The Letta report on the future of the EU single market
At its meeting on 30.06.2023, the European Council called for "an independent high-level report on the future of the single market to be presented at its meeting in March 2024 and invites the future Presidencies of the Council and the Commission to take this work forward in consultation with the Member States".
On 17.04.2024, former Italian Prime Minister Enrico Letta published his almost 150-page report on the development of the European Single Market. Its core theme: the EU should increase its competitiveness again in the next five years up to 2029, above all by taking further steps to complete the single market. Only in this way could the Union achieve more "economic security" and an "effective European industrial policy".
The following article presents the main features of the Letta report and places it in the context of a constantly changing EU internal market. In this context, it not only discusses the added value that the single market has had for EU citizens and companies, but also where there is currently a need for action. From these deficits, it should already be possible to derive recommendations for action for the newly elected EU Commission, which should have a decisive influence on future European economic and industrial policy.
The demands of the Letta report also overlap in some key points with the European Council's "Strategic Agenda 2024-2029" for the new legislature. A report by former Italian Prime Minister Mario Draghi on the future of European competitiveness, which is expected to be published at the end of June 2024, also shows parallels to the Letta report, according to initial media reports.
The demands of the Letta report
In his internal market report, Letta calls for energetic measures for a "competitive industrial strategy" in order to be able to compete with other global powers such as the USA or China: "In the face of strong global competition", the EU must step up its efforts to counter the American "Inflation Reduction Act", for example, with its own industrial policy instruments. The US government introduced new tax credits in 2022 to promote renewable energies, the production of hydrogen and the storage of CO2, among other things.
According to Letta, in view of the global challenges, the current "four freedoms of the internal market" - the free movement of people, goods, services and capital - are no longer sufficient to drive forward the necessary changes in research, innovation and education. Letta therefore proposes an additional "fifth freedom": It "consists of placing research and innovation drivers at the heart of the internal market". This would create "an ecosystem in which the dissemination of scientific knowledge drives economic vitality as well as social progress and cultural enlightenment". Letta praised the progress already made by the EU with the "Digital Markets Act, Digital Services Act, AI Act, Data Act and Data Governance". These are "decisive steps towards a modern and effective digital strategy and technological autonomy" for Europe.
Letta deals in detail with the question of how the EU can finance the ecological transition that has been decided upon and still strengthen its strategic autonomy and competitiveness at the same time. His answer: "The commitment to a fair green and digital transition means a long-term perspective for a sustainable and fair transformation of European society and economy. The coming legislative period is crucial for the implementation of this comprehensive transition. The question is no longer whether Europe will achieve these goals, but how."
The financing of these goals - the "how" - requires the close linking of EU funds, national state aid and a common industrial policy. "We should develop bold and innovative solutions that strike a balance between the need to quickly mobilize national, targeted public support for industry and the need to prevent fragmentation of the single market."
In his report, Letta explicitly proposes the use of "EU public funding": "Refining the state aid approach will facilitate the creation of the necessary political conditions to unleash European public investment." At the same time, however, he emphasizes how important it is to mobilize the sufficient private capital available: "The European Union has private savings of 33 trillion euros, but these consist mainly of cash and bank deposits. This wealth is not being fully utilized to meet the strategic needs of the EU." Instead, "around 300 billion euros from the savings of European families flow abroad every year - mainly into the American economy".
Despite his call for "public EU funds", Letta avoids the politically provocative term "Eurobonds" - i.e. common European government bonds - in his report. Letta had publicly called for such "Eurobonds" just a year ago.
The report supports the industry's call to secure Europe's international competitiveness through global agreements: High interest rates and energy prices threatened Europe's industrial performance just as much as the massive subsidies from the USA and China. It must therefore be "a primary objective of the use of public funds" to support "jobs and industries in Europe" - and not to promote the "industrial development of our partners or competitors".
According to Letta, European companies currently suffer from "an astonishing lack of scale" compared to their global competitors in the USA and China. It is "crucial to support large EU companies to become bigger in order to compete on the global stage". However, "not all companies in the EU need more size": "Our model, which thrives on the essential link between large and small companies and actively ensures a level playing field, must be maintained."
Against this backdrop, the report warns of distortions of competition within the EU due to national state aid - caused by the "differing budgetary leeway of the member states": The "gradual easing of state aid in response to the recent crises" has "helped to limit the negative effects on the real economy", but has also "led to distortions of competition" within the EU. Letta alludes here, among other things, to the billions in subsidies with which financially strong Germany promoted non-European investors (chips, batteries) at home.
