysis based on Eurostat. This contraction was aggravated by new restrictions on the Single Market. Soon after the start of the outbreak in the EU, a number of Member States unilaterally introduced a number of restrictions that they justified by a need to protect public health. Whilst some of these have subsequently been relaxed or ended, a number of new restrictions have been introduced in some Member States. Businesses, notably SMEs, have complained about a number of practical problems, notably the perceived lack of clarity regarding applicable national measures. Information was often hard to find, complex and only available in the national language of the Member State concerned. In addition, companies highlighted the large degree of divergence and fragmentation between national approaches even in cases of similar epidemiological situations. This is particularly difficult for those businesses being active or having to transit across several Member States. Furthermore, the intra-EU export restrictions on products were subject to frequent adjustments exacerbating legal uncertainty and triggering national stockpiling responses with further negative effects. In the area of medicinal products, for example, economic operators had stocks close to expiry date, which were not in shortage nor in demand at national level but were still blocked on the national territory. In addition, many measures were not notified or only notified after they had been adopted, preventing the Commission and other authorities from raising potential concerns and weakening the ability of the EU to coordinate its response. In addition, overly cumbersome border controls restricting the free movement of persons caused serious delays in freight traffic and even blocked the delivery of goods to other Member States, leading to major disruptions to supply chains in many industrial ecosystems, including retail and automotive. The free movement of services was affected strongly, including by forced temporary closures of non-essential businesses, travel restrictions, and a lack of clarity on applicable rules on movement across borders. Furthermore, border restrictions reduced the mobility of workers and service providers. The number of postings dropped dramatically in the second half of March and in April and May. Stakeholders repeatedly complained of problems in construction (e.g. posting workers), retail (e.g. difficulties of frontier workers to reach the workplace), agri-food (e.g. lack of seasonal workers or difficulties in manning of fishing vessels), health (e.g. hospitals in border regions having staff from across the border) and energy-intensive (e.g. engineers unable to carry out urgent cross-border maintenance services on industrial equipment). Irrespective of the employment situation, this remains very difficult for some service providers and workers, mostly on short-term contracts, without decent accommodation at the place of work. The accumulation of these restrictions caused major disruptions in many of the EU’s industrial ecosystems, especially given the close links between activities within them. Some restrictions were particularly harmful to the functioning of the Single Market and even counter-productive. Bans or other restrictions on intra-EU exports of products raise serious doubts about their suitability and proportionality. They also undermine the principle of European solidarity and create a domino effect across the Single Market. Businesses (mainly in the health ecosystem) underlined the negative impact on their supply chains of such new export restrictions, in particular during the first wave of the pandemic. Commission services worked to lift around 30 export restrictions within the Single Market during the first wave , recommending instead a system of prior notification of exports allowing authorities to refuse these on a case-by-case basis and for a limited time, based on clearly identified risks of shortages. Since then, Commission services have monitored national measures to prevent that new bans or other trade restrictive measures and has challenged unjustified or disproportionate measures using all available tools, including infringement procedures. The Single Market Task Force (SMET) set up following the adoption of the Long-term action plan for better implementation and enforcement, is proving an effective tool. Guidelines on border management allowed for improvements to the free flow of goods and essential services. The “Green lanes” system based on the principles set out in the “Green Lanes” Communication has significantly alleviated the serious delays faced by freight traffic but remains voluntary. The recent reintroduction by some Member States of checks on transport workers, in particular at or behind the border is causing significant social and economic disruption and resulting in substantial challenges for freight and logistics, as well as for the movement of goods and people. This highlighted that the “Green Lanes” principles for freight transport must also continue to be applied in full in any circumstances when internal border controls are temporarily reintroduced as a measure of last resort. Furthermore, in the last year, discriminatory practices have emerged in the agri-food sector, favouring national products over products originating from other Member States, and so fragmenting the Single Market. Measures such as calls on “naming and shaming” of firms importing goods, obligations on retailers to advertise or source a certain percentage of food products from national producers; giving preference to national food in public procurements; or promoting national food products with state or EU funds, may breach the Single Market. The Commission has used infringement proceedings against such measures. These issues are being discussed with Member States in the SMET together with alternative means to support farmers and short-supply chains in line with EU rules. Public buyers had to deal with an immense increase of demand for similar goods and services. They had to ensure the availability of personal protective equipment such as face masks and protective gloves, medical devices, notably ventilators, other medical supplies, but also hospital and IT infrastructure, to name only a few. They were able benefit from the use of electronic procurement tools for their emergency purchases, facilitating the implementation and monitoring of the contracts. In addition, the risk of shortages of essential products protected by intellectual property rights has also triggered debates in relation to compulsory licensing of patents both at Member State and EU levels. This mechanism based on the WTO TRIPS Agreement and implemented in the EU mainly at Member State level provides for a safety net, if voluntary solutions to make intellectual property available fail or are not available. Steps have been taken to facilitate the availability of results of publicly funded Research & Innovation programmes in the EU and its Member States to address shortages and ramp up production of critical materials.

Due to the commitment and close co-operation between public and private players to boost availability of essential products across the EU, the need to resort to compulsory licensing has been largely mitigated. Unexpected and uncoordinated use of compulsory licensing by one Member State in an EU-wide emergency situation can distort trade, innovation, exacerbate product shortages in other Member States, and more generally weaken the collective bargaining power of the EU, e.g. in the context of joint procurement, and also negatively affect ongoing negotiations with patent holders. The result of all these restrictions and disruptions was that the ability of industry to quickly introduce and scale up production in critical areas was seriously constrained as certain products (e.g. cloth-face masks) lacked harmonised standards under the existing EU product acquis. In addition, testing facilities for essential products were closed in some Member States, putting further pressure on the ability of industry to quickly respond to emerging needs. Furthermore, market surveillance authorities faced a high number of non-compliant products shipped from third countries. As a result, shipments were blocked by customs in their transit to final destination in one Member State leading to further delays in the free movement of goods across the Single Market. 2.2.The impact of the crisis on the economy and the industrial ecosystems perspective The pandemic has hit the European economy harder than any other economic shock in the history of the EU. The drop in economic activity has translated into significant reductions in the number of hours worked, while employment losses have so far been more contained in part because of the widespread use of short-time work schemes, supported at EU-level by the SURE instrument. Employment strongly declined in the second quarter 2020 before rebounding in the third quarter of 2020. The impact on young people has been particularly harsh, with the number of young people neither in employment nor in education and training (NEETs) on the rise, in particular in Mediterranean and Central European Member States .Despite important downside risks, economic recovery is within sight: according to the latest Commission Forecast, the EU economy is expected to grow by 3.7% in 2021 and 3.9% in 2022 (See Figure 2). Moreover, it is expected to reach the pre-crisis GDP level earlier than expected in the Autumn 2020 Economic Forecast. Figure 2: Evolution of GDP and employment, 2019=100 Source: European Commission analysis based on data by Eurostat. Economic activity can also be analysed through the lens of industrial ecosystems. This approach aims at capturing the interlinkages and interdependencies occurring between different economic actors. The contraction of economic activity is uneven across economic activities, and the protracted nature of the pandemic tends to deepen these sectoral differences in impact. Contact-intensive services, which tend to be relatively