What is the EU Single Market and why is it so central to Brexit?

Last year, Theresa May declared that the UK would leave the Single Market when the country exits the European Union. So what is the Single Market, how was it formed, and can the UK still enjoy its benefits after Brexit?

Here is what you need to know. 

What is the Single Market?

The Treaty of Rome in 1957 aimed to abolish "obstacles to freedom of movement for [goods], persons, services and capital".

These "four freedoms" form the bedrock of the Single Market - or the "common market" as it was then known.

Free trade deals usually focus on getting rid of tariffs on goods. But the Single Market is more than just a free trade zone. It treats the EU and other members as one bloc without borders where companies can do business on a level playing field.

Goods, services, investment and people can move around freely. Or at least, that's the idea.

Why is it so central to the Brexit debate?

Immigration is one of the most significant reasons why the issue of whether or not the UK ought to retain membership of the Single Market is so hotly contested.

The UK economy is service heavy. Nearly 80pc of economic activity is generated by services firms, rather than the manufacturing of goods, agriculture or fishing. The EU is an important market for these services, in part thanks to the advantages of the Single Market.

However, the creation of an independent immigration policy was a significant driver of the vote to leave the EU.

Due to the four freedoms which form the basis of the Single Market, remaining within it and also ending freedom of movement in order to develop an immigration policy is incompatible, according to top EU officials.

The EU’s chief Brexit negotiator, Michel Barnier, has said there can be no “cherry picking” of different aspects of EU membership. One such fruit-plucking scenario would be if the UK could end freedom of movement but also retain the same or choice areas of market access to the bloc.

How does it differ from the Customs Union?

The Customs Union is separate to the Single Market. There are also important differences between the Customs Union and a customs union. Both are narrower in scope than the Single Market.

Broadly, customs unions are an agreement between states to apply the same tariffs and standards to goods. Once goods enter the union, they can move around without paying a fresh set of taxes when they move from state to state.

Turkey, which is not a member of the EU’s Single Market, is, however, a member of a customs union with the EU.

The EU-Turkey model has been widely criticised as a possible option of the UK post-Brexit, as many believe it could curtail the development of an external trade policy. Some countries can access the Turkish market but not vice versa after striking deals with the EU. It's an effect experts often call asymmetric access.

The EU’s Customs Union, covers more goods than its separate customs union deal with Turkey. There some are exemptions for key areas for Turkey such as agriculture.

Labour's leader, Jeremy Corbyn, has said that, if led by his party, the UK would seek a new customs union arrangement with the EU after Brexit. This is a major point of difference between the two main UK parties.

Which countries are inside the Single Market?

Currently, the 28 EU countries - including the UK - are full members.

The four members of the European Free Trade Association (EFTA) - Norway, Iceland, Switzerland and Liechtenstein - also participate in the Single Market - but to different degrees.

For example, Norway pays into the EU budget, and follows around three-quarters of EU directives (although this is not the same as three-quarters of EU laws).

Has it always been smooth?

No. Like any large project, the Single Market has faced problems and obstacles.

As well as eliminating tariffs, one of the EU's goals is harmonising regulations across the bloc and removing so-called non-tariff barriers to trade.

That's easier said than done. 

One court case that helped to shape the Single Market involves crème de cassis - or more specifically, how much alcohol it contains.

For many years, German bars and shops were banned from selling the French blackberry liqueur because it did not comply with Berlin's alcohol standards.

At the time, fruit liqueurs were required to have a minimum alcohol content of 25pc. Germany even argued that the health of its citizens depended on having clearly defined minimum limits on alcohol.

Rowe-Zentral, a German importer and exporter, challenged this at the European Court of Justice (ECJ). Their argument was simple: if it's good enough for France, then it should be good enough for any other EU member state, including Germany.

The court agreed, and the judgment helped to form the principle of mutual recognition.

Mutual recognition

There are exceptions, and countries have won cases on the grounds of health, consumer protection, tax policy and fair trading.

It led to Red Bull's original recipe being banned in France for 12 years after French authorities argued that taurine - a key ingredient - was harmful.

France was eventually forced to accept imports after the courts ruled that it could no longer ban the drink unless a health risk was proven.

Red bull
Red Bull drink cans are seen in a supermarket in Vienna. When the French ban was lifted, the cans that went on sale featured a logo advertising the product's unique selling point: "taurine formula". Credit: Reuters

Belgium was also forced to accept margarine imports from other EU nations in the Eighties after the court forced the country to lift its ban on imports that were not packed in cubes.

The country argued that the strict rules were in place to help customers to distinguish the product from butter to protect them.

The court disagreed.

There have been compromises. A ruling by the ECJ in the 1980s said French authorities were wrong to ban imports of woodwork machines approved for use in Germany.

