As the EU plots how to respond to Donald Trump’s escalating trade threats, the bloc is wasting no time insulating its economy from future shocks. And the biggest weapon it has in its arsenal, economists say, is the single market.
The question now is whether the EU has the political will to deepen its economic integration, which has been undermined by long-standing national interests.
Against a backdrop of geopolitical turmoil, fierce foreign competition and snail-paced economic growth on the continent, the European Commission last week unveiled plans to further consolidate its much-vaunted internal market. It’s a move that would allow the EU to accelerate its sclerotic economy without relying on increasingly uncertain exports to the United States, its largest trading partner.
“The first economic partners of Europeans should be Europeans themselves,” said Stéphane Séjourné, the EU’s commissioner for industry, as he presented the Commission’s new single market strategy. “If we want to boost our economy, the single market is the competitive factor that we can control,” he added.
Integrating the single market
The idea is simple. By slashing the regulatory hurdles that prevent many EU businesses from operating beyond their home countries, European consumers would get more for less. Companies, especially small and mid-sized ones, would be able to tap into a market of 450 million people without needing to cross the Atlantic.
Currently, more than 30 years since the single market was launched, many goods and services remain confined to 27 smaller markets, reflecting stark differences in languages, culture and taste.
By targeting the most common barriers — from fragmented rules on packaging and waste to conflicting national regulations — the Commission hopes to enable more cross-border competition.
Mario Draghi — the former president of the European Central Bank who helped make ‘competitiveness’ the EU’s new mantra — has voiced frustration over the persistent regulatory barriers that continue to hamper European trade, describing them as “far more damaging for growth than any tariffs the U.S. might impose.”
But if all goes according to plan, the benefits of removing the obstacles to a single European market for goods and services could amount to €713 billion by the end of 2029, according to the Commission. There’s only one caveat: the strategy hinges on EU countries setting aside their national interests.
A case in point is Chancellor Friedrich Merz’s new government, which has made clear that Germany won’t abandon its energy-intensive industrial companies — the engine of the German export economy — even if that means providing steep electricity subsidies that would undermine the development of a more competitive single market. If the EU were to greenlight Germany’s plans for power subsidies, it could incentivise other countries with similar fiscal leeway to follow suit, further distorting the internal market.
"Proposals like Germany’s to provide ongoing subsidies to energy intensive industries risk locking up resources in inefficient industries, while preventing Europe’s economy from adapting to the reality of higher energy prices,” said Zach Meyers, director of research at the Centre on Regulation in Europe think tank. He added: “It does seem like it's working in the opposite direction to what the Commission is pushing for.”
Single market setbacks
Calls to complete the single market have become a routine fixture in EU policy making ever since 1987, when then-Commission chief Jacques Delors implemented the Single European Act that paved the way for the free movement of goods across Europe. Expanding access to the single market, the Commission contends, would open the door to more cross-border selling in activities that have long remained confined to their national markets, such as construction, parcel delivery, and installation and repair.
The history of the single market is one of repeated setbacks. In 2006, a push to move ahead with the integration of the services sector — which was lagging behind relative to goods — led to what many considered a largely ineffective Services Directive proposal. Then, a year later, an attempt to fix the problem of the bloc’s low productivity in the Lisbon Strategy once again fell short due to limited political support.
“All of these things could and should have been done a long time ago,” Meyers said. But, he argued, “building a stronger internal market really is the only option to get a lot of European growth in the future,” particularly given that Europe’s traditional reliance on exports can’t be taken for granted in the current trade environment.
To put the scale into perspective, the International Monetary Fund estimated lingering internal barriers to be equivalent to tariffs of 45% for manufacturing and 110% for services. That means that, “even if it’s unrealistic to expect that [single market barriers] are eliminated, any significant progress would have far greater impact than US tariffs or any potential trade deal the EU could sign,” Andrew Small, a senior fellow with German Marshall Fund, told The Parliament.
The EU is currently wrestling with a 10% “baseline” tariff on all exports to the US, on top of 25% levies on steel, aluminium and cars that President Donald Trump imposed earlier this year. Trump earlier this month threatened to impose a 50% tariff on EU goods from June, before granting a reprieve to Commission President Ursula von der Leyen. The two sides now have until 9 July to hash out a trade deal before the US president's new punishing rate comes into effect.
In search of EU capital markets
While the bloc’s internal market strategy does a good job at identifying barriers — such as labelling requirements and paperwork deemed excessive — experts warn there’s a staggering blind spot: it doesn’t seriously address the lack of EU-wide capital markets.
That’s one of the reasons Europe has no Big Tech giants akin to Silicon Valley, according to Jacques Pelkmans, a professor specialising in European economic integration at the College of Europe.
“What do [European firms] do when they have a good product or service?” asked Pelkmans, who spent decades advising EU institutions on how to foster integration. “They go to the US or they go to venture capitalists that are in Europe, who will bring these companies to the US.”
The case of Spotify — an audio streaming service founded in Sweden in 2006 before ultimately going public in the US in 2018 — epitomizes Europe’s failure to nurture and retain innovative startups, Pelkmans argued. "After two years of begging and running around Europe [to attain financing], they went to the US because they could get what they wanted,” he said.
For over a decade, European policymakers have been wrestling with how to build an integrated financial sector, having come to accept that EU-based firms won’t stand a chance against their American and Chinese peers if they can’t find financial institutions willing to share the level of risk they need to scale up.
But ultimately, Pelkmans stressed, the creation of a full-fledged single market that includes a capital markets union will be down to EU member states to take concrete action that looks beyond their borders.
“The real question is, will they dare to make hard decisions?”
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