A single market is the integration of a group of countries’ economies. It allows free movement of capital, labour, goods and services. This essay is going to look at why it is important for the EU to develop a single market, and more specifically one within the financial services sector. It will specify the problems that are incurred when trying to establish the market, and analyse the ways that the European Union have tried to alleviate these problems to help move the market forward and make it more efficient.
By removing trade barriers and allowing the free movement of capital, labour, goods and services, it means that the countries are given an added incentive to trade with each other. The removal of trade tariffs will lead to trade creation. Trade creation is what happens when the members of a customs union, such as the EU, remove trade tariffs. Because the tariffs have been removed it leads to lower priced goods being imported, and because of the lower prices, consumption increases. An example of trade creation would be the import of butter from Denmark to the UK. If the price of Danish butter in the UK is 130p; once the import tariff is removed the price will fall to, say, 120p. Due to the fall in price the consumption will increase. The increased consumption of butter is the trade creation (Economics Online. 2011). It can also lead to other benefits for the economy. Not only can the Danish butter suppliers benefit from economies of scale due to their increased sales, but the UK can lower their own butter production and use their resources more efficiently. This leads to the countries’ economies becoming more reliant upon each other and harmonizing their relationship. This links back to the original aims of the EU that was to bring peace within Europe and prevent a repeat of the destruction caused during World War Two.
The development of the single market was not going to happen overnight. It would take many years and have to overcome many problems before becoming fully established. One of the first problems that needed to be solved in order to establish a single market in financial services was to achieve the acceptance of common supervisory regulations. This raised the question of which countries regulations should applied when a firm operated in another country or sold services across borders. Should it be the home country or the host country? If the regulations of the home country where to be used then this would mean that the firms operating in one country would face different levels of regularity, therefore creating an unfair market with competitive distortions, as the firms would all be answering to different regulatory bodies. Also the consumers that use these financial services need to be protected and this tends to be better provided by the host countries government, as it is their people that are being protected (Howells, P, 2008). On the other hand, as the financial services are seen to be central to the success of a countries economy, if the regulations of the host country are used they may make it more difficult for the foreign institutions to dominate their market (Howells, P, 2008). This would again lead to unfair competition and lead to the market being in-efficient.
In the Cockfield Report of 1985, amongst other things, they looked at reducing the problem of home country versus host country regulation. In 1979 the European Courts of Justice denied Germany the right to ban the import of Cassis de Dijon from France on the grounds that its alcoholic content was lower than that required by German Law (Howells, P, 2008). The reason that they did this was because not meeting a national law, in itself, was not a sufficient reason to refuse an import from another member state. This lead to the acknowledgment that although in some cases the laws needed to be…