insensitive to the economic cycle, have been affected the most. The sectoral variation in the containment measures largely explains differences in impact. Moreover, where contact is easier to avoid or teleworking is possible, economic activity has been more resilient. Similarly, in industries producing essential goods such as food, the reduction in turnover was rather modest. On the other hand, businesses relying on close physical interactions have experienced significant adverse shocks to turnover as they were forced to shut down or change the nature of their operations (e.g. tourism, food services, cultural and creative activities). Moreover, demand-sensitive sectors like the automotive industry experienced strong reductions in sales. Nonetheless, the lockdown has hit all ecosystems. Divergences started to emerge during summer, due to the dynamics discussed above. In the second quarter of 2020, the lockdown triggered sizeable losses for all ecosystems, with the exception of “Digital”. The figure below shows that “Tourism”, “Textile” and “Automotive” have suffer the most in terms of turnover (See figure 3). The average losses reported in the figure hide significant heterogeneity within some ecosystems. For instance, travel agencies and tour operators faced turnover losses of roughly 80% in the last three quarters of 2020. In the same period, air transport also lost between 60% and 70% of their revenues. Moreover, the data significantly underestimate the impact for ecosystems as Cultural and Creative and Proximity, Social Economy and Civil Security, which are underrepresented in data. In the third quarter, most ecosystems returned close to 2019 levels, but divergences started to emerge. In the fourth quarter of 2020, such divergences became more apparent: Turnover in the “Tourism” ecosystem has further contracted significantly, pointing to a worrying situation, as this ecosystem did not recover even in the most favourable period of the year. The “Digital” and “Energy Intensive Industries” ecosystem, instead, increased their turnover, with respect to the previous year. Figure 3: Change in Turnover by Ecosystem – by Quarters. Source: European Commission analysis based on data by Eurostat Short-term business statistics. Note: data show annualised y-o-y change in turnover for each quarter of 2020. For “Agrifood”, “Health”, “Social”, and “Creative & Cultural” data available cover only partially that ecosystem. For this reason, they are depicted using dotted bars and the related values have to be interpreted with caution. Data for Cultural and Creative Industries and Proximity, Social Economy and Civil Security may underestimate the impact of the crisis, as data for some relevant sectors are not available. To provide a better picture of the impact of the crisis for the ecosystems not fully covered by data on turnover, Commission services use quarterly data on Value Added. The data show that in 2020, the arts, entertainment and recreation activities experienced the largest percentage drop compared to 2019 (see Figure 4). The impact was particularly strong in the second and fourth quarters, corresponding to the most relevant waves of the pandemic. A large share of these activities are part of the Cultural and Creative industries as well as of the Proximity, Social Economy and Civil Security ecosystem. Figure 4: Gross value added, 2020. Percentage change with respect to the same period in the previous year. Source: Eurostat [namq_10_a10] Studies on different components of the CCI ecosystem also show severe disruptions, potentially comparable to the Tourism sector. This is particularly the case for activities based on venues and visits: performing arts and ‘heritage’ sectors (e.g. live music, theatres, circus, festivals, cinema, museums and heritage sites). For example, cinema operators in the EU report a 70% drop in box office sales in 2020, music venues report a 76% drop in attendance (64% in revenues) and museums lost revenues up to 75-80% (in popular touristic regions). Outside of venue-based activities, news publishing saw its advertising revenues drop between 30% and 80%. Revenues in the audiovisual sector (including remotely accessible services like broadcasting or streaming besides cinema), are estimated to have decreased by 15% in 2020. TV advertising revenues are estimated to have dropped by 15-20% in 2020. The increase in the uptake of streaming and gaming services cannot alone compensate for the severe losses suffered elsewhere in the ecosystem. The drop in turnover across ecosystems is mirrored by a drop in volume of hours worked. In some ecosystems, such as “Aerospace & Defence”, “Retail”, and “Digital”, the drop in total hours worked is considerably larger than the drop in turnover: this signals important productivity gains in these ecosystems. In the “Energy-Renewables” ecosystem, instead, despite a relevant loss in turnover, the volume of hours worked and the level of employment have remained constant, leading to some fall in productivity (see Figure 5). As above, data for Cultural and Creative Industries and Proximity, Social Economy and Civil Security significantly underestimate the impact of the crisis, as data for some relevant sectors is not available. In particular, given the high share of self-employed and non-standard employment in these ecosystems, the impact has certainly been very severe. Figure 5: Change in Turnover, Employment and Hours Worked in 2020 Source: European Commission analysis based on data by Eurostat. Note: For “Health” and “Proximity, Social Economy and Civil Security”, data do not cover enough sectors to build a proxy, so they are not included. Data for “Cultural and Creative Industries” significantly underestimate the impact of the crisis, as data for some relevant sectors are not available. Surveys data can be used to build an economic sentiment indicator for each ecosystem, which is a good proxy of the actual economic impact. This complements the analysis for the most recent months, for which official data is not yet available, and points to an improving, though heterogeneous, situation across the board (see Figure 6). Services sectors are clearly the most affected, as well as retail, while manufacturing and construction seem to have better absorbed the second round of containment measures. Consequently, in April 2021, the economic sentiment turned positive for most ecosystems, but remains negative in Textiles and Tourism, despite a significant improvement.. As above, Data for Cultural and Creative Industries and Proximity, Social Economy and Civil Security may underestimate the impact of the crisis, as data for some relevant sectors is not available. Figure 6: Evolution of the Confidence Indicator by Ecosystem Source: European Commission analysis based on data by the Joint Harmonised EU Programme of Business and Consumer Surveys. Note: For “Retail”, “Agri-food”, “Proximity, Social Economy and Civil Security”, “Energy-Renewables”, and “Health”, data coverage is partial, so they are depicted using dotted lines and the related values have to be interpreted with caution. Data for Cultural and Creative Industries may underestimate the impact of the crisis, as data for some relevant sectors are not available. Overall, this evidence suggests that the prospects for a quick and strong recovery differ across ecosystems. As seen in the third quarter of 2020, demand can quickly rebound if the health impact of the pandemic is contained. Nonetheless, the sheer size and the persistence of the shock are likely to spur business failures and a fall in employment in the future, leading to reallocation of resources both within and across ecosystems. Swift and large-scale policy support programmes rolled out by governments in response to the unfolding of the pandemic cushioned the adverse effect on employment, bankruptcies and household income, and avoided the destruction of viable businesses. Beyond their macro-stabilisation effect, the measures will foster a faster recovery. In particular, a pandemic-driven surge in bankruptcies could have severe macroeconomic effects, as the exit of businesses would translate into losses of employment, higher unemployment benefit expenses and reduced private consumption, possibly resulting in a downward spiralling of aggregate demand. Moreover, the potential concentration of insolvencies in specific sectors could lead to more persistent unemployment if labour reallocation is made more difficult by the specificity of human capital and skills of the workers affected. Government policies have effectively staved off the surge in bankruptcies so far. As the emergency support measures are gradually phased out, firms’ ability to repay debt will be a function of firm characteristics pre-crisis, the magnitude and duration of the sectoral shock, as well as the sectoral recovery prospects. The share of Euro Area corporate non-performing loans (NPLs) stood at 5.2% of total loans in Q2-2020, marginally lower than in the previous quarter (5.3%) and down from 6.3% in Q2-2019. While it is clear that the debt-servicing capacity of the private sector has been adversely affected by the pandemic, government credit guarantees and loan repayment moratoria have prevented so far a rise in loan defaults. The most recent evidence shows that the characteristics of firms filing for bankruptcy in the course of 2020 is similar to pre-crisis patterns. These findings support the hypothesis that policies have been effective in avoiding a COVID-driven wave of bankruptcies. As illustrated in Figure 7 below, the number of bankruptcies in 2020 decreased compared to 2019, owing to administrative delays and, in some countries, loan repayment moratoria and the temporary relaxation of bankruptcy regulations. Thus, the headline NPL ratios – based on a rather stable NPL stock and the increasing loan denominator – do not yet reflect the underlying deterioration in the credit profile of borrowers. The stronger capital position of banks compared to the financial crisis should help them better absorb the shock.