As a countermeasure, the report proposes a new "solidarity mechanism". This would oblige EU states to use part of their national subsidies for European projects: "One way to overcome this dilemma could be to strike a balance between stricter enforcement of state aid at national level and a gradual expansion of financial support at EU level." In concrete terms, this would mean "a state aid contribution mechanism" that requires member states to "allocate part of their national funds to finance pan-European initiatives and investments".
In his report, Letta also speaks out in favour of the politically highly controversial "EU enlargement": "A larger EU is today, as it was yesterday, the best protective instrument to safeguard European interests and the principles of the rule of law and to defend the citizens of the EU against external threats." However, all potential accession candidates would have to provide "clear and unambiguous evidence and unwavering respect for the non-negotiable principles of democracy, the rule of law, humanity and the protection of minorities" from the outset. Every candidate country must "fully subscribe to these principles".
Letta also calls for a "common market for the security and defence industry". According to his calculations, around 80% of European military aid for Ukraine went into non-European military equipment. In contrast, 80% of US support for Ukraine came from national production. This "glaring difference" illustrates "the weakness of our approach": "Instead of financing the industrial development of our partners or competitors, Europe must be at the forefront in the use of public funds." Progress in the development of a "common market for security and defence" is "crucial to provide the EU with the necessary means to meet current and future security challenges".
In order to better understand the most important demands of the Letta Report, you can find the key facts about the internal market, which has been in existence for more than 30 years, and the main challenges for the future here.
The emergence and development of the EU single market
The idea of a single European economic bloc emerged as early as 1957 with the founding of the "European Economic Community" (EEC). The core objective was to harmonize the most important laws and standards in all EU countries, to enable duty-free, cross-border trade and to achieve greater mobility for people and companies.
Thanks to the single market, the EU is now the largest barrier-free and integrated economic area in the world - with more than 450 million citizens, over 23 million companies and twice as much intra-Community trade in goods and services as before. At around 15 trillion euros, the European single market alone generates around 18% of the world's gross domestic product.
On the basis of this joint economic power, the EU can represent its interests - including those of its member states and companies - more effectively vis-à-vis other economic powerhouses such as the USA and China. The single market is also an important factor in strengthening Europe's international competitiveness.
What successes has the single market brought to people and the economy?
This common economic bloc guarantees citizens and companies in all member states the so-called "four freedoms": the free movement of people, goods, services and capital. EU citizens can live, work, travel, study or retire in all member states, they are treated equally everywhere when it comes to employment, social security and taxes, they benefit from a duty-free, cross-border selection of products and services and from European consumer protection regulations.
The single market is also a fundamental basis for success for companies. They benefit from a common currency, a high level of political stability, bundled demand power, diversified sources of supply, duty-free access, qualified specialists in all member states, high-quality cutting-edge research, functioning infrastructure, well-established relationships between companies, employees and their representatives, as well as highly harmonized EU norms and standards. In this important area alone, the EU has so far harmonized more than 3,600 standards. This means that companies can rely on equivalent quality standards and production conditions throughout the EU.
In which areas is the single market not yet functioning?
One thing is clear: even after more than 30 years, the single market is still not running smoothly everywhere. In addition to flagship sectors such as trade and tourism, the three important markets of finance, telecommunications and energy are not yet sufficiently integrated. This is particularly evident in the latter area: in view of the energy crisis, it is extremely difficult to provide all member states, companies and consumers with a secure and financially viable energy supply without a common European electricity and gas market.
But why is this the case? Even after 1993, many companies in the energy and telecommunications sectors are still wholly or partly owned by nation states. In many cases, they do not want to give up their political and economic influence. However, the relevant supervisory regulations for banks and insurance companies have still not been harmonized. This is mainly due to the resistance and differing interests of some member states and companies.
In addition, the national requirements for companies often differ considerably when it comes to services, social security and tax law. For example, the lack of a common European VAT system increases the workload for companies and impairs their international competitiveness.
Internal Market Rapporteur Enrico Letta comments: "It is no coincidence that we have a very fragmented system in three areas - communications, energy and finance. These national markets, which were originally designed to protect domestic industries, are now a major brake on growth and innovation at European level. However, there is no common industrial policy without energy, connectivity and finance. These three areas are the prerequisites for a strong and effective European industrial policy."
Where does the EU Commission currently see the greatest need for action?
The current annual report on the internal market and competitiveness lists nine priority areas of action in which the Commission and member states have already taken action and also want to make progress in the coming years:
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In order to improve the "functioning of the internal market", member states have, among other things, committed to abolishing 301 disproportionate prior checks for professions by 2023. They have also removed more than 60% of the over 170 procedural obstacles for wind and solar energy projects.
