Source: http://spotidoc.com/doc/166220/the-european-single-market-%E2%80%93-how-far-from-completion%3F
Timestamp: 2018-05-23 13:11:59
Document Index: 345561702

Matched Legal Cases: ['CJEU ', 'Art. 26', 'Art. 26', 'Art. 26', 'Art. 345', 'Art. 26', 'Art. 26']

The European Single Market – How Far from
In 2012, the European Single Market will celebrate its 20th anniversary. Thanks to the May 2010
Monti report and the release of the European Commission’s “Towards a Single Market Act”
six months later, renewed scrutiny is being given to the market’s achievements and failings
over the previous two decades. In this issue’s Forum, our authors analyse this progress from
diverse viewpoints and draw different conclusions as to the future path to be taken.
The single market is back! Or was it ever gone, actually?
Following the Monti report of 2010 and the 50 suggestions by the European Commission for a Single Market
Act, the single market has returned to the Union’s list of
high priorities. Does that mean that the internal market
had been forgotten for two decades? What progress was
made in this period? How can one appreciate the accomplishments so far and hence the integration deﬁcits which
ought to be overcome for EU economic growth and productivity as well as for its legitimacy with citizens, workers
When Mario Monti came out with his insightful and strategic report on 9 May, it was overwhelmed by the enormous
attention being paid to the ﬁnancial rescue of Greece’s
sovereign debt at that time. The ambitious Grech report
endorsed by a very large majority of the European Parliament1 suffered more or less the same fate. Earlier in
2010, the new European Commission had published its
EU2020 strategy2, and despite Barroso’s request to Prof.
Monti to write a strategic single market report, the internal
market did not ﬁgure prominently in EU2020.3 Everything
seemed to militate against the single market becoming a
Report on delivering a single market to consumers and citizens, Rapporteur Louis Grech, 3 May 2010, A7-0132/2010.
European Commission: Europe 2020, A strategy for smart, sustainable and inclusive growth, COM (2010) 2020, 3 March 2010.
In fact only a small section appears in the text, almost as an afterthought
and under the misnomer “Missing links” in section 3.1. Four of the seven
“ﬂagships” comprise single market elements but they are not presented
as such. For more details, see e.g. Jacques P e l k m a n s : Single Market
Revival, CEPS Commentary, 17 March 2010, at www.ceps.eu.
renewed priority for EU political leaders. Meanwhile, this
might have changed with the European Commission’s 50
suggestions4 and the active consultation which followed.
The proposed Single Market Act is now expected late in
the spring of 2011. The judgment is still out, however. The
European Council will have to turn away from its almost
obsessive exercise of repairing the Stability and Growth
Pact with a Pact for the Euro (combined with the Stability
Fund), meant to pre-empt or minimise a future sovereign
debt crisis, but doing little to improve the underlying EU
framework and incentives to return to a (higher) growth
path. A revival of a credible and ambitious single market strategy is a painstaking undertaking and it requires
a ﬁrm and relentless commitment from political leaders
in order to make signiﬁcant progress over several years.
Without this commitment, if leaders only pay lip service,
progress is bound to be little different from the splintered
and haphazard low-key approaches we have seen ever
since 1993. Moreover, EU political leaders must be seen
as standing just as ﬁrm as they do in domestic politics
when it comes to internal market questions.
This article will take stock of the internal market accomplishments of the last 25 years, as a backdrop to the current single market debate. The main reason for doing this
European Commission: Towards a Single Market Act, for a highly
competitive social market economy, COM (2010) 608, 27 October
2010. Note that the Commission issued the EU Citizen report 2010,
Dismantling the obstacles to citizens’ rights, COM(2010) 603, on the
same date, with another 25 actions, presumably in response to the
Monti report’s insistence on improving legitimacy with EU citizens.
Intereconomics 2011 | 2
is that most EU observers and practically all citizens have
lost track of where the single maket is today. Indeed,
many are wondering why the once proudly announced
“completion” of the internal market (the title of the famous
1985 White paper for EC1992) is called into question time
and again. Why does the EU regularly come back with
new “strategies” to deepen and widen the internal market
and why should the Single Market Act be a top priority
Harmonisation under “old” approach (e.g. tractors,
etc.) + 160 SPS measures
Approximation under “new approach” (large markets,
e.g. machinery)
Global approach of conformity assessment (based on
No inner ﬁscal frontiers for goods trade (new VAT +
excise duty system)
In order to appreciate what was realised under EC1992,
one ﬁrst needs to recall the starting point in 1985. The EU
at the time was little more than a “customs-union-plus”.5
One also needs to remember what the 1985 White paper
comprised and what was actually accomplished from the
list of nearly 300 proposals. Whereas normally in EU affairs there tends to be a lot of difference between ambition and realisation, that is not the case for EC1992. By
late 1992, some 95% of the proposals had been adopted. Much less known is that a lot more was tackled than
announced in the White Paper. Table 1 sketches what
EC1992 accomplished.
Free movement of ﬁnancial services (banking, insurance, securities)
New, more general mutual recognition approach in
Open, competitive public procurement/public works
(iii) stricter conditions for national public R & D funding
and for national regional aid
EC1992 is so famous for three reasons. First, the sheer
ambition of the programme was reﬂected in the large
number of intra-EU liberalisation and EU regulation measures: in fact, far more than 300 in the ﬁnal analysis. Second, a series of extremely hard issue areas were tackled
successfully. This point is worth noting because memories are fading quickly. Assertions, heard in the current
debate on the Single Market Act, that EC1992 was not really so difﬁcult after all, constitute a curious instance of
circular reasoning. True bastions of protective national
regulation (like insurance and securities or airlines) had
to be demolished. Removing inner frontiers was initially
regarded as unfeasible. Arriving at common regulations
and mutual trust in veterinary and phyto-sanitary rules
(some 160 SPS directives and regulations in highly sensi-
Liberalisation & regulation of six modes of transport
(rail symbolically)
Economic cohesion policy with much larger funding
tive areas such as foot and mouth disease, etc.) was most
controversial. A common merger control had been ﬂatly
refused by three big EU countries for 16 years. The abolition of national quotas of selected third countries’ clothing products and cars – one of the many items accomplished but not mentioned in the White Paper – turned
out to be a painful struggle implying the abolition of the
Summarising, free movement of goods was tariff and quota free,
but regulatory barriers were numerous and permanently increasing.
There was a common external trade policy but again mainly for goods
and restricted to border issues. Free movements of services, capital
(six out of the ten EU countries at the time still had exchange controls)
and workers were severely restricted. In 1985 the CJEU condemned
the Council of Ministers for a “failure to act” on a common transport
policy. The CAP was so distorted that intra-EU trade in agricultural
goods was subject to “green exchange rates” and numerous speciﬁc
interventions. EU competition policy was reasonably credible but
merely concerned goods markets, lacked a merger control policy and
still had no teeth in state aids control. For extensive analysis see J.
P e l k m a n s : Completing the internal market for industrial products,
Luxembourg 1986, Ofﬁce for Ofﬁcial Publications of the European
Jacques Pelkmans, CEPS, Brussels, and College
of Europe, Bruges, Belgium.
Hans-Peter Burghof, University of Hohenheim,
Multiﬁbre Arrangement (linked to the Uruguay Round but
only fully completed by 2005) and doing away with the
voluntary export restraints (and the Italian quotas) for
Japanese cars much later in the 1990s.
Third, the innovativeness and originality of EC1992 is
yet another reason for its fame. The new and global approaches, based on what can be called “regulatory mutual recognition”, constitute early examples of “better EU
regulation”. Turning away from the heavy-handed and
extremely detailed old approach of regulating literally
everything concerning a good and its components, often
even its design, as well as testing details and inspection
or approvals, the new approach only deﬁnes common
regulatory objectives of safety, health, environment and
consumer protection, and possibly some further reﬁnements if the scope is very large (e.g. the machines market covers more than 40 000 types), and recommends
that technical details for (voluntary) European standards
be written in full conformity with these objectives. This
makes sense because what the EU legislator ought to
do is no more than overcome market failures (by adhering to these objectives) and ensure a robust system for
reference to standards and the associated conformity
assessment (i.e. the global approach) so that free movement of these goods is guaranteed for producers and
traders. This type of “co-regulation” has proven far less
costly and rigid, whilst facilitating fairly rapid agreement
on a range of directives with a huge number of goods
and allowing innovation, too.6 The approach in banking
(with home country control of banks, mutual recognition
between national authorities of this control and an EU
passport for subsidiaries) and to some degree in insurance (for example, distinguishing “mass risks” of groups
of consumers, subject to asymmetry of information, and
“large risks” of enterprises) was entirely novel. It should
also be noted that the long postponed free movement of
transport services, called a “common transport policy”
in the treaty, was accomplished without heavy-handed
regulation or other interventionism.7
The ambition and success of EC1992 in deepening and
widening notwithstanding, the EU internal market was not
“completed” in 1993. One can wax philosophical about
what a “completed” internal market would actually look
like. When comparing the contemporary internal markets
of the USA, Canada, Australia, Switzerland (all federal
countries) and the EU, which are all “deep” and have a
wide scope, the differences are striking.8 A benchmark for
the EU can be deﬁned, however. The crux is in Art. 26,
TFEU.9 A full analysis cannot be provided here, but the
principal weaknesses of this Article are the following:
• Art. 26/1 should replace “or” with “and” in “establishing or ensuring the functioning”. This is not a trivial
matter; better still, the article should specify “proper
functioning” because it is only the “proper functioning”
of the internal market which will best serve the socioeconomic goals of the treaty. The internal market is
the “workhorse” of the treaty in promoting growth and
productivity increases, insofar as the EU level can do
that. Proper functioning refers to the optimal working
of markets in the EU so as to induce reallocation and
dynamic effects. The term “proper functioning” would
induce greater discipline by not allowing all kinds of
soft, half-baked solutions.