Figure 7: Registration of business and declaration of bankruptcies, seasonally adjusted data (2015=100) Source: Eurostat, experimental statistics. While the policy response has prevented a wave of bankruptcies, it has not eliminated financial distress. Rather, the protracted nature of the pandemic has deepened the sectoral heterogeneity of its impact. Whether one uses the sectoral or the ecosystem grouping of economic activity, the stark finding is that firms which were perfectly healthy before the crisis have also been significantly affected by the crisis. Simulations based on the income statements and balance sheets of initially solvent firms show that the trajectories of firms operating in different sectors have gradually diverged. These simulations take into account a subset of government support measures such as short-term work schemes, loan moratoriums, and tax deferrals. As shown in Figure 8 below, corporate financial distress differs strongly across all sectors of the economy, with the largest share of distressed firms in the automotive and hospitality industries. Figure 8: Share of EU firms likely to face financial distress at different points in time. European Commission analysis based on ORBIS, Eurostat and Member State specific information collected by DG ECFIN The same heterogeneity is visible when replicating the analysis by ecosystem. This complementary approach allows to better take into account the interlinkages across sectors. By the end of March 2021, the fraction of illiquid firms is estimated to range between 18% in the digital and 74% in the tourism ecosystem (see Figure 9). Data representing SMEs has been reweighted for this analysis in order to correct for the underrepresentation of SMEs and microenterprises in firm-level data. Nonetheless, results should be interpreted with caution for ecosystems as Cultural and Creative Industries and Proximity, Social Economy and Civil Security, characterised by the presence of many self-employed, associations and microenterprises, which may have suffered disproportionally from the lockdown measures. Figure 9: Share of firms likely to face financial distress by March 2021 Source: Commission analysis based on ORBIS and Eurostat (SBS and STS). Due to the specific characteristics of the ecosystems, data for Cultural and Creative Industries and Proximity, Social Economy and Civil Security should be interpreted with caution. Less performant firms in terms of economic characteristics as productivity are more likely to become illiquid within each sector or ecosystem. Yet, a significant fraction of the total liquidity shortfall is attributable to large and highly productive firms (see Figure 10). This finding indicates that financial distress may not be tightly connected with pre-COVID productivity. Figure 10: Share of firms (among top/bottom productive firms) likely to face financial distress by March 2021 Source: Commission analysis based on ORBIS and Eurostat (SBS and STS). Note: The graph shows the share of firms facing financial distress among the higher and lower half of firms in terms of labour productivity, measured prior to the COVID-19 pandemic. Due to the specific characteristics of the ecosystems, data for Cultural and Creative Industries and Proximity, Social Economy and Civil Security should be interpreted with caution. In terms of financial characteristics, firms that were already financially vulnerable before the crisis are more likely to face financial distress. Some pre-crisis characteristics of firms can affect their ability to absorb repeated adverse shocks to revenue. In particular, less profitable and more leveraged firms tend to have smaller liquid asset buffers and face more difficulty in absorbing the adverse shock. Data shows that firms with relatively high ratio of equity to assets (solvency ratio) tend to become illiquid only as the crisis protracts. Specifically, among firms that became illiquid by the end of March 2020, 80% had a solvency ratio below the median level in pre-crisis times. However, just half of firms that become illiquid by the end of March 2021 (but were not illiquid previously) have a pre-crisis solvency ratio below the median (See Figure 11). Figure 11: Financial profile (pre-COVID19) of new firms estimated to face financial distress in each month since March 2020 Source: Commission analysis based on ORBIS and Eurostat (SBS and STS). Note: The Solvency Ratio is calculated as equity/assets and it is defined using the pre-COVID period. The firm level simulations use the most recent cross-section of financial statements covering millions of firms in the EU allows evaluating the capacity of these firms to overcome the COVID-19 shock on sales, including through previously accumulated cash reserves, operational flexibility as well as policy intervention. Due to the specific characteristics of the ecosystems, data for Cultural and Creative Industries and Proximity, Social Economy and Civil Security should be interpreted with caution. Financial distress is more likely to translate into solvency concerns for firms that were already at a high risk of default at the onset of the crisis. The likelihood of default pre-crisis is assessed using firms’ liquidity, leverage, and profitability characteristics. It is expected that firms at a high risk of default pre-crisis and illiquid in its aftermath may face greater difficulties in accessing credit. For the EU economy as a whole, about one third of all firms were estimated to be illiquid at the end of 2020. About one third of these illiquid firms were also at a high risk of default pre-crisis, implying that about 11.4% of all firms in the EU economy are likely to exit as support dries up, as they may fail to get access to fresh sources of credit. This share is estimated to increase to 12.3% by the end of 2021 in the scenario that incorporates the ongoing third wave of the pandemic. There is strong variation in expected exit depending on the economic activity. The percentage of firms expected to exit by the end of 2021 on the basis of this estimation varies between 7% in construction and 27% of in the accommodation and food services sector. This quantification is most likely a lower bound as it does not include viable firms pre-crisis that might become insolvent following the pandemic shock. This could have negative effects on employment in the coming months and bear negatively on the job-creation potential of the forecasted recovery. 2.3.The impact of the crisis on SMEs SMEs are particularly vulnerable in the context of the pandemic. Preliminary estimates from the SME Performance Review suggest that across the EU, the number of SMEs fell by -1.3% in 2020, employment in SMEs by -1.7% in 2020 (representing 1.4 million jobs) and SME value added by -7.6%. SME value added is unlikely to reach 2019 levels even by the end of 2021. According to SME associations, more than 60% of SMEs have reported a fall in turnover and about two-thirds of SMEs report that they have delayed investment decisions or downsized investments. Seventy-two percent of respondents to a recent SME survey indicated that the crisis affected them strongly or moderately because of supply chain disruptions, employee absences and temporary shutdowns. SMEs were not well prepared: almost two thirds of respondents had no plan in place to handle supply chain disruptions. One third created such a plan during the pandemic. The main reactions of companies to supply chain disruptions were looking for alternative suppliers and drawing up a plan to increase resilience to such disruptions (see Figure 12). Figure 12: Response to the SME Survey Source: EU Survey of SMEs carried out July-December 2020: multiple answers allowed While bankruptcies among SMEs have so far not increased compared to 2019, within this group, this is also likely due to various government support measures and moratoria on insolvencies. However, financial pressure is likely to increase in 2021 with insolvencies expected to rise as various forms of relief are phased out. As most Member States focus their support schemes on debt solutions, the risk of over-leverage and the need for recapitalisation will be severe for SMEs, especially smaller ones. According to an AFME report , there is a shortfall of between EUR 450 billion to EUR 600 billion in public and private sector equity at an EU-level over an assumed two-year period. Closing this gap will be a challenge that will have to be addressed at both EU and MS level. As SMEs are deeply integrated into supply chains and comprise about 99% of companies in every industrial ecosystem, a rise in bankruptcies could significantly impact supply chains and jobs. In addition, late payments, which have long been an issue for SMEs, could exacerbate as since March 2020, payment delays have gone up rapidly knock-on effects throughout supply chains. 2.4.Progress on addressing key Single Market obstacles The new Single Market restrictions detailed above came on top of a number of existing barriers to companies operating within the Single Market. These were detailed in the 2020 Staff Working Document of 10 March 2020 on addressing barriers to the Single Market referred to above.