Digital Markets Act (DMA) and Digital Services Act (DSA) in place since 2024 to protect consumers and businesses from illegal content and unfair conditions on global internet platforms. Further EU regulations are intended to ensure fair access to data and promote the use of trustworthy artificial intelligence (AI). In autumn 2023, the Commission announced that it would reduce the reporting obligations of small and medium-sized enterprises (SMEs) to government agencies by 25%.
By facilitating "access to private capital" and a "capital markets union", the EU wants to enable more private and professional investment to finance the real economy and provide more risk and venture capital for companies. As a result of these measures, borrowing costs should fall, among other things, so that companies can invest more in the internal market.
Internal Market Rapporteur Enrico Letta comments: "The term Capital Markets Union is not very sexy. I think we need a new branding for it. I will try to propose another name." The main aim, however, is to raise money for riskier ideas and innovations.
In the area of "public investment and infrastructure", the EU and member states have significantly increased their financial commitment in recent years and want to increase it further - in addition to the commitment of private investors. Companies must be given easier access to sources of financing, and the costs of raising capital across borders should also be reduced. Only through a combination of public and private investment will it be possible to raise the approximately 650 billion each year with which the EU wants to drive forward the green-digital transition and strengthen the continent's economic resilience. As a core measure, the member states are to take greater account of environmental, social, sustainable and innovative aspects when tendering for public contracts in future. In this way, non-price aspects are to be given more weight in the procurement of goods and services.
Although investment in "research and innovation" has risen from 1.8% to 2.2% of gross domestic product (GDP) within 20 years, it is still well below that of the USA and China. The aim is to focus research efforts more strongly on the long-term requirements of competitiveness. In addition, the results of this research are to be translated into practical business applications more quickly: Companies and research institutions should not only work more closely together, but also receive more support for the adoption of innovative results. The development of technologies that combine digital and environmentally friendly innovations could serve as a model: The EU is a world leader in this area.
The EU continues to face enormous challenges in the problematic energy sector. Europe is a global pioneer in the transition to CO2-free energy production - in 2022, the EU's greenhouse gas emissions were 32.5 % lower than in 1990, although GDP rose by 67 % at the same time. However, energy prices are still well above the long-term trend and higher than in competing regions of the world. This is a burden on companies and consumers.
The reform of the EU electricity market should therefore accelerate the use of clean energies: Long-term contracts should ensure stable prices and more investment security here. After all, lower energy production costs are essential if Europe is to become more competitive internationally again.
The EU wants to further promote its successful "circular economy" model: Less raw material consumption, less waste and more recycling will make the continent less dependent on external supply constraints. The manufacturing industry is already using the necessary raw materials much more efficiently - its resource productivity has increased by 37% since 2000. The EU's recycling capacities should cover a total of 25% of the annual consumption of strategic raw materials by 2030. To achieve this goal, Member States can promote sustainable material consumption by supporting the industrial use of secondary materials and platforms for the sharing economy.
In the increasingly important field of "digitalization", Europe needs to catch up fast. The EU's share of the global market for information and communication technologies (ICT) has collapsed over the past ten years - from 21.8% (2013) to just 11.3% (2022). The USA dominates here with a market share of 36% (previously: 26.8%). To further develop the digital single market, the EU supports projects for artificial intelligence, advanced digital skills, cross-sector data use, cybersecurity and digital solutions for public administration and companies. In addition, intra-European capacities for cross-cutting digital technologies have been expanded in order to reduce dependencies on chips and cloud services. In addition, the member states are to coordinate their investment strategies in the digital problem areas and thus increase the effectiveness of the measures taken to date.
In the area of "education and qualifications", the biggest problem is the rapidly increasing shortage of personnel and skilled workers. The ecological and digital transformation is also increasing the demand for new professional skills among employees. To meet this challenge, workers need to be retrained and upskilled across Europe. 1 500 economic and social partners have committed to providing 10 million workers with the additional skills they need by 2030. The skills shortage could be alleviated if workers were able to move more easily from country to country within the single market. So far, however, only 14 % of small and medium-sized enterprises (SMEs) have attempted to recruit workers from other member states. The main reason for this low rate is regulatory and administrative hurdles in the member states: EU citizens have to deal with different registration procedures from local authorities and complex national IT systems when relocating for professional reasons.
When it comes to "trade and autonomy", Europe's position as the world's largest exporter (market share 16 %) is increasingly under threat. Due to growing geopolitical tensions and unfair trade practices, the EU has taken new measures to diversify supply: Europe is specifically strengthening trade and investment relationships with trustworthy partners and building up its own production capacities in critical areas.