• Art. 26/2 should include (besides goods, services,
persons and capital) “codiﬁed technology”, usually
encapsulated in intellectual property rights (IPRs). The
treaty is still saddled with a major drafting ﬂaw from
the Rome treaty and this solution would remove it immediately. Art. 345, TFEU says that the treaties “shall in
no way prejudice the rules in Member States governing the system of property ownership”. It underlies the
absurd veto of the European patent. The original article
should have distinguished a national system of ownership (e.g. land, state-owned enterprises, etc.) from
issues of IPRs. There is no sound reason why almost
For details, see J. P e l k m a n s : The demise of intra-EU technical barriers?, in: M. B u l t e r m a n et al. (eds.): Views of European law from the
mountain, 2009, Liber Amicorum Piet Jan Slot, New York/Alphen ad
Rijn, Wolters/Kluwer, pp. 59-72.
In road haulage, all that was regulated were safety requirements (e.g.
total driving hours per day; the equipment requirements were harmonized, e.g. max. weight on axles) and some social provisions to
protect drivers. Cabotage was granted, be it only after some delay.
Of course, the abolition of ﬁscal and customs frontiers was also critical for road transport. In air transport, the intra-EU regime is similarly
“light” and monopolies were quickly removed. Safety inspections of
aircraft, already strict, were Europeanised. The lingering problems after 1992 consisted mainly in state aids and bilaterals with third countries, see below.
For a detailed comparison of those ﬁve internal markets, see G. A n d e r s o n (ed.): Internal markets and multilevel governance, Toronto
2011, Oxford University Press, forthcoming. In 1988 the Cecchini
group attempted to come to grips with the notion of an internal market
in a detailed study of the internal markets of Canada and of the USA,
comparing them with the implicit notion of EC1992. See J. P e l k m a n s , M. Va n h e u k e l e n : The internal markets of North America,
fragmentation and integration in the US and Canada, Research on the
Cost of ‘non-Europe’, Basic Findings (background reports), Vol. 16,
Luxembourg 1988, Ofﬁce of Ofﬁcial Publications of the EC.
It reads as follows. Art. 26/1: “The Union shall adopt measures with
the aim of establishing or ensuring the functioning of the internal market, in accordance with the relevant provisions of the treaties”. And
Art. 26/2 : “The internal market shall comprise an area without internal
capital is ensured in accordance with the provisions of the treaties”.
all vetoes on progress on free movements have disappeared but not those concerning codiﬁed technology.
A European patent does not take away or endanger
any private “ownership”, but it is critical to enjoy free
movement of codiﬁed technologies, so crucial for innovation and growth.
• Another weakness is entrenched. The innocent phrase
“in accordance with the (relevant) provisions” of the
treaties becomes problematic if sections of the TFEU
are still more or less as they were in the Rome treaty,
although long proven to be inadequate. This is the case
for services and to some extent labour, and it severely
hinders the accomplishment of a fully ﬂedged internal market in these two submarkets. Moreover, there
are several other weaknesses in the treaty, including
problems concerning the conferral of powers (for example, the Meroni doctrine, blocking the option of having independent regulatory agencies at EU level) and
subsidiarity, which tend to be protected by this phrase.
If indeed a “completed” internal market were wanted,
some of these provisions would have to be either redrafted or reinterpreted by the EU Court of Justice in
the light of the overriding importance of “completing”
the internal market, including its proper functioning.
Given these weaknesses, a “completed” internal market
is a fata morgana. Nevertheless, one can proceed far beyond the status of early 1993, even though in services and
labour some integration deﬁcits are likely to remain and
problems concerning the insufﬁcient conferral of powers
to the EU level will continue to plague certain submarkets.
In the 18 years since EC1992, much has been achieved in
terms of the deepening and widening of the internal market. With the political leadership paying far less attention
than before, and lacking a vision as well as a ﬁrmly agreed
upon benchmark, the progress has been fragmented over
many areas, frequently only known well by specialists. At
the same time, with further deepening, the treaty weaknesses speciﬁed above have become more pronounced,
and complicated suboptimal solutions have had to be
In order to appreciate progress to date, it is useful to distinguish the deepening of the acquis from a widening of
scope. Although the line cannot always be sharply drawn,
the widening of the scope of the internal market was required even after EC1992. Examples of widening include
the opening up (and regulation of) network industries, the
Europeanisation of IPRs other than the patent, the EU
(carbon) emissions trading system and the prudent liber-
alisation and facilitation of intra-EU exchange in military
goods, beyond dual purpose goods. Given the text of the
Maastricht treaty, especially the Social Dialogue, one may
include a series of minimum requirements directives in labour markets as well. Deepening refers to the EU acquis,
which is somehow not leading to sufﬁcient market integration due to shortcomings or gaps (or remaining distortions), and these inevitably induce pressures to complete
(deepen) that part of the EU acquis. Often, this is combined with modernisation for all kinds of reasons.
In Figure 1 a summary is provided of progress to date.
A few comments might be helpful. Deepening typically
comes in “generations” of EU legislation for certain markets or activities. A prominent example is ﬁnancial services markets, where Figure 1 indicates a 3rd and a 4th generation of regulation. The 3rd generation was the Financial
Services Action Plan using the Lamfalussy procedure,
from 2000 to 2005. It built on the second generation originating from the EC1992 process. The idea was to radically
liberalise securities trade (at ﬁrst still suffering from signiﬁcant host country control which tends to maintain fragmentation) in the Markets in Financial Instruments Directive and otherwise upgrade and reﬁne the banking and insurance directives as well as deal with accounting standards, corporate restructuring and selected supervison
issues. The driving forces included the euro, Basel II, and
gaps and omissions in the second generation, against the
backdrop of rapidly consolidating equity markets.
However, the ﬁnancial crisis which broke out in 2008 demonstrated that, despite the improved and more complete
texts, the underlying solvency (e.g. capital requirements)
and risk management standards were hopelessly weak,
whilst supervision was both failing and insufﬁciently coordinated in the EU as a whole. Much has been analysed
but one recent paper stands out as particularly interesting. Barrell et al. show empirically that large banks, perhaps “too big to fail”, may take greater risks than smaller
institutions, thereby aggravating systemic risks still further. For a sample of no less than 713 OECD banks, the
authors show that size is indeed related to risk-taking and
that banks with high proportions of Tier 2 capital are particularly vulnerable to adverse incentives.10 This prompted
the fourth generation of ﬁnancial services regulation and
supervision, which is now approaching its ﬁnal stages.11
10 See R. B a r r e l l , E. D a v i s , T. F i c , D. K a r i m : Is there a link from bank
size to risk taking?, NIESR Discussion Paper No. 367, London 2010.
11 Since the FSAP was also highly technical, one improvement, initiated
around 2000, was actually adopted only in 2009, when the 4th generation was in full swing. It is the sophisticated Solvency-II directive
for insurance. The extremely detailed so-called level 3 (of Lamfalussy)
implementation questions, which might eventually add up to far beyond 10 000 pages of methodology of risk assessment, etc., will have
to be available by 2013.
s 3rd generation EU regulation (selective) s 2008 Goods Package (+ MR)
s REACH (chemicals)
financial services (FSAP)
s Adaptation Old Approach
sææ4th generation (id.)
(+ simplif. food specific dir.)
s Opening up of 6 network
s EU Medicinal, Chemical,
industries (in stages)
s EU Agencies (Safety, Air,
s EU emission trading system
Maritime, Rail; Air Traffic)
& climate policy
s Horizontal services
s Prudent liberalisation of EU
SM in defence goods
s MR for professionals s Stock exchanges;
s EU trademarks
s Minimum labour
standardised cross
market reg +
300 sectoral
border securities trade s Other EU IPR,
(copyright design)
N o t e s : 1. Modernisation of EU competition policy; 2. RIAs (since 2003)
and better regulation; 3. Better inter-MS horizontal/adm. cooperation;
4. Public procurement, 2nd generation.
Similar remarks can be made of the 2008 goods package (second generation of the global approach and improved protection of mutual recognition), the REACH
regulation on chemicals (second generation overhaul,
with an EU Agency and far-reaching risk assessment)
and the 2004 second generation of public procurement
rules (indicated as one of the four horizontal forms of
deepening at the bottom of Figure 1).