These barriers are a mixture of horizontal barriers across all industrial ecosystems and specific barriers within individual ecosystems. Horizontal barriers remain for example, for the free movement of products. To address these, Commission services are working in close cooperation with Member States to ensure the full implementation of the new EU Regulation 2019/515 on mutual recognition. In addition, work is ongoing with interested Member States’ representatives in the context of an “Accelerated Mutual Recognition” project. The aim is to come to an arrangement for specific sectors (e.g. precious metals, construction). The objective of this project for interested Member States is to facilitate a common understanding of their respective national rules to ensure that if a good is considered compliant in one participating Member State, it will automatically and without detailed assessment be recognized as compliant in another participating Member State. Such an arrangement would facilitate the work of national competent authorities and provide more certainty to economic operators when they decide to enter other Member States’ markets. In addition, inadequate market surveillance may also endanger a well-functioning Single Market for products that are safe and compliant with EU high standards and technical regulations, distorting competition and a level playing field for EU companies. Stepping up coordination, investment, resources and digitalisation of market surveillance authorities is therefore a high priority of the Commission and the EUPCN (EU Product compliance network), which has been recently set up as foreseen in the new Market Surveillance Regulation. Moreover, resources are available under the Recovery and Resilience Fund for Member States to build or upgrade their market surveillance systems. For instance, the RRF could support the consolidation of national market surveillance authorities, the establishment of new accredited public laboratories, or the digitalisation of product inspections and data collection. But such horizontal barriers are particularly prevalent for services, with a significant impact on the EU economy: the Services Directive alone covers service activities that account for 46.4% of EU GDP. Full implementation of the Directive could potentially increase the level of EU GDP by 1.7%. Indeed, the entry into force and implementation of the Services Directive brought clear economic benefits (see Figure 13 below). Figure 13: Overall barriers evolution in the EU Source: Study on “Mapping and assessment of removal of legal and administrative barriers in the services sector”, DG GROW. Note: The level of barriers measures the intensity of restrictions in services regulation in a specific sector, quantified on a scale from 0 to 1. However reform progress has been slow and in some cases has been reversed. To address this, Commission services prepared a comprehensive review of its most pertinent rules in all Member States . Inter alia, this shows that regulation of services markets remains complex and the Single Market in services remains fragmented. While, for example, most authorisation schemes applicable to service providers have remained in place, some of the key restrictions accompanying and underlying the authorisation schemes have been removed. In many cases, only a few Member States retain a certain type of restriction. Making progress here is all the more important because of the increasingly strong interaction between goods and services, often referred to as ‘servitisation’. In 2011, the value-added by services in EU manufacturing output and exports (at an aggregated level) already amounted to 40%; an estimated 25-60% of employment in manufacturing firms relates to service. Service activities in turn have much to gain from further digitalisation, which could contribute to lift the comparatively low productivity of the European services sector. Digitalisation is important for European companies’ capacity to grow, innovate and go international, but requires significant investment. Nevertheless, this is held back by the existing regulatory set-up. For example, the business services sector is of crucial economic importance for the EU (representing 13% of total value added) and provides key inputs into many ecosystems, yet is held back by restrictive national rules such as strict requirements as regards who can hold equity of business service providers or manage them, which legal form they can take and how they can team up with other service providers to offer joint services. Finally, preventing new regulatory barriers from being put into place is much more effective than seeking to address barriers once in place, particularly for services. Whilst regulation must keep up with developments in services markets, the Proportionality Test Directive and existing notification procedures provide a comprehensive framework for ensuring that measures made by Member States are justified and proportionate. The ability of companies to send their workers temporarily to another Member State (i.e. posting of workers) is key for manufacturing and service activities. Complex and costly administrative formalities linked to the posting of workers are a leading obstacle across ecosystems, in particular for SMEs. Recently revised EU rules regulating the posting of workers ensure the mobility of posted workers and must be implemented correctly by Member States. The European Labour Authority has been set up inter alia to assist Member States and the Commission in their effective application and enforcement of the relevant EU rules related to labour mobility across the EU. Specific obstacles to the functioning of the Single Market persist across all industrial ecosystems. An analysis in Annex A3 shows that some ecosystems are characterised by particularly high levels of regulatory and administrative complexity that hinder their transformation. Two examples are the construction ecosystem and retail ecosystem. The transition to a greener European economy in no small part depends on the performance of the construction ecosystem and its ability to renovate Europe’s existing building stock, accounting for approximately 40% of EU energy consumption and emissions. The efficiency of construction services is, however, held back by a number of Single Market barriers. They include compulsory certification schemes based on national standards and regulation without functioning mutual recognition schemes, as well as difficulties for companies to obtain the insurance coverage they need to offer their construction services in other Member States. In addition, the environmental performance of the retail ecosystem (e.g. green transport and deliveries, low-emission stores, green product design) is essential for Europe’s green transition. Nevertheless, national restrictions to establishment and operations deter innovation and affect the ability of retailers to invest in digital and green infrastructure and services. Ongoing actions to eliminate barriers in the retail ecosystem include the identification of best practices that are tried and tested and could provide inspiration for reforms in other Member States. Underpinning all this work on removing Single Market barriers is work on standardisation. For several years now, standardisation work has been supporting EU legislation on eco-design for a wide range of products. It is also crucial in implementing recent initiatives aimed at “greening” of critical sectors (such as the Plastics Strategy, sustainable fertilisers and “green” construction products). In the digital transition, standardisation will support the implementation of new technologies like Artificial Intelligence, whilst ensuring protection of citizens’ rights in terms of privacy, personal data accessibility and non-discrimination. Administrative burden is often flagged as one of the key obstacles to doing business, especially cross-border. Ensuring a smooth functioning and further implementation of the Single Digital Gateway will help overcome language barriers, introduce the once-only principle, increase transparency of rules and accelerate the digitalisation of procedures. In addition, the possibility to set up companies on-line and the cross-border co-operation and exchange of information between business registers (BRIS) will make the creation of new companies quicker and help overcome administrative barriers . As a first step, in accordance with the Single Digital Gateway regulation, Member States are publishing online and making accessible through the gateway the national rules applying to citizens and businesses who want to make use of their Single Market rights. Thanks to the gateway, SMEs can be better informed about the applicable rules and they can more easily get relevant assistance. It also allows EU citizens and businesses to report any obstacle they still encounter in the Single Market.

2.5.Lessons learnt to increase the resilience of the Single Market The crisis has underlined the fundamental importance of the Single Market. Particularly in the early days, businesses and citizens suffered from border closures, supply disruptions, lack of clarity and predictability, and fragmentation. The Commission adopted a number of recommendations to provide swift and practical solutions to concrete obstacles on the ground: -Guidelines on border management allowed for improvements as regards the free flow of goods and essential services. The establishment of “green lanes” in particular led to a quick and marked reduction of delays faced by freight transport at border crossings. Data from the green lanes reporting portal indicates that already in April 2020 there was a roughly 85% compliance rate with the green lanes recommendations. In subsequent months, compliance rates further increased to around 95%. The Commission also issued Guidelines on air cargo and seafarer mobility to ensure uninterrupted cargo transport and taken several other measures. -On the basis of a Commission proposal, Council Recommendation (EU) 2020/1475 fostered a coordinated approach to the restriction of free movement in response to the pandemic basing restrictions such as quarantine and testing on the epidemiological situation in other Member States. The Council Recommendation was amended on 1 February 2021 to take into account the challenging epidemiological situation. The Council Recommendation provides relevant exemptions for essential travellers such as transport workers. -The Commission ensured the mobility of workers and service providers including through practical advice on the free movement of essential workers, urging Member States to establish specific burden free and fast procedures to ensure a smooth passage for critical cross-border workers, including proportionate health screening. In addition, specific guidance was provided in the area of professional qualifications to support the free movement of health professionals. Furthermore, the Commission presented on 16 July 2020 Guidelines on Protecting Seasonal Workers in the context of the COVID-19 outbreak, to strengthen the protection of this particularly vulnerable group of workers; -The Commission also adopted guidelines presenting general principles for the safe and gradual restoration of passenger transport by air, rail, road and waterways. The guidelines put forth a series of recommendations, such as the need to limit contact between passengers and transport workers, and passengers themselves, reducing, where feasible, the density of passengers. -Commission guidelines also boosted Europe’s efforts to fight the pandemic. For example, recommendations to testing bodies and market surveillance authorities facilitated the supply of personal protective equipment and medical devices and guidance to public authorities enabled purchasing urgently needed supplies and services under the EU’s public procurement framework. In addition, guidance on national measures relating to medical products and devices and of personal protective equipment aimed to address the proliferation of export restrictions. In addition, different efforts made it possible to maximise the availability of medical supplies on the Single Market. The Commission coordinated a number of joint procurement actions, where Member States joined forces in negotiating purchases. In addition, the strategic rescEU stockpile and the COVID-19 Clearing House for medical equipment were established, the latter accelerating matchmaking for needed medical equipment. Furthermore, European standardisation bodies made 21 harmonised European standards for personal protective equipment and medical devices freely available, facilitating the conversion of production lines (and the creation of new ones) to respond to shortages. A specific European standardisation document for generic fabric facemasks was also developed and made freely available. Secondly, existing Single Market tools and instruments have proven valuable: -The Single Market Transparency Directive ensured transparency of measures restricting the free movement of goods. Altogether, Member States used the urgency procedure under that Directive 85 times during the first wave of the pandemic to