Paris argued that French machines were safer for their workers. The ECJ did not accept this argument, but said imports had to face rigid safety inspections.

Controversy

This principle of mutual recognition also led to controversial laws such as the European Arrest Warrant, which was designed to speed up extradition proceedings.

The law, which came into force in 2004, makes it easier to extradite citizens of one EU country to face criminal charges in another.

Many have argued that countries abuse the system - and waste taxpayers' money as warrants have been issued for trivial offences such as the theft of a dessert.

Accusations of creeping EU interference have coincided with bans handed down from Brussels on some of the most powerful vacuum cleaners.

The European Commission has pointed out that the ban relates to hoovers that "use too much energy" and are inefficient, rather than ones that "suck powerfully".

Sir James Dyson
Inventor Sir James Dyson has objected to EU energy labelling rules, claiming that they allowed his rivals to achieve misleadingly good efficiency ratings. Credit: Telegraph

Rules are there to be broken

Membership of the Single Market requires member states to accept all four of the freedoms outlined above.

But there have been exceptions.

For example, Liechtenstein, which is in the European Economic Area, but not in the EU, was granted special status under Protocol 15 in the EEA agreement that let it limit the number of new residents for a period of four years by subjecting them to “prior authorisation entry, residence and employment”.

Cyprus imposed capital controls between March 2013 and April 2015 in order to prevent a run on its banks.

Article 63 of the Treaty on the Functioning of the European Union states "all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited".

However, the European Commission claimed the controls were in the public interest and therefore legal to prevent the "uncontrollable outflow of deposits which would lead to the collapse of the credit institutions".

It said in a statement:

In current circumstances, the stability of financial markets and the banking system in Cyprus constitutes a matter of overriding public interest and public policy justifying the imposition of temporary restrictions on capital movements.

Services

While the EU has ironed out most of the kinks in the freedom of movement of goods, harmonising services has been more tricky.

A report published by the Organisation for Economic Co-operation and Development (OECD) in 2016 showed progress towards deepening Europe's Single Market had "stalled".

It said almost all of the progress had been made in bailed-out nations such as Greece, which have been forced to implement changes as a condition for bail-out funds.

"In some isolated cases [including Ireland and Hungary], previously achieved reforms have even been reversed," the EC said.

Sectors including energy and transport remained "insufficiently interconnected and open to competition", while in some countries "new barriers" had been introduced in services.

"The EU Single Market remains far from completed," the OECD said in its annual review of the bloc.

Many also highlight the importance of so-called passporting rights for financial services companies, which give UK companies the right to do business in any other EU or EEA member state while being based in the UK and regulated by British authorities.

According to the City watchdog, 5,476 UK-registered firms use passporting to do business elsewhere in the EU.

A further 8,008 financial companies from either the EU or EEA depend on passports to access the UK.

Swiss banks do not have passporting rights and so operate their European investment banking businesses through subsidiaries in London.

European Commission figures also show completing a Digital Single Market could boost the EU economy by up to €415bn and create hundreds of thousands of jobs.

Different rules and regulations make complying with all of them costly.

Small online businesses currently face up to €9,000 in extra costs to adapt to international laws, according to the EC.

VAT compliance expenses are estimated to cost €5,000 a year alone, it claims.

What is the Single Market worth to the UK and EU?

Estimates vary, though most studies have shown the Single Market has had a positive impact on EU economic output.

The Institute for Fiscal Studies said in a recent study that "a figure in the region of a 5pc increase to EU GDP, relative to a situation where a Single Market was not pursued, would not seem implausible".

It said:

If that were the case, the Single Market’s impact would mean an average EU citizen enjoys annual income and public service spending at a level 5pc higher than otherwise. Still, we should exercise caution – several of the studies suffer from methodological issues that could bias the results upwards or downwards. In addition, the impact for individual member states could certainly differ from the EU average figure.

For the UK, the IFS said maintaining membership of the Single Market as part of the EEA could be worth 4pc of GDP.

What will the UK's relationship with the Single Market be like after Brexit?

It's too early to say. Pulling out of the Single Market effectively rules out an EEA-style membership. 

Banks and financial services businesses continue to lobby for passporting rights as well as the ability to influence rule making after Brexit.

This is what the IFS said in a recent report:

Beyond the EEA, the UK could seek a type of ‘free trade agreement’ (FTA) with the EU. This would likely mean better ‘access’ relative to a situation with no agreement by substantially reducing, and potentially eliminating, tariffs on goods. Some trade agreements, such as the forthcoming EU–Canada deal, also reduce some non-tariff barriers on services, though such deals are rare, harder to agree and stop well short of the kind of service access conferred by membership of the Single Market.

UK services trade has grown significantly over the past two decades, and the country has traditionally run a trade surplus in this sector equivalent to around 5pc of national income, according to official figures.

License this content