Figure 1 shows that a lack of strategy does not mean
that nothing happens. The widening to the six network
industries (telecoms, post services, gas and electricity,
and the two networked transport sectors, rail and airlines, none of them in the 1985 White paper) has been
a major instance of progress. Still, these dossiers, too,
were opened up in stages. Thus, telecoms (eComms)
has now gone through three generations, beginning in
1998, and the beneﬁcial economic effects have been
enormous. Yet, even today, the competition is essentially “national” and an internal eComms market is simply absent.12 The fundamental reason is the ﬂawed EU
governance model, including the legal (and political)
difﬁculty of setting up a genuine EU regulatory Agency
given the Meroni doctrine. Interestingly, the postal, gas,
electricity and rail sectors have all gone through three
generations. Another instance worth noting is the hori-
12 As is shown, with ample empirical evidence, in J. P e l k m a n s , A.
R e n d a : Single eComms market? No such thing…, CEPS Policy
Briefs, No. 231, January 2010, see www.ceps.eu.
zontal services directive 2006/123 (once proposed as
the Bolkestein draft) which has led to the far-reaching
screening of thousands of national and regional laws
and signiﬁcantly improved market access for establishment (the critical mode for services provision). It is predictable that it will be followed by another generation of
revision; the question is when. Furthermore, a number
of EU Agencies for safety (in transport), for risk assessment (e.g. EFSA for food, ECHA for chemicals) and for a
still wider technical assessment (EMEA for medicines)
have been founded. Though not fully independent, their
expertise provides the space to depoliticise such issues in the general European interest (except, so far, the
touchy issue of genetically modiﬁed organisms). Finally,
the four horizontal improvements (bottom of Figure 1)
improve the quality of internal market regulation and
implementation, whilst reducing the costs of both EU
regulation and EU competition policy.
The core economic business of the Union is its internal
market, and for good reason. It is the principal route, at
the EU level, for promoting the socio-economic goals
of the EU, and it forms the essence of the E of EMU,
crowned by the euro. After the ambitious and successful EC1992 programme, another two decades of haphazard but nonetheless signiﬁcant deepening and widening of the “single market” has taken place. In 2011,
the internal market is no longer comparable to the status quo of 1993. But the lack of strategy and vision or
benchmark has a price: political attention becomes
fragmented over many separate markets or activities
and the overall economic purpose of the EU economy
gets lost.13 It required a strategic and yet detailed report
by Mario Monti to lay down the foundations of a new
strategy, both key for enhancing economic growth and
careful to improve legitimacy with citizens and others in
Europe. It creates fertile soil to make the case for more
internal market once again, building on achievements
already made since 1993.14 EU lawmakers and the political leaders of the Member States should give it the
highest priority, now.
13 For a critical analysis of the lack of strategy and its consequences,
see J. P e l k m a n s : More internal market without strategy?, in: H.
G u i m a r a e s , A.P. F a r i a (eds.): Product market integration, a multifaceted approach, 2010, Emerald Publishers.
14 See also J. P e l k m a n s : The Case for “More Single Market”, CEPS
Policy Briefs, No. 234, February 2011, see www.ceps.eu.
Monique Goyens*
Will the European Single Market Finally Become a Reality for EU
In 2012, the Single Market will celebrate its 20th anniversary and undergo a relaunch, which was kicked off by
the Monti report.1 However, an impetus just as important,
though less prominent, was the European Parliament report devoted to “Delivering a single market to consumers
and citizens”2, followed by the Commission Draft Single
Market Act published in November 20103, which opened
a public consultation combined with a hearing and conferences intended to identify the priority measures the EU
must take to complete the Single Market.
It is therefore a perfect time to assess the results of the
Single Market policy from the consumer perspective and
to analyse the ongoing consultation process with a view to
optimising the impact of this policy on consumer welfare.
A market ﬁnds its substance in its customers. Therefore,
it is crucial that any policy aimed at improving the functioning of a market, be it local, national, European or international, gives proper consideration to the consumer
perspective of a properly performing market. This is why
this article will brieﬂy deﬁne the initial consumer expectations of the EU Single Market as created in 1992, then turn
to identifying its current shortcomings and ﬁnally suggest
an assessment of the present Commission approach as
reﬂected in the Single Market Act.
This article was partly drafted with reference to the position prepared
by BEUC, the European Consumers’ Organisation, in response to the
public consultation launched by the Commission on its proposal for a
Single Market Act. This position is the result of collective thinking and
evidence gathered by the policy ofﬁcers from the BEUC secretariat
and the experts from BEUC member organisations. For more information, visit www.beuc.eu.
“A new strategy for the single market at the service of Europe’s economy and society”, Report to the President of the European Commission José Manuel Barroso by Mario Monti, May 2010,
http://ec.europa.eu/bepa /pdf/monti_report_final_10_05_ 2010_
European Parliament report on “Delivering a single market to consumers and citizens”. Rapporteur: Louis Grech, May 2010,
ht tp://w w w.europarl.europa.eu /sides /getDoc.do?pubRef=-//
E P// N O N S G M L+R E P O R T+A7-2010 - 013 2+ 0 +D O C +PD F+V0 //
EN&language=EN.
the Council, the Economic and Social Committee and the Committee
of the Regions, “Towards a Single Market Act for a highly competitive
social market economy. 50 proposals for improving our work, business and exchanges with one another”. COM(2010) 608 ﬁnal/2.
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:0
608:REV1:EN:PDF#page=2.
From the outset, it is important to stress that the Single
Market has indeed already delivered to consumers in speciﬁc areas: this is especially true for telecommunications,
passengers’ rights or the consumer acquis (based on the
principle of minimum harmonisation). In the area of ﬁnancial services, recent developments indicate that the EU is
also on the right track here in promoting the consumer interest in a single ﬁnancial market.
However, the recent experience and major disappointment on key consumer issues such as collective redress,
consumer rights and European contract law do not give us
a lot of hope that the Barroso II Commission will have the
political will to ﬁnally put consumers centre stage.
The Announced Benefits for Consumers of a
Back in 1992, the announced beneﬁts that consumers
would draw from the creation of a European Single Market were fully inspired by neo-liberal economic theories:
the opening of borders would boost markets through enhanced competition and would offer to consumers the
combined beneﬁts of increased choice among better
As from the beginning, the underpinning concept was
that of indirect consumer welfare deriving from increased
business mobility: it was anticipated that the beneﬁts
gained by the industrial and retail sectors – especially by
the SMEs – through the enlargement of their hinterland by
promoting freedom of establishment, free movement of
goods and services and of capital would spontaneously
enhance consumer welfare.
This script has however failed to materialise, for several
Consumer Welfare as a By-product of Increased
The initial single market approach – still predominant today – per se presents an incomplete view of consumer
markets and an incorrect reading of neo-liberal theory,
as it views the consumer as a passive recipient of products and services and does not pay sufﬁcient attention to
the aspects linked to consumer mobility, which is a main
condition for a market to be truly competitive. A genuine
EU Single Market policy would have veriﬁed whether the
conditions for consumers to move freely between offers of
products and services, whatever the location of the company, do effectively materialise and would, where needed,
have addressed market failures in this respect. One can
therefore regret a lack of vision for the consumer’s role in
the market and therefore a lack of vision for the EU’s consumer policy.
The most prominent among the few proactive expressions of the right that should be granted to consumers to
move freely within the EU market is to be found in Article
20 of the Services Directive4, which provides for the prohibition of discrimination based on grounds of residence
or nationality. The Services Directive, however, had to be
implemented at the national level only by December 2009,
and it is thus not yet possible to assess its impact on commercial policies that aim at territorial segmentation.
The overwhelming number of other policy initiatives taken
under the Single Market umbrella have concentrated on
enhancing the mobility of undertakings without granting
sufﬁcient attention to the parallel need to promote consumer mobility, nor to the risk of re-segmentation of markets through private behaviour.
The Myth of the Rational and Mobile Consumer
Numerous initiatives taken by the EU under the Single
Market policy rely on a similarly classical conception of the
rational consumer: according to this perception, when a
consumer receives adequate information, he will be able
and willing to make the most appropriate choice and will
use his mobility to engage in the best deals.
In recent times, this optimistic vision of the empowered
consumer has begun to face major criticism with the
emergence of behavioural economics evidence indicating that consumers rarely act in their best interests, even if
well informed, for numerous reasons linked to behavioural
and cognitive biases.5 While acknowledging these biases,
and even supporting research in the area of behavioural
Directive 2006/123/EC of the European Parliament and of the
Council of 12 December 2006 on services in the internal market,
32006L0123:EN:NOT.