notify COVID-19 related legislation to the Commission. The notifications of the draft technical regulations allowed the Commission to identify barriers to the free movement of goods, in particular concerning medicines and medical equipment most needed during the crisis, and address them in a timely and efficient manner. The measures most commonly notified during the first wave of the pandemic related to export restrictions for medicines as well as export bans on protective equipment, medical devices and in vitro medical devices needed in hospitals. Export bans for disinfectants and alcohols needed for their production were also frequently notified. -Assistance tools such as SOLVIT and YourEurope Advice have received and dealt with a large number of enquiries and requests from businesses and workers to solve COVID-19 related problems. Business cases dealt with by SOLVIT include problems on free movement of goods (e.g. export restrictions on disinfectant and its ingredients, complaints about rules for CE labelling of masks) and on free movement of services (e.g. problems posting workers to another Member State, issues accessing COVID-19 crisis assistance for self-employed). In addition, SOLVIT received many cases involving mobile workers. In particular, certain enforcement models, like the Consumer Protection Cooperation (CPC) Network, proved to be very efficient in addressing the surge of online consumer scams linked to the pandemic. The EU Rapid Alert System for dangerous non-food products was a very efficient tool to speedily exchange information on unsafe COVID-19 related products. -The Commission also facilitated and encouraged the action of market surveillance authorities against illicit and non-compliant personal protective equipment and medical devices and fake certificates. -Member States also took action, accelerating public purchases of goods and services needed to fight the pandemic. For example, during the first wave, 11 Member States used the options provided in the EU public procurement directives to adopt temporary derogations to national public procurement rules in order to streamline the purchase of health products and services. Some Member States also addressed possible shortages in healthcare professionals by relaxing access requirements and enabling accelerated and less burdensome recognition procedures for professionals from other Member States. Below are key observations based on the assessment presented in the subsections above, and informing the lessons learnt presented in the Communication: ·Existing EU crisis governance mechanisms are not fully effective at coordinating national responses in times of emergency while protecting the Single Market; ·In several instances, better ex ante assessment by Member States on planned restrictions would have helped them to understand whether these measures would be effective and justifiable restrictions to Single Market freedoms; ·Insufficient notification by Member States at EU level for national measures that introduced restrictions both for goods and services created uncertainty; ·Member States could have made available more clear, comprehensive and stable information on applicable national restrictions for businesses; ·The administrative capacity to fully implement and apply Single Market rules including during crises times, including the notification of national measures, was often insufficient;

·Measures such as “green lanes” coupled with digital solutions were able to facilitate the free movement of goods, services providers and their workers during crises. ·Faster and more effective purchases of urgently needed goods and services through stronger cooperation among public buyers across the EU and the use of digital solutions, together with new mechanisms to ensure and speed up the availability of essential products in the EU and a common approach on stockpiling measures for products that are vital during crises would have helped. ·Manufacturers should have been granted better access to the necessary product testing facilities and market surveillance authorities should have had the means to control that products entering the Single Market met the necessary requirements. ·Building skills that increase workers resilience and digital competences would have contributed to maintaining production and service lines. Despite the usefulness of existing Single Market tools, the crisis showed that not all of them are suitable for emergency situations. The Commission was forced to take a large number of ad hoc actions to safeguard the functioning of the Single Market. Gaps in existing legislation and practices hindered industry and SMEs, highlighting the need for tools to meet the specific needs that arise in the context of a severe crisis, ensure the free movement of goods and services and support efforts to enable and speed up the availability of essential products. The Single Market needs to be better prepared to face a future crisis, based on forward looking and structural solutions that allow for predictability and legal certainty. 3.Delivering on the ground: the implementation of the 2020 Single Market Enforcement Action Plan, Industrial and SME Strategies Key messages Good progress was made in implementing the measures announced in the March 2020 Single Market Enforcement Action Plan, Industrial Strategy and SME Strategies. The implementation of the Single Market Enforcement Action Plan (SMEAP), the creation of the joint Single Market Enforcement Task-Force (SMET) will contribute to the deepening of the Single Market. A number of actions to help SMEs grow within the Single Market have been put in place and the review of the EU competition framework is ongoing. A global level playing field has been upheld, by prioritizing WTO reform, following up on the White Paper on foreign subsidies, and thanks to actions aimed at improving SMEs’ access to global markets, as well as the new Customs Union Action Plan. Companies and the economy have been supported in the transition towards environmental sustainability including climate-neutrality and a circular economy, in particular through the New Circular Economy Action Plan. Good progress was made on energy with the Clean Energy and Hydrogen strategies, on mobility and construction with the Sustainable and Smart Mobility Strategy and Renovation Wave. The Commission is also paying special focus to products and their components, for example by publishing a Chemicals strategy and working for a Clean Steel partnership under Horizon Europe. It is moving to empower consumers under the Circular Economy Action Plan and New Consumer Agenda. Action has helped the digital transition, by proposing the Digital Services Act (DSA) and the Digital Markets Act (DMA) as well as the Data Governance Act. The development and deployment of next generation cloud technologies as well as a high common level of cybersecurity have been promoted. Innovation is being supported through the Intellectual Property Action Plan and a communication on “A new ERA for Research and Innovation” as well as through a more strategic approach to partnerships. Skills are at the heart of the EU policy agenda and their development is being promoted thanks to initiatives like the European Skills Agenda and the Pact for Skills. The first European skills partnerships in key industrial ecosystems have been announced as well as a vision for achieving the European Education Area and a new Digital Education Action Plan (2021-2027). This will contribute to addressing the gender gap in STEM as announced in the Gender Equality Strategy 2020-2025. The agreement on the Multiannual Financial Framework and Next Generation EU will support investment and financing and private finance will be leveraged through the new Capital Market Union action plan as well as a number of actions to help Europe’s SMEs. Member States can design Important Projects of Common European Interest (IPCEI) in line with State aid rules and new ones have been put in place. The new Pharmaceutical Strategy, R&I partnership on pandemic preparedness, Action Plan on Critical Raw Materials, and Cybersecurity Strategy are reinforcing Europe’s industrial open strategic autonomy. Finally, a new partnership approach to governance has been promoted. In particular, the Commission has continued to promote the development of industrial alliances to bring stakeholders together to contribute to the delivery of EU policy objectives. Commission services have also moved to promote wider partnership in industry, most notably through the Industrial Forum. In March 2020, just before the crisis fully hit all parts of the EU, the Commission adopted a package of measures including a new Industrial Strategy and SME Strategy. Over the past year, the Commission services have started to implement these measures, updating them as necessary in the light of the crisis. Adopting these measures, will help businesses and economy to recover from the crisis but also to move to a more stable and sustainable long-term footing. In particular and as promised in the Industrial Strategy, good progress has been made towards:

·Moving to a deeper Single Market; ·Upholding a global level playing field; ·Supporting companies and the economy in the transition towards environmental sustainability; ·Boosting the digital transition and innovation; ·Promoting skilling and reskilling; ·Assisting investment and financing for the transition; ·Reinforcing Europe’s strategic autonomy; ·Taking a new partnership approach to governance. 3. 3.1.A deeper Single Market To allow the Single Market to work for all, common rules must be implemented and enforced across the EU. Based on a renewed partnership between Member States and the Commission, the “Long term action plan for better implementation and enforcement of the Single Market rules” (SMEAP) sets out horizontal measures and 22 specific actions to maximise the effectiveness and efficiency of compliance and enforcement across the EU. The joint Single Market Enforcement Task Force (SMET), set up in April 2020, plays an essential facilitating role as a high-level forum where Commission services and Member States work together to assess the state of compliance of national law with single market rules, discuss the most pressing single market barriers needing to be addressed, as well as horizontal enforcement issues. Barriers will also be addressed through the National Recovery Plans, currently under preparation by Member States as part of the Recovery and Resilience Facility. SMEs have the highest potential to benefit from the Single Market so the SME Strategy announced a number of measures including an EU Startup Nations Standard launched earlier this year. Commission services are also setting up an EU Observatory on payment performance in commercial transactions to ensure a more regular monitoring for the payment behaviour by public authorities and businesses. The Fit for Future (F4F) platform - a high-level expert group to help simplify existing EU laws will advise the Commission on how to step up the application of the Late Payment Directive to ensure results for small businesses. The Commission also acted to review the EU competition framework. Between September 2020 and March 2021, three Staff Working Documents were published: one that summarises the findings of the evaluation of procedural and jurisdictional aspects of EU merger control, one summarising the results of the Fitness Check of the State Aid control system and one on the evaluation of the Vertical Block Exemption Regulation. In December 2020, the Commission proposed a Digital Markets Act that builds on the antitrust enforcement practice in the digital sector. 3.2.A global level playing field The 2020 Industrial Strategy noted that while the openness of Europe’s economy is at the source of its prosperity and competitiveness, the EU should not be naive about threats to fair competition and trade. The EU supported global efforts in the G20, the WTO and bilaterally to monitor critical supply chains and address disruptions throughout the crisis, and set the direction for an open, sustainable and assertive trade policy in the Trade Policy Review Communication adopted in February 2021. In June, the Commission therefore published a White Paper on foreign subsidies and is currently working on a legislative proposal. Given its essential role for a stable trading environment, the EU is prioritising reform within the WTO later across its functions. Discussions in Council on the International Procurement Instrument are also progressing. Attention is also being paid to improving SMEs’ access to global markets, launching the information portal ‘Access2Markets’ in October and including SME chapters or provisions in all new trade or partnership agreements. For entrepreneurs, the extended Erasmus for Young Entrepreneurs Global programme started in March 2021. Beyond this, the new Customs Union Action Plan sets out a series of measures to make EU customs smarter, more innovative and more efficient over the next four years. The proposal for the ‘EU Single Window Environment for Customs’ was also adopted to enhance cooperation and coordination between different authorities.