For example, the EU has concluded free trade and economic agreements with New Zealand, Kenya and Chile and is negotiating further agreements. At the same time, the EU has launched strategic raw materials partnerships with Canada, Ukraine, Kazakhstan, Namibia, Argentina, Chile, Congo, Zambia and Greenland. The common goal of the Commission and the member states is to monitor the resilience of strategic supply chains, build industrial capacity in strategically important areas (e.g. critical raw materials) and promote the raw materials and digital partnerships already established by the EU through closer cooperation between industrial players in Europe and the partner countries. The NetZero Industry Act, Critical Raw Materials Act and Chips Act in particular serve this purpose.
What parallels arise with the European Council's "Strategic Agenda 2024-2029"?
The demands of the Letta Report coincide in some key points with the European Council's "Strategic Agenda 2024-2029". The core element of this agenda is the implementation of the so-called "New European Competition Deal".
The European Council similarly notes that geopolitical tensions and more assertive policies by international partners and competitors, particularly in relation to subsidies, have exposed the Union's weaknesses, while long-term productivity, technological and demographic trends require urgent policy adjustments.
Specifically, the agenda formulates the following objectives: For example, policies must be better placed at the service of strengthening Europe's economic, manufacturing, industrial and technological base in order to ensure economic resilience and industrial renewal, global competitiveness, technological leadership and the Union's attractiveness as a business location. In this context, the pursuit of a level playing field both globally and within the internal market is essential.
In addition, conditions are to be created that enable European companies to take advantage of the opportunities offered by a climate-neutral, digital and circular economy. Cross-border connectivity and high-quality infrastructure play a key role in this. Europe must also reduce its strategic dependencies in certain sensitive sectors, particularly in the areas of energy, critical raw materials, semiconductors, health, digital technology, food and critical technologies. Investments in key strategic sectors and infrastructures require a combination of public and private funding. In this respect, access to capital should be facilitated, especially for SMEs and start-ups.
The implementation of the "New European Competition Deal" requires efforts at both Union and Member State level and in all policy areas. Essentially, the agenda also emphasizes the importance of expanding and thus completing the EU single market: In this context, action is needed to remove any existing barriers, improve cross-border mobility and develop a new horizontal single market strategy for SMEs by 2025. With regard to the expansion of the Capital Markets Union, national framework regulations for corporate insolvencies and corporate tax law in particular should be harmonized.
What is the forthcoming report on European competitiveness about?
Recent statements by the rapporteur Mario Draghi allow conclusions to be drawn about the content of his report on European competitiveness.
At a meeting of EU finance ministers (ECOFIN) in Ghent, Belgium, at the end of February, Draghi called for a more energetic approach to international trade relations. In addition, governments and central banks should - once again - work more closely together: Monetary policy should give governments room for investment, which they can use to increase potential growth and better cope with negative supply shocks, which are likely to occur more frequently due to ongoing de-globalization, he said. Draghi: "If we look at our main competitors and the US in particular, the gap is everywhere. In productivity, in gross domestic product (GDP) growth, in GDP per capita. The global economic order in which Europe has thrived is being shaken by dependence on Russian energy, Chinese exports and US defence."
In the face of wars and climate change, the former Italian Prime Minister has prepared the EU countries for a massive need for investment. Europe would have to invest "enormous sums in a relatively short time": "In recent years, there have been many profound changes in the global economic order, and these changes have a number of consequences, one of which is clear: A huge amount of money needs to be invested in Europe in a relatively short period of time." Draghi put the cost of the green and digital transition in the EU at least 500 billion euros per year - plus the investment required to strengthen its own defence capabilities.
The finance ministers discussed solutions with Draghi on how Europe could position itself more strongly against the USA or China. According to participants, everyone agreed on strengthening the role of the European Investment Bank (EIB) to mobilize private capital. In addition to its current function as a "climate bank", the EIB should in future focus more on the topics of competitiveness, defence and security.
Conclusion
Shortly before the end of the legislative period, a relatively concrete picture of future European industrial and economic policy can already be sketched out in political terms.
In summary, it should be noted that the EU's current economic and integration engine - the single market - will continue to be of crucial importance in the future. All stakeholders agree that the potential of a fully harmonized single market has not yet been exhausted and that there is a considerable need for action. This would require a comprehensive reform of the internal market strategy.
On the global stage, the EU must become more economically resilient and competitive. For example, there is a broad consensus on energy and security policy issues to prevent further dependence on other economic powers and instead promote the EU's economic autonomy.
It remains to be seen how the political declarations of intent and recommendations for action will ultimately be translated into concrete legislative proposals by the future EU Commission. As the letter report itself notes, the election result will not only determine the strategic direction, but will also shape the recommendations contained in this report.
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