Behavioural economics demonstrates for example that people always
tend to postpone to “tomorrow” stopping smoking, eating healthily, working out… For more inspiration: Richard T h a l e r, Cass S u n s t e i n : Nudge: Improving decisions about health, wealth and happiness, Penguin Books, 2008.
economics6, the European Commission still fails to apply
the ﬁndings of these studies to the policies that it implements, overestimating the role of information in consumer
It is essential that the future initiatives taken by policymakers in the area of consumer policy take due account
of the lessons learnt from behavioural economics. These
lessons have to be given due consideration when engaging into any impact assessment that precedes policy measures relevant to EU consumers.
The Limitation of the Single Market Concept to its
In a genuine single market, the notion of borders should
be redundant. The European territory should be considered as a single jurisdiction, which means, from both a
business and a consumer perspective, that the same
rights and opportunities should be granted, irrespective
of whether one engages in a cross-border relationship or
not. The Single Market is relevant to consumers in their
daily life, be it when engaging in cross-border purchases
and activities or when shopping at home. A legal framework that is intended to provide consumer conﬁdence in a
market should make it possible for consumers to enforce
their rights regardless of the geographic scope of their activity.
Against this approach, too many of the measures taken to
implement the Single Market have sought their justiﬁcation
in its cross-border dimension and have consequently concentrated on eliminating territorial hurdles without taking
into account the more global and fundamental challenge
of creating consumer conﬁdence in the markets concerned. They have not engaged in an ambitious pursuit of
promoting consumer welfare in the EU market by providing consumers with strong rights against potentially unfair
and deceptive market behaviour on behalf of enterprises.
In spite of the promotional messages that have surrounded
the completion of the single market, the EU itself has not
seen the effort through to the end. Several major components for a genuine market without borders have not been
ﬁnalised. Indeed, when companies, and more speciﬁcally
SMEs, are asked to identify the major obstacle that they
face in cross-border trade, they most often mention as a
priority concern the discrepancies in VAT. These discrepancies lead to a refusal to sell to consumers cross-border.
http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/0
8/748&format=HTML&aged=0&language=EN.
The EU and the governments of its Member States might
have good reasons for not engaging in a more in-depth
harmonisation of their legal systems on VAT. However, EU
policymakers should then abstain from advertising the
Single Market as being integrated and should not create
false hopes of such a market delivering to its companies
and its consumers.
The Risk of Instrumentalisation of Consumer Policy to
Boost Cross-border Trade
The EU is characterised by a multiplicity of consumer
cultures: consumer attitudes and expectations vary considerably among the Member States and these variations
are reﬂected in the consumer policy approaches that are
taken by their governments. While the EU has done a lot,
as of 1975, to deﬁne and add substance to fundamental
consumer rights, their implementation and their application to concrete market developments vary, sometimes
signiﬁcantly, among the Member States.7 In order to respond to this variety, the EU legislator has adopted in the
past the dynamic concept of minimum harmonisation: according to this concept, EU legislation setting consumer
protection standards will not prevent Member States from
maintaining or adopting in the future more protective consumer provisions.
From a market integration perspective, minimum harmonisation, as opposed to full harmonisation, is an imperfect
tool, as it will still not phase out divergences in national
legislation. Consequently, companies that wish to engage
in cross-border trade have to abide by different rules.
From the point of view of consumer policy, however, this
concept leads to a win-win situation: on the one hand,
consumer protection is boosted in those Member States
where it traditionally lags behind, and on the other hand,
those Member States that champion consumer protection can keep their stronger levels of protection. Minimum
harmonisation is a tool to make national legislation more
uniform while respecting national cultures.
More fundamentally, minimum harmonisation is a less
dogmatic tool allowing Member States to react more adequately to local or national market developments and to
maintain national authority over such developments, with
a possibility for national authorities to share their experiences in the Consumer Protection Cooperation network.8
For a description of the state of consumer policy and consumer
movement in the EU27, please refer to the 5th Consumer Market
Scoreboard, published by DG SANCO on 4 March 2011.
See Regulation 2006/2004 on cooperation between national authorities responsible for the enforcement of consumer protection laws
(Consumer Protection Cooperation), OJ L 354, 9.12.2004, p. 1.
More globally, the concept of minimum harmonisation implies a political message that the protection of the consumer is a fundamental European value that should take precedence over any potential facilitation of cross-border trade.
On the contrary, with full harmonisation and the underlying
risk of mitigating national consumer protection standards
for the sake of ﬁnding political agreement between all decision-makers that intervene at the EU level, the message
becomes that of consumer policy being instrumentalised
for the sake of increased cross-border trade.
The recent EU trends, however, show a move towards a
more systematic application of the principle of full harmonisation in consumer law. It must be stated very clearly that
this is not an adequate and ﬁne-tuned consumer policy tool,
but rather a disguised instrument to promote trade interests.
Where the Single Market Concept Ends: Enforcement of
Consumer conﬁdence is key for a market to function.
This implies conﬁdence in the products and services to
be purchased as well as in respect of the rights granted
to consumers by the product and service suppliers. This
moreover implies conﬁdence that if those rights are not respected spontaneously by the supplier, the consumer is
able to enforce them in an easy, effective and cheap way.
The Single Market concept, as implemented over the last
20 years, simply collapses when it comes to enabling economic operators, and notably consumers, to enforce their
rights across borders within the EU: when facing a dispute
with a “foreign” supplier, the consumer, already confronted with many difﬁculties in obtaining access to justice in
local situations, has to overcome such signiﬁcant hurdles
to obtain redress that he simply gives up. The European
institutions have been very reluctant to acknowledge this
major weakness of the Single Market concept, and they
are still hesitating, after so many years, to introduce those
tools that have long ago been identiﬁed as the most effective in terms of consumer access to justice, most notably
collective redress mechanisms.
The Single Market Reality Check: Consumer
Frustrations Due to Inconsistency
The above-mentioned shortcomings are embedded in the
Single Market concept of the past. On top of these, it has
to be questioned whether the concrete implementation of
the Single Market beneﬁts that were anticipated for consumers, such as access to more and better products at
cheaper prices, have materialised.
In a Single Market, consumers should be able to buy
cross-border almost as easily as they can buy at a dis-
tance within their own country. Yet this is far from being
the case in the EU at present. Compared with buying “at
home”, consumers buying cross-border face big uncertainties.
Undertakings have been given the right by the EU to establish wherever they wish in the EU and to offer their
products and services in the entire EU territory, subject
to a limited number of restrictions. There is, however, currently no straightforward right for consumers not to be discriminated against when wishing to purchase a product or
a service from any supplier within the EU.
Indeed, especially in the online world, consumers who
wish to shop cross-border often face restrictions that have
been decided by companies: some of these restrictions
are legitimate and understandable, such as the decision
for a small company not to engage in cross-border deliveries upon the request of a single or a limited number of
consumers because of the hassle that this can bring for
small potential outreach. Some other restrictions, however, are the consequence of commercial policies by undertakings that are intended to segment markets with a view,
for instance, to adopting different pricing policies in different countries. Among those restrictions, the following can
• Exclusive distribution arrangements by suppliers cause
the Single Market to be divided into separate territories.
Copyright holders often limit the authorisation for distribution of their works to a speciﬁc country, and this
then prevents consumers in other countries from purchasing certain types of products or services9: a more
pro-European attitude would be to contractually accept
the multi-territorial distribution of copyright protected
• Selective distribution arrangements by manufacturers often limit the ability of retailers to sell online. The
recently revised Commission regulation in this area10
failed to address the challenges inherent to the online
environment by maintaining the “brick and mortar” re-
For example, Spotify, a website where you can legally download
music, is not, or only partially, available in all European countries because of the territoriality of licensing agreements; see the explanation
on their website: http://www.spotify.com/int/about/music-catalogueinfo/.
10 Commission Regulation 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European
Union to categories of vertical agreements and concerted practices.
OJ L 142, 23.4.2010, p. 1; Commission notice - Guidelines on Vertical
Restraints, OJ C 130, 19.05.2010, p. 1.
quirement even for those products for which no objective justiﬁcation applies.
• Many companies that are present in several EU countries often refuse to sell cross-border. Online suppliers
that are present in different countries often apply different prices for the same goods while refusing to deliver
those goods other than domestically.11 Companies redirect you automatically to their domestic website (and
its pricing policies) once they have identiﬁed your place
of normal or supposed residence (most currently via
the identiﬁcation of your credit card number).
• Discriminatory conditions are often applied to foreign
consumers. When it is possible for a consumer to purchase cross-border from a company that is present
in different EU countries, it happens that the delivery
costs are related to the country of delivery and not to
the effective costs linked to the delivery and related,
more objectively, to the distance and the means of
transport used.12
• When paying online consumers face different problems, including the lack of different means and the existence of discriminatory charges, the lack of interoperability between the means offered and, ﬁnally, security
Beyond the online experience, consumers who wish to engage in cross-border transactions in the ofﬂine world can
also face major obstacles:
• Access to ﬁnancial services in cross-border situations
can be a daunting challenge. Opening up a bank account abroad, let alone taking a consumer credit or a
home loan, is for most consumers a most disrupting experience. The most prominent international credit cards
are often not accepted by foreign ticket machines.13
• The management of copyright levies also gives rise
to numerous difﬁculties. Companies may decide to
withdraw speciﬁc types of equipment from a national
market due to a complex system of reporting and reimbursement. Furthermore, copyright levies vary considerably among Members; nevertheless the equipment is
sold by companies at similar retail prices. This means
12 The Amazon UK website indicates for certain goods that delivery is
free in the UK. However, from an objective point of view, it could in
some instances be less costly to deliver to Ireland than to the UK.