3.3.Climate neutrality and a circular economy The Commission has adopted a number of measures to promote the transition towards increased environmental sustainability including social aspects in global supply chains. At the heart of these are the Green Deal and New Circular Economy Action Plan adopted in March 2020.. Within this, the Commission is paying special focus to sustainable production and consumption, in particular on designing greener products and their components, and harmonising rules for them, and has published a Chemicals strategy for sustainability to better protect citizens and the environment and boost innovation for safe and sustainable chemicals. Work on a Sustainable Product Initiative is underway together with sectoral initiatives on electronics, batteries, construction, textile, plastic and packaging. The Commission adopted a proposal for a new regulation on batteries and waste batteries to modernise EU legislation on batteries to make them more sustainable throughout their lifecycle. In addition, to promote the circular economy transition across Europe, the Circular Economy Stakeholders Platform continues to gather industry, businesses, think thanks, non-governmental organisations, innovation communities and public authorities . The Clean Steel partnership is advancing successfully to be approved as one of the proposed partnerships under Horizon Europe. The steel industry is responsible for about 20% to 25% of industrial CO2 emissions . The partnership aims to align the public and private sector on alternative pathways towards CO2 reductions to of up to 95% by 2050 compared to 1990 levels. Energy is a particular concern, so in July 2020, the Commission adopted the Energy System Integration Strategy to achieve a cost-effective decarbonisation of the EU economy, involving technologies such as ICT and digitalisation, smart grids and meters and flexibility markets. Such a Strategy lays the foundation for the decarbonised European energy system of the future in synergy with the dedicated Hydrogen strategy to support the production and use of clean hydrogen. Energy is identified as one of the strategic areas for setting up a data space. Common European Energy data spaces are being put in place to exploit the potential of data to achieve the Green Deal Objectives, to support data exchange which helps the integration of renewables in the energy system. The enabling instruments will be the Delegated Acts on data sharing and Horizon Europe. The EU Strategy on Offshore Renewable Energy proposes to increase Europe’s offshore wind capacity to at least 60 gigawatts (GW_ by 2030 and to 300 GW by 2050. Underpinning all this, the Just Transition Platform provides technical and advisory support towards the green transition for public and private stakeholders in coal and other carbon-intensive regions. The Emissions Trading System and the Energy Taxation Directive are being revised to better align them with the increased climate and environmental ambitions. Mobility and construction are also central. In December 2020, the Commission adopted the Sustainable and Smart Mobility Strategy to ensure that the EU transport sector is fit for a clean, digital and modern economy. In October, it launched the Renovation Wave. Consumers have a key role to play. Among the priorities of the Circular Economy Action Plan and the New Consumer Agenda is to ensure that sustainable products are available to consumers on the EU market, that consumers have better information to be able to make an informed choice, and better information on the durability and reparability of products. It also means empowering SMEs and consumers to drive the transition, so as part of an upgrade of the Enterprise Europe Network, Commission services are finalising the setting up of dedicated Sustainability Advisors to advise SMEs. In November, the Commission launched the New Consumer Agenda. The Commission services are considering the introduction, for selected sectors, of a Carbon Border Adjustment Mechanism (CBAM) should differences in levels of ambition worldwide persist. 3.4.Digital transition and innovation Digital technologies are profoundly changing our industry, business and societies. The Commission has already taken significant steps to invest in them, provide workers with new skills, reduce administrative burden for businesses, and set clear rules for their uptake. In December, the Commission proposed the Digital Services Act (DSA) and the Digital Markets Act (DMA). The new rules will better protect all users of digital services and their fundamental rights online, and will lead to fairer and more open digital markets for everyone. A modern rulebook across the Single Market will foster innovation, growth, and competitiveness and will provide users with new, better and reliable online services. The efficient and ethical use of data will be central to Europe’s future competitiveness. The European data strategy aims to create a single European data space where personal as well as non-personal data are secure and businesses also have easy access to high-quality industrial data. The recently adopted Data Governance Act will improve access to data and increase trust in sharing personal and non-personal data and lower transaction costs linked to data sharing. And from this year on, the Commission will co-invest in a High Impact Project on European data spaces and next generation federated cloud infrastructures and services. The development and deployment of next generation cloud technologies will be co-financed under the new long-term EU budget and complemented by private and national co-investment. The Communication on the Digital Decade will act as a compass to steer the digital advances to be reached by 2030, including the digital transformation of industry. Underpinning the safety and security of all this, in December the Commission proposed a revised Directive on measures for a high common level of cybersecurity across the Union. The proposal will increase information sharing and cooperation on cyber crisis management at national and EU level. The IP Action Plan adopted in November 2020 sets out key steps to improve the protection of Intellectual Property, boost its uptake by SMEs and facilitate the sharing of IP, so as to increase the technological uptake in the industry. The Industrial Strategy noted that if the EU wanted to lead this transition and that to sustainability, its strategy needed to have an industrial innovation strategy at heart. The Commission therefore created the Advanced Technologies for Industry (ATI) monitor, providing qualitative and quantitative data on technological development and trends. The communication on A new ERA for Research and Innovation was adopted in September, proposing a revitalised European Research Area (ERA) with a forward-looking agenda. Horizon Europe introduces a more strategic approach to partnerships and ensures that these partnerships are aligned with EU priorities and inter alia key drivers for industrial innovation and competitiveness [1] . In September, the Commission proposed a new regulation, providing a substantially larger budget for the EuroHPC JU (high performance computing Joint Undertaking). The recently formed Quantum Industry Consortium (QuIC) will be the voice of the quantum industry in Europe ensuring a sustainable and competitive business environment. In February 2021, the Commission proposed to set up another ten institutionalised partnerships under Horizon Europe, aiming to improve EU preparedness and response to infectious diseases, develop efficient low-carbon aircraft for clean aviation, support the use of renewable biological raw materials in energy production, or make rail transport more competitive. This list included the Key Digital Technologies JU will consolidate European companies present at different levels of the semiconductor value chain. Administrative burden for businesses has been reduced with the implementation of the Single Digital Gateway Regulation. 3.5.Skilling and reskilling

