The Attempts by the EU to Alleviate the Inherent Problems of Establishing a Single Market - Essay Example

?Analyze the attempts by the EU to alleviate the inherent problems of establishing a single market within the Financial Services Sector. IntroductionUnlike the earlier emphasis by the European Union to remove tariffs and the establishment of a common policy to regulate dealings with the rest of the world, the Treaty of Rome went to an extra length and introduced a single European market (SEM) to facilitate trade in all goods and services amongst the member states. In this regard, the 1957 treaty had pointed out removal of all non-tariff barriers to allow free movement of goods. The continued scrapping of all barriers to enhance freedom to supply services such as insurance and banking was one of the aims of these efforts, and this had to go along with free movement of capital and labor. As a result, the integration process had to take a more heightened effort to ensure it was fruitful. The Commission published a White Paper in 1985, whereby the enabling instrument was the Single European Act (the SEA). The aim of this Act was to remove the non-tariff barriers and to encourage free movement of capital and labor by 1993. It was also agreed that discrimination by all means should cease (House of Lords, 2008, p. 33). The non-tariff barriers Although the European Commission was hell bent on establishing a single market, not much had been achieved by 1980s. Furthermore, by the mid - 1980s, most of the aims of the Rome treaty had not been attained despite the first stage of integration having been completed. Actually, non-tariff barriers were reported to have increased between 1975 and 1985 despite all these efforts. It was thereby realized that a strategy was needed to strengthen the integration among members (Canoy, Liddle and Smith, n.d, p. 3). The Single European Act had, in mind, three major types of non-tariff obstacles to factor mobility and trade, which inspired its objectives. The first was the physical barriers, whose formation was as a result of controls and customs formalities (House of Lords, 2008, p. 29). Its aim included moving administrative checks away from the borders and ensuring their processes were simplified, development of a common policy on transport, as well as removal of all internal controls and frontiers on capital and people. The second type was technical barriers, which encompasses the various technical product specifications. Its purpose was to harmonize regulations or to create mutual identification of standards of each member country; to institute the correspondence of qualifications; and to dismantle exchange controls. The third type was fiscal barriers, which was characterized by a very complex process of tax rates harmonization particularly in relation to the corporation and indirect taxes. Also, the SEA placed emphasis on the suitability of allowing free trade on each member country’s public purchasing, which encompassed incorporation of social charter and application of competition. Nevertheless, there was no reliable arrangement for tackling the differences in respect to the external trade policy and a policy on subsidies was not clearly spelt out. It was also not clear, how harmonization could lead to mutual recognition in regards to the achievement of the single market (Eichacker and Amherst, n.d., p. 4). The banking industry The banking industry, among other financial sectors, was greatly regulated and it was characterized by diversified regulatory practices. Essentially, barriers to the supply of overseas services presented more problems than location-related barriers. In some countries, financial institution and non-resident banks were restricted in their rights to do business with residents, by stringent laws and regulations (House of Lords, 2008, p. 36). The first Banking Directive instructed members to set up systems for supervising and authorization of banks as well as other credit institutions. This directive, also, led to the requirement that these financial institutions should get licensed to be recognized. In addition, licensing accorded the financial institution's freedom to do business in other member countries on condition that they were given permission to do so by the host government and abided by the requirements of the local banks (Eichacker and Amherst, n.d., p. 6). To be sanctioned, any financial institution was required to meet an initial capital requirement, to have separate capital from its owners and to have at least two reputable and experienced management representatives and a director. Nevertheless, the location of the head office in another member state could not warrant the legal withholding of the sanctioning. Since the introduction of SEA, a chain of banking directives has taken place, including the “Second Banking Coordination Directive of 1989 (SBCD)” (Eichacker and Amherst, n.d, p. 5). This directive was found on the grounds of the home country’s Cockfield Report strategy regulation as well as the mutual recognition. This opened doors for banks to do business anywhere within the EU region, all courtesy of a single license obtained from the home country - nevertheless, there were some exceptions to the home-country control. For the purpose of monetary policy, the host countries were charged with controlling the bank’s liquidity. In addition, the banks were required to comply with the consumer protection requirements and related laws of the host-country, in order to protect the interest of the public. Regarding the scope of consumer protection requirements, the law was inadequate as it created some ambiguity. Nevertheless, the directive scrapped the requirement for maintenance of dedicated capital by the branches