13 Based on personal experience, at London St Pancras you cannot buy
your Underground ticket with a foreign credit card from a ticket machine. You have to queue and then pay with your (foreign) credit card.
The same troublesome experience also appears at Madrid Barajas
airport and probably in many other locations.
that the consumers in a country where there are no, or
reduced, copyright levies end up subsidising the copyright holders and their collecting societies from another
Among the 50 proposals contained in the draft Single
Market Act, several have potential to boost consumer conﬁdence in an EU integrated market.
While rules are established or proposed at the EU level to
facilitate cross-border trade by companies, there seems
to be a lack of political will to provide for similar rules to
promote active cross-border consumer attitudes.
One should mention in this context the absence of a global
recognition of producers’ liability for a lack of contractual
conformity: when a consumer buys a good across the border, e.g. when travelling or via the Internet, she is supposed
to turn to the retailer in case of incident to beneﬁt from the
legal guarantee. This can be difﬁcult and cumbersome for
the consumer, who has to send the good back, even when
the producer of that good might have a branch in the consumer’s country of residence. Some companies have understood the marketing advantages of providing worldwide
commercial guarantees, but at the EU level, this should be
considered a straightforward consumer right in the ﬁeld of
legal guarantees. This would be a strong signal to consumers that they are provided with adequate tools to actively
beneﬁt from the Single Market across the borders.
There is also a need to promote interoperability and compatibility between systems, particularly for electronic
equipment as well as in terms of access to online services,
such as e-government and e-health, in order for consumers not to be locked in with a particular provider.
These are examples of active consumers being prevented
from grasping single market beneﬁts. More fundamentally,
however, the beneﬁts of increased competition between
national and foreign companies for passive consumers
have not dramatically materialised: in some sectors, such
as retail ﬁnancial services or energy, the potential beneﬁts of increased competition linked to the liberalisation of
these markets have been outweighed by the fundamental
restructuring and oligopolisation of these sectors.
In 2011, the Single Market is at a crossroads: the relaunch
of the Single Market could be a unique opportunity to redesign its centre of gravity so as to ensure that consumers
are the focus of the Single Market policy and that priority
is granted in policymaking to consumer-friendly initiatives.
It is therefore important to add to the initiatives currently
listed in the Single Market Act those that are needed to
achieve a consumer-friendly market.
One can particularly welcome the initiatives announced by
the Commission in the area of electronic commerce and
its intention to concentrate on problems faced by consumers in the digital economy, including those linked to the
right not to be discriminated against because of nationality
or place of residence (proposal 5).
The announced intention of the Commission to make
the standardisation framework more effective, efﬁcient
and inclusive and to extend the scope of the procedures
from goods to services is crucial for European consumers and is closely linked to the proposals concerning an
Action Plan for European Market Surveillance. Indeed, the
increased participation of consumer representatives in
the setting of standards for consumer goods and services
constitutes a major assurance of their compliance with
consumer needs and expectations; additionally, increased
cooperation by supervisory authorities on the safety of
products that are marketed in the EU represents a major
factor of consumer conﬁdence in a market where goods
move freely across borders (proposals 6 and 39).
The announcements made by the Commission in the Single Market Act on improved access to justice, with reference to Alternative Dispute Resolution mechanisms and
consideration given to collective judicial redress (proposal
46), deal with a previously mentioned major loophole of
the Single Market, and it is essential that this is being addressed.
The intention of the Commission to better involve civil society in the preparation and implementation of its policies
(proposal 48) represents an important commitment to improved consumer engagement in policymaking.
For these proposals to deliver to EU consumers, however,
they now need to be given substance by being effectively
drafted and implemented in a consumer-friendly way. This
is where a continuous space for dialogue between EU
policymakers and consumer representatives is to be established in order to ensure the EU does not miss its main
target in terms of delivering welfare to consumers in the
The Single Market Act does not list in an exhaustive way
those measures that are needed in order to deliver a con-
sumer-friendly environment within the EU market. Beyond
the initiatives that are listed, areas have been identiﬁed in
which there still are a lot of discrepancies among national
legislations, to the detriment of both businesses and consumers, and in which, simultaneously, a lot can be done
to improve consumer protection and the balance of rights
between the different market operators. This is notably
the case in the area of copyright legislation (scope and exemptions, levies), data protection rules and rules related to
investor protection. In order to earn consumer conﬁdence,
the Single Market policy also has to address these elements.
Initiatives Listed in the Single Market Act that Are Biased
There are initiatives in the Single Market Act that reﬂect the
biases to which the Commission may be submitted when
deciding its policy priorities. This is especially the case in
the areas linked to intellectual property and copyright law.
In this context, proposal 3, which proposes an action plan
against counterfeiting and piracy, falls short of distinguishing the issue of counterfeiting of physical goods from the
issue of copyright infringements online. The harm caused
by the selling of counterfeit medicines is not the same as
the one caused by a teenager downloading a single music
ﬁle for his private use. Before engaging in any wide-reaching action in this area, the Commission should ﬁrst undertake an assessment of the economic impact of ﬁle-sharing
on the basis of independent and objective data, which it
has thus far fallen short of doing.
Furthermore, the intention of the Commission to strengthen intellectual property rights enforcement should only
be done once it has ﬁnalised the analysis of the impact
of such an initiative on fundamental rights, innovation and
the development of an information society. Due consideration must be given to avoiding consumer detriment and
to the need to promote creativity. Strengthening of IPRs
cannot go on ad inﬁnitum to the detriment of both creativity and access to knowledge.
Consumers are often referred to in EU speeches by President Barroso and his college, and consumer welfare and
empowerment are regularly mentioned in EU documents.
Indeed, consumer policy is one of the very few EU policies
which have the clear potential to reach out to the European
people, to directly impact their daily lives and to reconnect
them to the currently not very popular EU by delivering
It is obvious, however, that beyond these words, consumer welfare is only considered to be a by-product of growth,
the creation of jobs and the reduction of burdens on business. While the pursuit of these goals is quite obviously
legitimate, it is essential to acknowledge that the speciﬁcity of the consumer interest must, in certain conditions,
lead to amending these economic policies in order to
privilege consumer welfare in terms of access to safe and
high-quality goods and services, information, protection
against unfair commercial practices and contract terms
and the enforcement of rights. To do this, decision-makers
should engage with consumer representatives to better
understand consumer expectations, needs and difﬁculties
and refrain from considering consumer policy, as some
of them indeed do, as a negligible element of the Union’s
Only with this effort will the Single Market deserve the
conﬁdence of its consumers.
Uniformity or Diversity – What Works Better for a European Banking
The European Commission has strong views on the German banking system1: its three pillar model of private, cooperative and state-owned savings banks is obsolete and
Most outspoken in this regard was the former competition commissioner Nellie Kroes in June 2009, interestingly starting from the observation that the German banking system is completely different from
has to be changed. Germany should be able to sustain
more than one global player in the banking sector, like
Spain or the Netherlands. The high relevance of institutions that are not listed on capital markets seems to be
an obstacle to the development of a modern banking system. This is believed because, ﬁrstly, many of these banks
are owned by a public constituency and the general experience with regard to the efﬁciency of state-owned banks
is extremely negative. Secondly, these banks, public or
co-operative, cannot be taken over by an arbitrary third
party. Thus, the positive effects of the market for corporate control on efﬁciency seem to be absent. And thirdly,
Germany, with its many strongly regionally based banks,
has not been very attractive for entrants and thus limits
the degree of European market integration.
It is not the task of this article to discuss these arguments
in detail, although much could be said on the topic which
is not in line with this reasoning. The fundamental point
is that the European institutions, or at least some of their
outstanding representatives, seem to entertain a rather
precise idea of how a banking system should be organised and, from this perspective, which developments are
deemed bad and should be hampered and which are
good and should be supported. Given the power of the
European institutions and the lack of democratic control at the European level, this should strongly inﬂuence
the development of banking systems in Europe, whether
with or against the will of the European people. The result
could be a rather homogeneous European banking system in which similar, preferably pan-European and thus
rather large institutions follow similar business concepts
– the ideal of an integrated European banking market?