The Commission is placing skills at the heart of the EU policy agenda, steering investment in people and their skills for a sustainable recovery. The European Skills Agenda adopted in July 2020 sets ambitious objectives for upskilling and reskilling for the next 5 years including for skills needed for the green and digital transitions. This was followed by the Pact for Skills in November and building on the Blueprint for Sectoral Cooperation on Skills, the Digital Skills and Jobs Coalition, and the European Alliance for Apprentice­ships. The Pact supports the setting-up of large-scale partnerships in strategic industrial ecosystems and value chains and the priority areas identified in the European Green Deal to achieve ambitious commitments. The first European skills partnerships in key industrial ecosystems were announced. The Commission also adopted two important initiatives in September. The vision for a European Education Area to be achieved by 2025, sets out actions for quality, inclusion and gender equality, green and digital transitions, teachers, higher education, and a stronger Europe in the world. It also promotes quality investment in education and training as well as stronger cooperation among Member States. The new Digital Education Action Plan presents a plan for a high-performing digital education ecosystem with enhanced digital competences for the digital transformation. The Commission has also launched a pilot digital volunteers’ programme promoting the transfer of knowledge between high-tech experts and SMEs. The renewed European Alliance for Apprenticeships was launched in July, helping SMEs by providing a stable supply of quality and effective apprenticeships and mobilising local and regional authorities. Gender equality must be a common principle of all our actions. The Gender Equality Strategy 2020-2025 delivers on a number of crucial issues to advance gender equality in the EU. One of them is promoting gender balance in ICT studies and careers. 3.6.Investment and financing Investment and finance were already critical for Europe’s companies. But the crisis has made this all the more critical. The EU has responded, most notably with agreement on the Multiannual Financial Framework (MFF) for 2021-2027 in December, providing a long-term EU budget of EUR1 074.3 billion. Together with the Next Generation EU recovery instrument of EUR750 billion, it will allow the EU to provide an unprecedented EUR1.8 trillion of funding over the coming years to support recovery and the EU's long-term priorities across different policy areas. At the heart of Next Generation EU, the Recovery and Resilience Facility will help Member States address their structural challenges, as well as accelerate a just transition towards a greener, digital and more resilient economy. To support the transitions to sustainability and digitalisation, the Commission is also putting forward a renewed Sustainable Finance action plan and is delivering on its Digital Finance strategy launched in September 2020. The EU Taxonomy Regulation was published on 22 June 2020 and entered into force on 12 July 2020. The Taxonomy Regulation establishes six environmental objectives on which delegated acts will set out the criteria of significant contribution, do no significant harm and other requirements. At the same time, the new Capital Market Union action plan proposed 16 legislative and non-legislative actions to make financing more accessible to European companies and create a true single market for capital. Finance will be particularly important for Europe’s SMEs. The Commission has advanced on the implementation of ESCALAR, a first of a kind risk/reward mechanism to boost the size of venture capital funds and crowd in private investments for scaling up. The Commission is also working on the products of the InvestEU’s SME window including a single integrated guarantee facility and will support equity financing for SMEs and small midcaps. In this context, the Commission is working on establishing a public-private SME IPO fund to help SMEs grow and access further sources of financing through public listings, in order to complement the range of already-existing public support measures at earlier funding stages and strengthen SMEs’ growth pipeline. To support top-class innovators, entrepreneurs, small companies and researchers, the Commission has launched a European Innovation Council (EIC) to provide funding and opportunities for ideas that are radically different from existing products, services or business models, are highly risky and have the potential to scale up internationally. The budget is over EUR10 billion for 2021-27 of which over EUR 1.5 billion is available for breakthrough technologies and innovative start-ups in 2021 with targeted funding for Green Deal innovations and strategic digital and health technologies. The Innovation Fund under the EU Emissions Trading System was also launched in 2020, providing more than EUR 14 billion by 2030 for low-carbon innovative clean-tech investments in energy intensive industries, renewable energy, energy storage and carbon capture, use and storage applications over this decade. The EU ETS Modernisation Fund with more than EUR 16 billion is already available to support its ten beneficiary Member States to modernise their energy and industrial systems. Pooling resources towards identified common priorities is equally essential. Important Projects of Common European Interest (IPCEI) provided for by Article 107(3)(b) TFEU help to catalyse investment in ground breaking innovation. Three IPCEIs have been put in place on batteries and microelectronics, the most recent one being the ‘European Battery Innovation’, the second IPCEI on innovations in the battery value chain which brings together 12 Member States that will provide up to EUR2.9 billion in funding in the coming years. This is expected to unlock an additional EUR9 billion in private investments. 22 Member States signed a manifesto to collaborate for the development of the European hydrogen value chain, including with one or more possible IPCEIs. In addition, in December, 19 Member States signed a declaration agreeing to work together towards a forward-looking IPCEI on microelectronics which also seeks to develop innovative and sustainable chips in Europe. 3.7.Reinforcing Europe’s industrial and strategic autonomy The Industrial Strategy committed the Commission to a reinforced industrial and open strategic autonomy. The Commission adopted a Pharmaceutical strategy for Europe. The aim is to better identify the challenges and assess the need for measures and actions aimed at strengthening the resilience of pharmaceutical supply chains and ensure the security of supply of medicines. The Commission has also launched an R&I partnership on Pandemic preparedness under Horizon Europe. The Action Plan on Critical Raw Materials and the 2020 List of Critical Raw Materials were adopted in September, setting out the challenges for a secure and sustainable supply of critical raw materials and actions to increase EU resilience and open strategic autonomy. In July, the Commission published a Report on Member States’ Progress in Implementing the EU Toolbox on 5G Cybersecurity. The Commission also addressed the status of implementation and next steps as part of the Cybersecurity Strategy adopted in December. An Action Plan on synergies between civil, defence and space industries was adopted in early 2021. 3.8.A new governance approach Since the adoption of the Industrial Strategy, the Commission has reinforced its partnership approach to industrial policy. In particular, it has continued to promote the development of industrial alliances to bring stakeholders together to contribute to the delivery of the twin transitions and open strategic autonomy in an open, transparent, diverse and inclusive way. Stakeholder collaboration in targeted industrial alliances may be helpful to address strategic dependencies (e.g. batteries), build a value chain in future growth markets (e.g. clean hydrogen), jointly develop research and innovation or change business models from supply and demand perspective (e.g. circular plastics). This experience builds notably on the success of the Batteries Alliance. The European Battery Alliance has helped to support manufacturing projects along the battery value chain at scale - some €100 billion in investment has been committed. It has also facilitated the design by several Member States of two Important Projects of Common European Interest (IPCEI) with in total EUR 6 billion approved State aid for research and innovation in the battery value chain, unlocking an additional EUR 14 billion in private investments. It has also led to a Blueprint Skills Programme for Batteries to develop a highly skilled workforce along the value chain and an interregional cooperation on advanced batteries materials involving 28 regions. Battery cell production in the EU is estimated to lead to 60 – 90,000 direct jobs and around 180,000 upstream jobs by 2030. If electric vehicles are taken into account as well, the most optimistic assessment estimates that the transition to electric mobility could create about 800,000 new jobs by 2025. In July, the Commission launched the European Clean Hydrogen Alliance, aiming at scaling up clean hydrogen production to 40 GW by 2030 and boosting demand for clean hydrogen in industry and mobility to achieve climate-neutrality. The European Clean Hydrogen Alliance has brought together more than 1,000 stakeholders along the value chain and is developing a pipeline of investment projects to deliver on the objectives of the hydrogen strategy for a climate-neutral economy.