of foreign banks (Eichacker and Amherst, n.d., p. 5). Harmonization of Tax Harmonization of Tax presented a lot of hurdles in an attempt to establish the Union. Although the initial reception of VAT as the common form of general indirect tax was remarkable, the process of tax harmonization has dragged and hence significantly reducing the pace of the progress. Nonetheless, there has been some achievement because the variety of VAT used by members has been reduced. A three-year timetable was announced by the Commission in July 1996, which crafted the road map towards the presentation of the final EU-wide VAT structure proposals, build on the home country’s principle, whereby cross-border and domestic trade was based on similar taxation (House of Lords, 2008, p. 9). This called for a reassignment of funds in regards to consumption information, coordination of the scope and number of reduced rates, a single standard-rate of tax agreement and exemptions presently in application. However, by 2001, no compromise had been reached and the Commission is still battling with the European parliament and the Council of Ministers in respect to these issues. Also, a couple of taxation of profit issues is yet to be resolved. Securities markets Apparently, establishment of a legitimate financial market across the EU is more essential than banking. The essence of establishing a free access to all sources of capital is believed to be important in order to ensure a fair competition for all firms operating within the EU. It was also agreed that effective utilization of savings requires all investment products to be opened for all investors, irrespective of their home country. Following the rapid growth in new financial products and the development of financial markets since the early 1970s the investment industry was becoming more and more significant (Eichacker and Amherst, p. 9). Even so, notable efforts were made from the late 1970s, particularly in respect to the harmonization of various member state regulations in regards the information availed to the investors and the admission of securities to stock exchange listing. In 1979, the minimum conditions for securities issuers was set out, encompassing a company’s period of existence, minimum issue price, sufficient distribution, free negotiability and the stipulation of suitable information to investors. The first major directive, which also encompassed the single passport standard, was established on January 1996 (Eichacker and Amherst, n.d., p. 4). The single passport extension was indispensable because this right was extended to banks that were not involved in the securities business, but it was not extended to non-banks. Nevertheless, there was an inherent problem since the banking industries in some countries had previously based their structures on the universal banking principles; but in other countries, especially those from the UK, had their two forms of business operated separately. The new SEA and Cockfield Report principles of a single passport, minimum harmonization, home-country regulation and mutual recognition were applied in two orders in respect to the marketing of unit trusts in 1985 and 1988. As a result, it was now possible to sell unit trust anywhere in the EU provided it was approved in one of the member countries. This was done without further authorization as long as it met the requirements that protected the investors in accordance with the host-country’s regulation (Eichacker and Amherst, n.d., p. 6). Conclusion The benefits of the establishment of a single market in the EU were estimated based on the welfare gains, and the findings were published in the Cecchini Report. This move was followed by a strong criticism in support that the estimates were overstated and that structural and regional hurdles could ensue. All the same, the single market program was generally endorsed. The elimination of barriers to trade to the mobility of capital and to trade within financial services had particularly slowed down compared to the rest of the European economy. Reluctance of national regulators to surrender control of actions in their jurisdictions was cited as one of the major causes of these states of affairs. In essence, this had slowed-down harmonization of regulations across the EU countries (Eichacker and Amherst, n.d., p. 10). To accelerate the road towards a single financial market, a change of tactic was factored in the Single European Act. The essence of inclusive harmonization of regulations was substituted by the most effective joint recognition of national regulations and standards. The other remarkable transformation was the adoption of home-country regulation. These new provisions were integrated in directives with the purpose of creating a single market within the three financial services sectors including banking, securities market and the insurance. Nevertheless, further directives should be introduced and their implementation into national laws investigated. Also, it is notably important that the single market laws get enforced at the national level before any gains is expected from the EU’s efforts (Eichacker and Amherst, n.d., p. 10). References Canoy, M., Liddle, R. and Smith, P., n.d. The Single Market: Yesterday and Tomorrow. [Online] Available from: [Accessed 7 December 2012]. Eichacker, N. and Amherst, N., n.d. European Financial Deregulation, Liberalization, and the EMU: The Financial Underpinnings of the European Crisis [Preliminary Version] [online] Available from: [Accessed 7 December 2012] House of Lords, 2008. The Single Market: Wallflower or Dancing Partner? [Online] Available from: http://www.publications.parliament.uk/pa/ld200708/ldselect/ldeucom/36/36.pdf [Accessed 7 December 2012]. Read More