Developments in banking regulation after the ﬁnancial
crisis point in the same direction. For many years, the
international regulatory community mainly paid lip service to the principle: “Same business – same risk – same
regulation”. Large players like Germany and, in particular, the United States, forced the international community
to accept exceptions that suited the particularities of the
respective banking system or business interests, peaking in the non-acceptance of the Basel II agreement by
the United States. The willingness of the United States to
comply remains doubtful, even after the crisis. However,
it seems that the problem could at least be solved at the
European level. The introduction of a central European
banking regulator is already an important step in this direction. One motivation for such a supranational regulator
could be to improve the control of the few large and internationally active ﬁnancial groups. However, its actual task
is a different one. It has to guarantee a uniform application of the regulatory framework in Europe. This might be
helpful to avoid areas of diminished banking security and
thus reduce the possibility of regulatory arbitrage, at least
between banking locations inside the European Union. It
could also lead to a more homogeneous European banking system.
Every banking system in the different countries of the European Union has developed under the special economic conditions of the respective country. If Europe grows
closer together, should the banking systems consequently not also become more alike? And further, if it is the task
of the European Union to improve the economic situation
of Europe, should it not also help the European countries
to create an optimal banking system like, for example, it
helps them to overcome obstacles to competition to create an optimal market for products? Some might have
doubts that the representatives of European institutions
(or anyone else) know what this optimal system might be.
All the different banking systems in Europe have shown
both good and bad performance in the past. I will argue
in the following that we do not need to know which system is best, because the diversity of the systems is itself
valuable. In this discussion, diversity refers both to the
differences among the national banking systems and to
the existence of considerably different types of ﬁnancial
intermediaries inside each system. I will scrutinise the
question both from the perspective of systemic risk and
The ﬁnancial crisis made apparent what was forgotten
for many years: banking systems are inherently unstable.
This instability cannot be mended as long as we need the
banking system as a central liquidity pool for our economy and therefore cannot totally exclude runs on this liquidity. Therefore, banks must be regulated to reduce
the probability of such runs. And the regulator must have
means to stop runs if they occur nonetheless. A homogeneous banking system makes this task easier for the
regulator, especially if we consider a supranational regulator that often does not know enough about the special
institutions of a particular country but wants to apply his
standardised methods that worked well in other countries. He could, so to say, create economies of scale if
the banking system was the same everywhere. However,
the problems he has to face might be much more severe
than the ones a decentralised regulator has to solve in a
diverse banking environment. The fundamental (and in
other ﬁelds of ﬁnance very well established) concept is diversiﬁcation. How does it apply to the institutional setting
of ﬁnancial systems?2
As we might expect and are able to observe in reality, a
particular crisis hits some types of ﬁnancial intermediaries harder than others. In Spain, it was mainly a certain
group of large public banks (cajas) that suffered badly,
whereas the large international banks did fairly well. In
Germany, many banks smaller than Deutsche Bank and
larger than the local banks were damaged substantially,
The following is an extension of ideas from the last chapter in H.-P.
B u r g h o f , B. R u d o l p h : Bankenaufsicht, Wiesbaden 1996.
amongst them many public Landesbanken, whereas
Deutsche Bank was soon back on its feet and the local
public Sparkassen and co-operative Volksbanken remained nearly untouched. In Switzerland, the crisis mainly reached the two global players. Countries like Ireland
or Iceland where the banking market is dominated by a
few very similar institutions got into very deep trouble.
Reasons for these different degrees of afﬂiction might be
both the differences in the business model of the respective institutions and the stochastic process of regulatory
failure that, e.g., allowed large German banks to engage
in certain activities on the international markets for securitised credit risk that their counterparts in some other
countries were not able to pursue. Thus, a homogenous
banking system might experience banking crises less often, but when it did, there would be almost no remedy
because most of its ﬁnancial institutions would be affected simultaneously.
At ﬁrst sight, this is only an argument in favour of diversity
inside the national banking systems. However, the economic consequences of a systemic failure in one banking
system are less severe if other countries are, due to different banking system structures, not afﬂicted, and positive
spillover effects can help the weakening economy of the
afﬂicted country. This happens in the most straightforward way if investors from still economically healthy countries are able to provide the urgently needed equity to offset the losses of banks in the afﬂicted countries. During
the current crisis, some banks, e.g. the Swiss UBS, were
able to receive large capital inﬂows this way. However, the
demand for goods generated by thriving economies can
also help the economies that are depressed from a banking crisis to recover much faster. The precondition is that
the different countries are not hit by a banking crisis at the
same time. Thus, the downside of too much homogeneity is a domino effect in both the banking sector and the
One of the most positive experiences from the current crisis is the degree to which countries (both in and out of the
European Union) were able to avoid popular protectionism and were willing to support each other. This is in stark
contrast to the situation during the global economic crisis
beginning in 1929 and might make the difference – at least
if we are able to solve the incentive problems of such support that remain unresolved up to now and are still being
debated on a European level. One precondition for the effectiveness of such co-operative behaviour is a multipolar global economy, something which was conspicuously
missing in the 1930s after the disasters of World War I but
which has been evolving with impressive speed since the
turn of the century. A second precondition is that not all
the relevant countries are hit by the crisis at the same time
with the same severity. Institutional diversity in the banking system can reduce the likelihood that no government
is able to provide support because its own state of affairs
does not permit such essential luxury.
Institutional diversity in the banking system might also help
to create solutions to the problems that become apparent
during ﬁnancial crises. It serves both the generic and intellectual process. Business might choose the system that
served best its needs in and out of the crisis. And politicians and administrators might draw new ideas on how
things can be organised and regulated not from abstract
considerations but from existing institutions that proved
their strengths and weaknesses in reality. In this sense,
it is the competition of different institutional settings that
generates new and creative solutions to the question
which banking system works best, rather than a level playing ﬁeld with cloned players, however hard these might
compete and however beneﬁcial this competition might be
for the consumer of bank services in the short run.
The last mentioned concept can be seen as a travesty
of the true intentions of the European Union with regard
to competition in the European banking sector. The difﬁculties arise from the fact that many of these different
institutional solutions require a special legal, in particular regulatory, setting. They might need a special charter
and protection from free riders that abuse the respective
name without delivering its true economic content. The
European Union regards such special rules with great
suspicion. They might function as barriers to market entry and could contain elements of unwanted subsidies.
The ideal of a level playing ﬁeld, which is understood as
the fundamental prerequisite for the creation of a single
European market in banking, would then be violated. The
chosen solution is to regulate different types of ﬁnancial
contracts instead of institutions, which leaves every competitor the freedom to offer the respective products or to
abstain. However, in the following I will show that a level
playing ﬁeld is an illusion as long as these contracts are
offered by different types of ﬁnancial intermediaries and
that an efﬁcient banking system is marked by a greater
diversity of such types.
Not only regulators can achieve economies of scale
through the creation of a greater degree of homogeneity.
Bank managers themselves face less complex problems,
auditors and rating agencies can employ standard procedures and models, both investors and potential debtors
have to acquire much less institutional knowledge, and
even business schools can concentrate on a single bank-
ing system and few types of ﬁnancial intermediaries.3
Everything gets simpler. But does it get better?
uct-oriented regulation to implement a level playing ﬁeld
for the European banking market.
It is an unpromising venture to try to measure or compare
the efﬁciency of banking systems.4 The ﬁnancial system of
a country consists of many different elements that might
be complementary to each other and provide different
tradeoffs. Due to complementarity, switching from one
regime to another is time-consuming and costly as many
of these elements would need to be changed to reach a
new local maximum.5 Determining the best system depends on what we want to achieve, and even a result
based on such an appraisal might be only temporary due
to changes in society, economy or technology. A crude
method used sometimes by political decision makers to
get a result despite all these obstacles is to compare the
prices of certain standardised ﬁnancial products. From a
consumer perspective and for the politicians representing
the consumer interest, the best system is one in which
he or she can get these products the cheapest. However,
this only holds if the contracts implied in these products
are really the same, independent of the kind of institution
offering them to the clients. According to practical experience, this is obviously not the case.
The discussion on the theoretical foundations of incomplete contracts, i.e. contracts that leave relevant points
open to debate and therefore have to be renegotiated in
some states of the world, has been at best inconclusive.
However, in reality, most contracts require renegotiation
in at least some states of the world, and many complex ﬁnancial contracts are marked by almost permanent renegotiations, often from the very beginning. Some ﬁnancial
contracts even contain the creation of special institutions
to renegotiate, and what else is a shareholder meeting
but a renegotiation of the original ﬁnancial share contract. Thus, contractual incompleteness and renegotiations are deﬁnitely among the most important elements
of ﬁnancial contracting, and it matters with whom one
Surprisingly, economic theory is not unanimous on this
point.6 Many economic models imply that contracts are
comprehensive in the sense that they contain, either explicitly or through legal provisions ﬁlling the gaps, remedies for any potentially relevant future state of the world.
Thus, the contracting parties will never have to renegotiate, and ﬁrms are nothing else but, to use the phrase of
Jensen and Meckling, “a nexus of contracts”. The contracts generate certain incentive effects that hopefully
lead to a second best behaviour of the individuals. How
the contracting parties themselves are organised and
what kind of institutions they represent does not matter.