In September, it launched the European Raw Materials Alliance in September 2020 to secure access to critical and strategic raw materials. But the Commission has also moved to promote wider partnership in industry, most notably through the Industrial Forum established in December and composed by representatives from all Member States and a wide range of stakeholders to support the Commission in the systematic analysis of problems faced by industrial ecosystems and areas for cross-ecosystem and cross-border collaboration. The EU Industry Days most recently held on 23-26 February 2021 as well as the reinforced SME envoy network 4.Conclusion The COVID-19 crisis has been an acid test of European businesses, European and national public authorities and above all, the commitment to the Single Market. The unilateral restrictions put in place caused major disruptions, causing as yet unquantifiable damage to European businesses, and severely impaired the ability of the EU to respond. Individual ‘industrial ecosystems’ such as tourism and mobility were particularly badly affected. And this came on top of a number of existing barriers to companies operating within the Single Market. The EU and the Member States must draw the lessons from the crisis. Despite extensive action to address its consequences, the crisis highlighted the importance of keeping a fully functioning Single Market and of European solidarity. This reminder would be expected to continue to guide the EU’s actions in the coming years, be it to remove remaining obstacles to the Single Market or by working together at all levels to deliver on the EU’s green and digital ambitions, ensure Europe’s resilience and increase its long term competitiveness, as highlighted in the linked Communication “Updating the 2020 New Industrial Strategy: Building a stronger Single Market for Europe’s recovery” (“the Industrial Strategy Update Communication”. The strategies set out in the March 2020 Single Market Enforcement Action Plan, Industrial Strategy and SME Strategy remain valid. Considerable progress was achieved in their implementation, but it is important to now build on the successes of the first year of implementation, support the recovery and accelerate the twin transition towards digitalisation and sustainability. This Report is offers an analytical underpinning to those efforts as presented in the Industrial Strategy Update Communication. Commission services will therefore provide annual updates.



Annexes A1. State of play of the implementation of the Single Market Enforcement Action Plan A2. Overview of the implementation of the Industrial Strategy and the SME Strategy A3. Industrial ecosystems fiches A4. Key Performance indicators – Methodology and Overview

Annex 1 State of play of the implementation of the Single Market Enforcement Action Plan To allow the Single Market to work for all and to drive our industry forward, common rules must be implemented and enforced across the EU. Based on a renewed partnership between Member States and the Commission and taking into account the findings of the Communication on barriers to the single market the Single Market Enforcement Action Plan presents some horizontal measures and 22 specific actions, with the objective to maximise the effectiveness and efficiency of compliance and enforcement across the EU. In the first year of implementation of the Action Plan, the Commission, in close collaboration with the Member States, completed a number of actions to strengthen joint efforts in this area. Since the adoption of the Single Market Enforcement Action Plan on 10 March 2020, there has been progress on: 1.promoting increased knowledge and awareness of Single Market rules among national authorities, courts, citizens and businesses;

2.remedying incorrect transposition, implementation and application of EU rules; 3.preventing national measures in Member States from going against EU law; 4.preserving the smooth functioning of the Single Market by detecting non-compliance; 5.strengthening enforcement and 6.improving the handling of infringement cases. The joint Single Market Enforcement Task-Force (SMET), set up by the Single Market Enforcement Action Plan, plays an essential facilitating role as a high-level forum where the Commission and Member States collaboratively seek solutions for addressing Single Market obstacles rooted in enforcement or implementation deficiencies. SMET is an important new tool with a significant role to ensure that the Single Market works properly and to continue reducing regulatory burdens. In this context, SMET prioritises and addresses barriers that hamper the full functioning of the Single Market for all key ecosystems, notably when their root causes lie in incorrect or incomplete implementation and enforcement as identified in the Single Market Enforcement Action Plan and the Single Market Barriers Report. SMET can also be convened when needed to address single market issues that call for rapid action, as was, for instance, the case with the emergency SMET meeting, called to discuss and assess Member States’ newly introduced controls of internal borders and measures on travel restrictions that restrict the free movement within the EU. SMET’s inaugural meeting took place on 7 April 2020 at the outbreak of the COVID-19 crisis to ensure the good functioning of the Single Market and allow the free flow of goods across EU borders. At this ad hoc meeting, SMET successfully addressed issues hampering the correct functioning of the Single Market due to COVID-19, such as intra-EU export restrictions of vital protective, medical and medicinal supplies, border controls and the need to increase production of essential equipment. The discussions in SMET showed a strong collective awareness that national intra-EU export bans or restrictions in one Member State risked creating shortages in other Member States. Since then, SMET had four formal meetings. Member States started by identifying the five most pressing obstacles to the well-functioning of the Single Market and, with the Commission, discussed actions that can help tackling a number of the top barriers indicated in the Single Market Barriers Report, matching those that were raised by Member States. To address such barriers, SMET set out a prioritised work plan in order to deliver clear results in a short time. The Task Force agreed to work on a three pillar work plan: 1) abolishing the remaining COVID-19 related barriers, notably in the agri-food sector; 2) addressing priority barriers identified by Member States and the Commission regarding national enforcement and implementation issues, such as insufficient information, complex administrative procedures, lack of digitalised procedures and barriers in professional services; and 3) reinforcing the Single Market to support the recovery. According to the agreed work plan, SMET discussed five pilot projects with concrete actions addressing concrete barriers in the agri-food sector, the free movement of professionals, the construction sector and the posting of workers. More specifically, these proposed projects will address: 1) protectionist measures in the agri-food sector; 2) certification schemes in construction services and non-harmonised construction products; 3) cross-border restrictions for professionals; 4) elimination of document requirements in relation to the recognition of professional qualifications; and 5) administrative burdens associated to the Posting of Workers. The objective of these concrete projects is to deliver tangible results with quick effect. SMET concluded that the barriers presented and discussed are a priority and should be eliminated. SMET, therefore, mandated the ‘SMET Sherpa Group’ to put in place the necessary steps with the administrations of each Member State and to report to SMET on the progress of their work. On 19 February 2021, an emergency SMET meeting took place to address a large number of travel restrictions and newly introduced controls of internal borders that Member States put in place in the context of increasingly tense situations and the new COVID-19 variants in most areas across Europe. SMET agreed on the need to ensure the good functioning of the Single Market, especially as regards the transport of goods and the cross-border economic activities in coherence with the measures agreed in coherence with the COVID-19 related guidance and recommendations. Furthermore, SMET agreed on the importance to preserve the functioning of the “Green Lanes” and the close coordination among Member States and the Commission in line with the revised Council Recommendations 2020/1475. Together with the network of national SME envoys and the EU SME Envoy, the SMET will also address gold-plating in the transposition process of EU directives to keep the regulatory burden on SMEs to a minimum. To promote the enforcement of a Single Market in a bottom-up approach, the Commission has launched a call for pioneer partnerships among border regions at the end of 2020, encouraging regional authorities to cooperate in addressing market barriers. The SMET complements the Cooperation network between national enforcement coordinators. Making use of the existing Internal Market Advisory Committee (IMAC), the cooperation network held its first meeting on 24 November 2020. It allows the Commission and Member States to exchange information and best practices and explore possibilities to improve coordination and communication on specific enforcement matters amongst Member States’ authorities. For general issues relating to the transposition and implementation of EU law by Member States and to the broader enforcement policy of the Commission, the services of the Member States and the Commission regularly meet in the EU Law Network, an expert group dedicated to sharing knowledge and exchanging best practices in this area. To reflect better the needs of the end users in the Single Market and to support the European Semester, the Single Market Scoreboard is being upgraded. As to the content of this update, following the recommendations of the study published in May 2020 , consultations were carried out with stakeholders and with Member States, focusing on the expansion of the scope and the selection of new policy areas and indicators. As to the IT system, a new system is being upgraded, which would address the policy and user needs. The database and data visualisation tool enables users, for their own research and policy needs, to access the wealth of data and to compare thematic datasets and performances across time and Member States . 1.Increasing knowledge and awareness of Single Market rules A first series of actions of the Single Market Action Plan aims to increase knowledge and awareness of Single Market rules among national authorities and courts as well as citizens and businesses.

Firstly, guidance helps to improve the application and enforcement of EU principles and rules. The Commission, therefore, adopted a number of guidance documents to increase knowledge of Single Market rules. In the area of goods, the Guidance on the application of Regulation (EU) 2019/515 of the European Parliament and of the Council of 19 March 2019 on the mutual recognition of goods lawfully marketed in another Member State is to help both, businesses and authorities in the application of Regulation (EU) 2019/515. The Commission presented and explained these rules to many business associations and maintained close contacts with the national competent authorities responsible for the application of this regulation. The Guidance document on Article 4 of the Market Surveillance Regulation sets out practical guidelines for the implementation of Article 4 of Regulation 2019/1020 that requires that an economic operator in the EU should provide f