Joachim Nagel speaking at the DIW Europe Lecture ©F. Schuh / Photocredit: DIW Berlin

Nagel: Continuing the success story of the European single market

Bundesbank President Joachim Nagel has called for new impetus for the European single market. “30 years after being established under this name, it is true to say that the European single market is more valuable to us today than ever before. This makes it all the more important that we continue this success story”, Mr Nagel stressed in his speech at the German Institute for Economic Research in Berlin (DIW Berlin). In his view, the three main areas of action were services, digitalisation, and the capital market.

The success story of the European single market

Mr Nagel highlighted the advantages of a large domestic market, pointing out that it allowed everyone to do what they are best at and that economies of scale could be harnessed more readily. With these strengths, European enterprises are also better positioned to thrive internationally. At the same time, the single market makes Europe more attractive as a location for international investors.

The euro has reinforced the benefits of the single market, he continued, by facilitating trade between Member States. In addition, there are common rules on competition and state aid, which he considered to be an important achievement. “Dynamic competition spurs enterprises to be more innovative and more productive. As consumers, we all benefit from this: we enjoy greater choice and lower prices”, Mr Nagel emphasised.

He summarised that Europe had become noticeably more prosperous thanks to the single market. He continued that the single market and its economic strength provided the common EU trade policy with the weight necessary to be able to negotiate on an equal footing even with economically strong countries. This aspect, he said, has taken on even greater relevance since the start of the Russian war of aggression against Ukraine. In the new geopolitical landscape, policymakers and enterprises are striving to reduce one-sided economic dependencies and increase the resilience of supply chains.

Additional impetus for the single market

This success story must now be continued. Europe must remain internationally competitive as a place of business, which could also be achieved by deepening the single market. In his speech, the Bundesbank President said that its potential had not yet been fully exploited. “Work needs to be done, for example, when it comes to trade in services, the capital markets union and the digital sector”, Mr Nagel said.

In the case of services, it is crucial that the hurdles of physical distance are made easier to overcome. Digitalisation is handing us new tools. As examples, Mr Nagel made reference to digital marketplaces, collaboration in virtual teams, and purely digital products such as streaming services or cloud applications. It is important for the government to keep up with the pace of digital transformation. For instance, authorities should provide fully online information and services as far as possible. This is very much the case when it comes to services that are required for cross-border mobility.

However, payment transactions also offer opportunities for further development. Today, cross-border payments can often only be made using international card schemes. There is no single, pan-European solution based on European infrastructure. The digital euro project could play a part in this. A digital euro would be an added option in cross-border payments that could contribute to efficiency gains and reduce existing dependencies. And, in the longer term, it could pave the way for innovative business processes in the European economy.

Mr Nagel sees much untapped potential for the free movement of capital within Europe. A single European capital market could both strengthen the forces of growth and contribute to the stability of the financial system. To achieve this, it is important that enterprises are able to more easily obtain financing across national borders, especially equity. Investors need greater transparency and a consistent legal framework. The lack of harmonised insolvency rules is therefore considered to be one of the main obstacles to the free movement of capital in the European Union. It therefore made sense to consider improving harmonisation in the European Union, he said. According to the Bundesbank President, a genuine single financial market would pay off in two ways: it could make the European economy more innovative and productive whilst at the same time bringing about attractive investment opportunities.

Effective fiscal rules important for the euro area

Joachim Nagel emphasised that credible fiscal rules were an anchor of confidence in the capital markets and that they also strengthened the ability of government finances to withstand crises. “A stable monetary union depends on all Member States having sound government finances. This then allows the single monetary policy to focus on safeguarding price stability. That is why effective fiscal rules are so important, especially in the euro area. They need to be conducive to sound government finances”, stressed the Bundesbank President.

In practice, however, according to Mr Nagel, they have often failed to have the desired effect. As a result, the rules have been unable to reliably safeguard sound government finances. With regard to the discussion surrounding the reform of the fiscal rules, he considered two aspects to be key. First, quantitative limits need to be set as crash barriers. Second, the Member States need to follow the path delineated by the crash barriers. Mr Nagel added that it was now necessary to anchor the quantitative limits more firmly than is currently the case by making the rules clearer and more transparent. Discretion should be used sparingly and exceptions should be limited to severe crises.

Finally, the Bundesbank President discussed the development of the internal market in the context of the process of European unification. The single market had not only become the backbone of the European economy and an indispensable source of our prosperity, but also furthers European integration as a whole, with very practical benefits in people’s daily lives. He concluded that we must not take these achievements for granted, however, and that it was important to keep working to preserve and renew them.