Although we cannot know from an outside perspective
what really drives the European decision makers, here at
least they can ﬁnd a justiﬁcation for the concept of prod-
Given the dominance of the Anglo-Saxon banking model in business
schools, one is tempted to say that they already did even before reality followed.
The well known collection of papers of F. A l l e n and D. G a l e : Comparing Financial Systems, Cambridge, MA 2001, MIT-Press, should
be mentioned here, although it does not solve the problem and is
sometimes misleading with regard to the description and understanding of non-Anglo-Saxon ﬁnancial systems.
To my best knowledge, the idea of complementarity in ﬁnancial systems was put forward by Andreas Hackethal, see e.g. A. H a c k e t h a l ,
R.H. S c h m i d t : Finanzsysteme und Komplementarität, in: Kredit und
Kapital, special issue No. 15, 2000.
In the following, terminology and arguments on incomplete contracts
are obviously greatly inﬂuenced by O. H a r t : Firms, Contracts, and
Financial Structure, 1995, Oxford University Press.
In a two-period setting, it is important to know if the counterparty has invested in any capacity to renegotiate at all
or is simply relying on the legal provisions.7 In the case
of a corporate loan, this might be the difference between
a disastrous bankruptcy and a successful reorganisation.
The efﬁciency effects of a potential renegotiation both
from an ex-post and an ex-ante perspective also depend
on the threat points and distribution of bargaining power.8
German banks backed by the creditor-oriented German
insolvency law and well experienced in renegotiations
might receive very different results in a private workout
than, e.g., US banks threatened by Chapter 11 and without the respective experience and close customer relationship. Thus, American bank loans tend to be much
softer and therefore provide very different incentives to
debtors, a discrepancy German bankers were seemingly
unaware of when they bought large amounts of American
credit risk before the ﬁnancial crisis. To put it succinctly,
both contracts are corporate loans, but their implicit content and economic performance are very different.
The relevance of institutions becomes still more apparent if we regard a setting with a greater or even inﬁnite
number of periods. The longer time horizon allows more
efﬁcient contracts than are available in a short-term setting, even if, as the well known folk theorem proves, these
contracts are very incomplete.9 Both parties might have
See D. S c h ä f e r : Restructuring Know How and Collateral, in: Kredit
und Kapital, No. 4, 2002, pp. 572-594, for a respective model.
Arguments along this line can be found in H.-P. B u r g h o f : Bankkredit
und Kreditrisikotransfer, Frankfurt a.M. 2005.
An application on bank loans is S.A. S h a r p e : Asymmetric Information, Bank Lending, and Implicit Contracts. A Stylized Model of
Customer Relationships, in: Journal of Finance, Vol. 45, 1990, No. 4,
expectations about what kind of equilibrium is played
and what behaviour is in line with this. The multi-period
setting allows for punishing the counterparty effectively if
he does not act in accord with his so deﬁned reputation.
However, both parties must be able to signal what kind of
equilibrium will be played, which is equivalent to saying
what kind of persons or institutions they are. A special institutional setting and regulation can help to deﬁne such
equilibria and thus make long-term ﬁnancial contracts
available to the consumer that would otherwise not exist.
We achieve a richer set of potential ﬁnancial contracts
if regulators allow institutions with very different reputations and they are supported in their differences through
the respective legal framework.
A fundamental economic justiﬁcation for the creation
of derivatives is that they help to overcome market incompleteness. Thereby, they enable market participants
to achieve better risk sharing and increase their utility,
which is equivalent to saying that they make markets
more efﬁcient. This is argued in an Arrow-Debreu framework where contracts are taken to be comprehensive.
Apart from the conventional doubts whether most derivatives are really created for this reason and not for
rent seeking, we might also ask ourselves how we can
achieve a higher degree of market completeness in a
world with incomplete contracts. In this world, the payoff
structures are not only deﬁned explicitly in the contracts
but also depend on the outcomes of renegotiations
and thus on the characteristics of the contracting parties. Thus, ﬁnancial markets with incomplete contracts
should become more complete if ﬁnancial intermediaries exist that differ with regard to the way they renegotiate. As stated above, ﬁnancial markets consequently
become more efﬁcient.
The new efforts in banking regulation are important to
overcome some of the problems that caused the ongoing
ﬁnancial crisis. More equity and a restriction on leverage
(as proposed in Basel III) will certainly increase the stability of the ﬁnancial system (although the latter regulation in particular could also lead to a more homogeneous
banking market). A common caveat is that such activities tend to ﬁght the last crisis rather than the next one.
Systemic stability is not only a question of the regulatory
framework in a narrow sense and its competent implementation, which were both found to be deﬁcient in the
course of the current crisis. It also has to do with the
ﬁnancial system as such and its resilience against systemic failure. One relevant aspect not discussed in this
article is the size structure of ﬁnancial intermediaries,
and “too-big-to-fail” certainly remains on the agenda. As
discussed above, the systemic vulnerability of European
banking also depends on the degree of diversity both
among and inside the different national banking systems.
More diversity should not only enhance systematic stability against any potential future crisis. It might also contribute to the efﬁciency of banking in Europe, offering a
richer set of ﬁnancial contracts to the clients. The current
policy of the European Commission follows different ideas on efﬁciency and competition and therefore tends to
threaten the still existing diversity in European banking.
In the long run, this might not be a change for the better.
And it is a break with long European traditions, as Europe for many centuries proﬁted from sharp competition
among very different kinds of institutions. This might still
be a valuable concept for the European future, as long as
it is happens under the umbrella of a peaceful and united
The European Single Market – How Far from Complete Is It or How
Complete Can It Ever Be?
Markets are innately social institutions. There is no such
thing as a “free market”, since all social institutions are
based on society-wide rules and on mutually expected
behaviour: all social institutions are inherently regulated
ones. Historically, a really functioning market was always
part and parcel of some political entity. The market of
the Hanse in the Middle Ages worked well as long as the
Hanse’s political structures were strong enough to se-
cure the trust in the contracts made “under it”. When the
political structure was seen as having been weakened,
the Hanse’s economic force was also sapped.
The ﬁrst political entities which really created territorially deﬁned markets were the territorial states of the late
16th and early 17th centuries. For the ﬁrst time a new political entity enforced contracts, harmonised weights and
measures and promoted exchange through investments
in infrastructure. Even then it took until the late 19th century to fully harmonise just the legal base – as we can
gather from the example of Prussia which, for most of
the 19th century, was divided into at least three zones
of civil law: the Gemeine Recht in the east, the Allgemeine Landrecht in most of the central provinces and
the Napoleonic Code Civile in the Western provinces. A
truly common market was created only when the German Reich introduced the Bürgerliche Gesetzbuch, the
BGB, in 1900.
obvious: you can tell people a thousand times that
the current level of social security guarantees is too
expensive and cannot be ﬁnanced any more in a sustainable fashion. They will, nevertheless, persist in
calling on the state to meet the risks of the day and
to provide more social security. So, at the end of the
day, it is the perceptions and demands of the people which guide the development of the market. This
holds true for the given demand and supply of goods
and services on the market and also for the necessity
to regulate or subsidise its subsectors.
Yet, markets did develop over time as social institutions.
Expectations of efﬁciency and trust increased but so did
the perceived requirements to regulate issues such as
environmental concerns and consumer protection. And
markets expanded early on into hybrid territories, into
the condominium of economics and politics – the Daseinsvorsorge, the public services – that is, into administratively provided public goods like electricity, water
or telecommunication. They were seen as natural monopolies important enough to warrant strong political inﬂuence and, especially, the “political production” of the
A small but telling example: until the late 1950s, Article 180 of the German Penal Code forced hotel owners to rent double rooms to married couples only.
Today such a provision would not only meet with surprise about what the state in those days deemed a
social problem important enough to be regulated via
the penal code, but any hotel owner would also meet
ﬁerce resistance if he were to inquire about the marital status of his prospective guests. Then, however,
it is obvious that the social institution of the (hotel)
market thrives in a dynamic social and political environment which leads to new or different demands for
less or more or other regulation and for less or more
or other subsidies. New market sectors will develop
which again will call for regulation and, if only initially,
And when most observers in the 1960s and 1970s
considered national markets to be complete – or even
over-complete, i.e. over-regulated – globalisation again
changed the surrounding landscape and the demand
for market-making and for market regulation. On the one
hand, regional and global markets developed in some
sectors in such a way that they essentially cast doubt
on most national sectoral regulation. In a global ﬁnancial market, national regulation of ﬁnancial intermediaries becomes less effective. For many observers this was
advantageous because it reduced cumbersome “over”regulation in some national markets. On the other hand,
the perceived loss of autonomous national political inﬂuence was regarded as a major problem for democratic
legitimacy since the different sets of national regulation
represented the outcome of decades of political struggle
over embedding ﬁnancial markets in democratic national
1. The Single European Market will never be “complete”.
Deﬁning what is complete rests either on some normative idea of Ordnungspolitik or on the perceptions
of market participants. The normative problems are
2. The sheer complexity of today’s extremely segmented, functionally differentiated and professionalised
markets prevents markets as a whole from reaching
an “optimum” in any sense of economic theory. Markets as social institutions are always inherently unstable and, hence, in dire need of regulation. However,
political regulation is a source of instability of its own.
