Tomorrow's Economy

Redefining the contours of European markets

3 March 2016

Rather than merely splitting Europe into euro and non-euro blocs, the UK-EU deal paves the way for a more differentiated Europe in the fields of financial markets, the single market and labour markets

Amandine Crespy

The settlement negotiated at last month’s European council has led actors and commentators alike to converge towards one conclusion: whether Britain leaves or remains in the EU, its ‘special status’ paves the way for a clearer distinction between two different areas within the European Union. Out of the limbo of a differentiated and fragmented Europe, ‘multi—speed’ or ‘à la carte’, a clearer picture should emerge in the medium run. This will institutionalise two distinct visions of the EU: a vast (mainly intergovernmental) economic space, on the one hand, and a political union (with more federal features) at its core, on the other.

This perspective now seems to enjoy the support of the main players, as a more integrated and better functioning eurozone shall be desirable for stability of the EU as a whole, and the UK as its financial capital. This is important because this had been a taboo ever since the impetus for giving the EU a constitution in 2000-05 ended in a fiasco.

When taking a closer look at the deal agreed upon last week, it appears that the emerging distinction between both Europes will arguably occur through the (re)modelling of the contours of Europe’s markets. While such a redefinition is still embryonic, it is telling that three out of the four main negotiation items relate directly to markets, namely financial markets, the single market, and labour markets.

The chapter on economic governance is probably the area where the implications are most difficult to understand. This is due to the ways in which the functioning of the eurozone (and hence the relationship between ‘euro-ins’ and ‘euro-outs’) is inextricably linked to the functioning of financial markets.

Here, David Cameron obtained a symbolic recognition that the rights and interests of non-eurozone members shall be respected, and the guarantee that the latter would not have to pay (or indeed be reimbursed) for any necessary bailout of eurozone members. The key issue for the future remains to what extent the regulation entailed in the newly established banking union shall apply to non-eurozone members (and hence the City) and whether the UK could veto an unwanted regulatory measure to be adopted in this framework. Here, the deal leaves the door open to political battles to come.

On the first point, the European council concluded that “specific provisions within the single rulebook and other relevant instruments may be necessary, while preserving the level playing field and contributing to financial stability”. What is at stake here is not only the competition between the City and other financial centres in the EU (mainly Paris and Frankfurt), but also the capacity of the EU to regulate financial markets in a way that can avoid any new bailout of the banking sector with taxpayers money in the future. On the second point, David Cameron was not granted a veto right on eurozone decisions; rather, a complicated procedure was defined which leaves the final decision to a bargaining in the European council should previous forms of mediation have failed.

The section of the deal on competitiveness was certainly the most uncontroversial part of the negotiations. It features essentially the functioning of the single market and the continuation of the ‘better regulation’ theme revamped into REFIT (Regulatory Fitness and Performance Programme) by the Juncker commission. In this regard, there is a fairly wide consensus on the need for further deregulation (cutting red tape for enterprises) and market liberalisation, notably through trade policy. Paradoxically, while the UK wants to loosen its ties with the supranational core, the agenda of the EU institutions has rarely been so British in its ideological vision as well as in its practical substance.

The understanding of ‘competitiveness’ merely as deregulation and liberalisation is certainly the one prevailing in the wider EU economic space. Yet, such a narrow vision is insufficient for the EU core union. Thus, a main endeavour of the Juncker commission in the framework of the European semester has been to boost investment. Yet, while fiscal austerity de facto acts as a strong impediment to investment, there are good reasons to doubt that the impetus has been strong enough to produce any tangible results regarding competiveness and growth.

The final chapter entitled social benefits and free movement was the most hotly debated because it touched upon a foundational principle of the EU, namely non-discrimination of rights among EU citizens. David Cameron could secure the suppression of in-work benefits for non-nationals on the grounds that the UK has to face an “inflow of workers from other member states of an exceptional magnitude over an extended period of time” which threatens its social security system and public services. In addition, child benefits granted for children living outside the UK will be indexed to the standard of living of the country where the child resides. These measures contribute to blur the contours of the EU market-based citizenship.

Historically, the extension of workers’ transnational rights was always a corollary for free movement within the single market. In times where unemployment levels are dramatically higher in southern and eastern Europe than in the north of the continent, the commission likes to see the EU as a unified economic space where the mobility of labour towards dynamic areas is encouraged. The granting of equal rights in foreign countries is thus acting as a facilitating mechanism, giving a political and social underpinning to the functioning of the labour market.

Were such rights limitations to be extended to other member states or persist over time (beyond the initial period of 7 years), this would deprive the concept of EU citizenship of much of its substance. It would mean that a one-sided approach is accepted where no reciprocal costs for the granting of social rights should be borne for the economic benefits stemming from foreign labour inflows. Again, this could be a further element of differentiation between the EU wider economic area and the political union at its core.

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