Political time horizons normally do not exceed the average legislative term of four or ﬁve years, and politicians answer to electoral majorities. The government
might, thus, do what is economically “optimal” but
would nevertheless lose the next election. In democratic societies, elections and referendums are just
the other side of the markets’ social embeddedness.
This creates mutual interdependence: while markets
are in dire need of supporting political regulation and
subsidies, they also heavily inﬂuence the electoral
prospects of political actors.
3. Due to the cumbersome and inescapable requirements of democratic legitimacy or to its short-term
horizons, political decision-making will always lag behind market developments. Only in rare instances are
political institutions really avant-garde in developing
new market segments. Markets are normally faster in
developing new ideas. This, however, leaves politics
with the constant task of re-embedding new commercial and economic developments, be it by supporting and subsidising new technologies so that
they can overcome structural barriers to market entry
or by regulating new market segments to avoid a distribution of chances, incomes or risks that is deemed
socially harmful. Actual political decision-making
normally looks backwards and draws on past experience even when future markets are to be regulated.
Politics regulates the past – the last crisis, not the
4. Market opportunities and political interference with
markets result in, or are part of, an oscillation of basic economic parameters: economic growth, inflation and unemployment. Such ups and downs are
the inescapable effects of decisions made by diverse
interdependent actors. But these ups and downs
sometimes affect actors very differently: unemployment, for example, is mostly a burden on employees
and the state, while employers carry only a part of the
costs and also beneﬁt from the reduced power of the
trade unions. Moderate inﬂation normally does not
hurt lower class employees too much, and the same
can be said of industry. But it sharply reduces the
purchasing power of the middle class, which usually
does not invest in stocks but relies on savings in bank
accounts or in bonds. Hence, even seen from a market perspective, there is no obvious and stable preference for any kind of market development or market
5. Nevertheless, there is no better alternative to a regulated market economy. A planned economy loses
most of its dynamism as the administration and its
planning staff have neither all the necessary information nor the capacity to guarantee the distribution of
scarce goods and services as effectively as any form
of market economy could. But it is also true that a
“free market” without any regulation is no market at
all, just a grand anarchy in which cartels and monopolies ﬁll the power vacuum and exploit the less powerful market participants.
6. The problem of the Single European Market is that
while markets evolve all over the world and political systems try to catch up with their most recent
developments, Europe is simultaneously creating a
political system of its own. This means that the tastes
of constitution-making and problem-solving for the
daily issues at hand must be performed simultaneously. Since John Rawls published his concept of a
“veil of ignorance”, we know that, for the sake of fair-
ness and equity, constitution-making and everyday
problem-solving should be dealt with separately, that
they should be in two different universes. If I know
where I’ll end up after I’ve solved my daily problems,
I’ll be inclined to bend the constitution in favour of my
expected position. This is exactly what happens in
the EU: if I know that I’ll be a net contributor to the
EU budget, I’ll try to contain the budget authority of
the EU. If I have a highly regulated national market,
I’ll have an incentive to strengthen the regulatory authority of the EU and to make the EU accept my regulatory concept as an example for all to follow and to
extend it to the European market as a whole. Rawls’
“veil of ignorance” is difﬁcult to preserve even in national constitution-making, and so, a fortiori, it cannot be “taken” in the constant, uninterrupted mix of
constitution-making and daily problem-solving in the
European multi-level system. To take the “veil of ignorance” is a transformative experience that needs to
move in its own universe.
In this complex situation, the Single European Market
and the European Union are confronted with at least
1. The political and social “bed” does not (yet?) really
exist in which the Single European Market could and
should be implanted. This allows the variety and the
velocity of change in the different social and political
demands to persist. And to complicate matters even
further, different segments of the Single Market vary
in their territorial reach: the three freedoms – the free
movement of goods, services, and capital – extend to
the 27 member states of the EU, to the three member
states of the EFTA (Norway, Iceland, Liechtenstein)
via the European Economic Area Agreement, and to
Switzerland via a special bilateral treaty. European
trade policy even extends to a 32nd state, since Turkey entered into a customs union with the EU in 1995.
EU regional policy reaches out to 29 member states,
including Norway and Switzerland, both net contributors to the EU’s Regional Funds. And the EU’s monetary policy focuses on 17 member states, the members of the euro area. Hence we see a functionally
differentiated, fragmented embedding of different
market segments, and we see a territorial inclusion of
some states, without them having – or even wanting
– the attendant political inﬂuence. Switzerland, for example, is part of most dimensions of the Single Market, but it can hardly inﬂuence EU regulation, at least
not by participating in EU decision-making.
2. Such a multi-level and multi-actor situation opens
multiple avenues for interference in both directions.
Market participants with enough political clout have
various points of access to lobby for regulation or to
“self-regulate” certain market aspects – and hence to
determine the regulatory density in their ﬁeld of interest. At the same time, a multitude of political actors
at various levels have access to numerous regulatory
instruments. In a centralised nation-state, the government and the administration are hierarchically structured and occupy the commanding heights of both
decision-making and implementation. In the multi-level system around the Single Market, these powers are
distributed amongst various actors. Decision-making
is partially commandeered by the WTO, by EU supranational bodies (such as the Commission, the European Parliament, the Council and the European Court
of Justice), by national decision-making bodies, by
independent agencies (such as the European Central
Bank) and also by (transnational) private organisations
like the International Standard Organisation (ISO) or
CEN and CENELC (the European bodies for technical norms). In most cases such decisions are not selfimplementing but in need of implementation by agencies and administrations which have some ﬁrm territorial grounding. That brings to the fore mostly national
and regional authorities, like national ministries and
administrations or regional administrative bodies in
national federal systems. It usually also increases the
leeway of the European Commission as it monitors implementation and since it naturally has some degree
of discretion in the process. But it also occasionally
entails “self-regulation” by market actors or the enforcement of certain regulations by large multinational
corporations via their supply chains. While the traditional national hierarchical “command and control”
perspective had reached its limits already in the 1960s
and 1970s and had to embrace more horizontal mechanisms of social participation, this multi-level market
regulation involves a much larger number of actors
and hence an, at least potentially, much wider disparity in interests and demands.
3. Any attempt to solve the political problems of the day
may also bring about a redistribution of competences
and powers. Not only do the perennial treaty revision
exercises and the debates on the European Constitution in the last two decades indicate that the European
Union is an attempt to develop a political system in a
piecemeal fashion. The EU goes down this road while
at the same time tackling the problems of the day. Our
sense that we live in a permanent crisis of European
integration is also fed by these parallel and interdependent processes. The EU might have been the best
level for regulating the ﬁnancial markets in the global
crises of 2008/2009. But regulation by Brussels would
have required more political competences at the supranational level. Here problem-solving and power
distribution collide. The effects: the EU seems incapable of coping with the regulatory needs of many market participants. But if people are asked whether more
political competences should be supra-nationalised,
a majority is very reluctant to grant the supranational
level more powers. European gridlock in action.
One might argue that these are all transitory problems
which will dissolve once all European states have become EU member states and codetermine all aspects of
their Union. But that is wishful thinking. There is no reason to believe that the governance structure of the 21st
century will eventually mirror the government structure of
the nation-state of the 1960s and 1970s, albeit on a larger
scale. Rather, in the EU and globally, we will have to live
“in the times to come” with:
• functionally highly segmented, yet more and more interdependent markets;
• the varying territorial reach of their respective regulations;
• the different social “beds” in which these market segments are socially and politically implanted or “embedded”.
This, to be sure, is part of the thus far remarkable success story of the Single European Market. But it also
means that this market, even less than any traditional national market, will never be complete in any sense of the
traditional notion of “completeness”: It will not be so in
• possible economic, social or political demands made
• the market’s political regulations;
• normative economic “optimality”.
Even worse, at least when seen from the perspective of
proponents of some sort of “optimality”, any discussion
of “completing the market” is inevitably marred by the
underlying question of the finalité européenne. Once this
telos has sucked us in, we’ll get lost in complexity pure.
So, we must avoid the traps of presumably “easy solutions” advocated by standard economic theories, though
they do attract us because we all long for a manageable
and hence low degree of complexity. That low degree of
complexity cannot be attained today – and I am not even
sure that it is worth aspiring to.
FROM THE PRINCIPAL’S DESK Term 3 2013 Date Claimers Wednesday 31
Document 124978
L.N. 46 of 2012 Employment and Industrial Relations Act Overtime Regulations, 2012
ACTA UNIVERSITATIS AGRICULTURAE ET SILVICULTURAE MENDELIANAE BRUNENSIS Volume LXI 52 Number 2, 2013
Celebrating 69 Years of Service –April – June 2014