Chapter 5The Single Market Programme
As we saw in the last chapter, it took a mere two years after entry for the United Kingdom to organize a referendum on its possible exit from the European Communities. Although the result was a decisive affirmation of British membership it was hardly an auspicious start to the new relationship. To make matters worse, the 1970s were a difficult decade economically, and not just in the United Kingdom. The new economic context would have immediate and longer-run political implications in both Britain and the rest of the EC.
The End of the Golden Age
Economic historians commonly refer to the period between 1945 (or 1950) and 1973 as the Golden Age of economic growth, fondly remembered in France as the Trente Glorieuses, and in Germany as the Wirtschaftswunder (see Chapter 1). The five years after the end of the war saw exceptionally fast growth based on reconstruction, but the economic miracle continued after 1950, by which time reconstruction was essentially complete. There were several reasons for this. Chief among them was Europe’s technological backwardness vis-à-vis the United States, which implied that the continent could grow rapidly simply by importing new technologies that had already been developed elsewhere. As already noted in Chapter 1, this required high levels of investment so that the factories embodying the new technologies could be built. Growth was highest in those countries where investment was highest; investment was highest where savings were highest (since savings were needed in order to finance the investment); and savings were highest where companies made large profits, and saved and invested these profits rather than paying them out as dividends. This in turn was facilitated by the corporatist bargains of the period: management and workers cooperated in order to ensure not only high profits, but the reinvestment of these profits so that everyone gained in the long run.1 Furthermore, investment was more profitable if companies were free to sell beyond their national frontiers, which is why European economic integration was so important to the national growth strategies of the period.
The United Kingdom’s economic performance was very disappointing during the Golden Age. Figure 5.1 plots the UK’s output (GDP) per capita as a percentage of output per capita in France and Germany. As can be seen, the UK had started the post-war era significantly richer than either country, but higher growth on the continent steadily eroded its relative economic position. By the late 1960s GDP per capita was lower than in either France or Germany. There are several reasons for this poor performance: for example, labour relations were much less consensual in Britain than on the continent, and British industry operated in a relatively uncompetitive environment. The dismal economic context was important in the 1960s in shifting British political opinion in a pro-European direction. The hope was that by eliminating trade barriers, and forcing British industry to compete with Germany in particular, productivity would eventually increase, and with it living standards.
British GDP per capita as a percentage of GDP per capita in France and Germany
—— Relative to France
—— Relative to Germany
Source: Bolt et al. (2018a, 2018b)
But just as Britain finally entered the European Communities the Golden Age came to an end. At the time the trigger seemed to be the Yom Kippur War that broke out in October 1973, and the OPEC oil embargo that followed. And it is certainly true that the oil shock ushered in an economically disastrous decade. Higher energy prices led to inflation more generally, but they also led to more unemployment as higher costs and prices led to lower sales. This came as a shock to economists and policymakers: theory and experience suggested that the economic cycle should involve periods of low unemployment and high inflation, followed by periods of high unemployment and low inflation. When unemployment was low and inflation high, the right thing to do was to restrain economic demand by raising interest rates, tightening government expenditure, or raising taxes. When unemployment was high and inflation low, the opposite policy responses were what was required. What the right policy response was in a situation of high employment and high inflation, or stagflation as it became known, was far less clear. And the decade that followed was very difficult everywhere.2
In retrospect, however, even deeper forces were at work. Economic growth in Europe slowed not just temporarily, but permanently. The long-run forces that had promoted rapid growth during the three decades following the war were no longer present. In part Europe was a victim of its own success: you can no longer enjoy rapid catch-up growth when you have already caught up. Nor was it possible to grow rapidly by transferring workers from low-productivity agricultural occupations to higher-productivity jobs in the manufacturing and services sectors, once agricultural employment had declined beyond a certain point. It became more difficult to sustain growth strategies involving the active cooperation of management and unions in the difficult macroeconomic environment of the 1970s, and globalization would eventually make it even more difficult: for what good was it to workers to help sustain profits and investment if the investment happened not domestically, but in other countries? And finally, the institutions that had facilitated catch-up growth might no longer have been appropriate for economies closer to the technological frontier, in which future growth would have to be based, not on importing technologies that had already been invented elsewhere, but on doing the inventing themselves.3
Figure 5.2 plots average growth rates in five economies (France, Germany, Japan, the United Kingdom and the United States) during three periods: the Golden Age (1950–73), the remainder of the 1970s and the 1980s. As can be seen, growth slowed everywhere after 1973. It approximately halved in the three European countries charted here, but since the initial growth rate had been much higher in France and Germany (of the order of 4 or 5 per cent) than in the UK (just 2.4 per cent) this implied 1970s growth rates that were still respectable on the continent, but barely more than 1 per cent per annum in Britain. Inflation was also particularly high in Britain: it averaged 15.4 per cent per annum between 1973 and 1980, as opposed to 10.5 per cent in France, and only 4.9 per cent in Germany.4 In 1976 the British government was forced to seek an emergency loan from the International Monetary Fund (IMF). It was thus hardly surprising that in 1979 the Conservative Party under Margaret Thatcher swept to power. Nor was it surprising that some in Britain blamed the economic difficulties of the decade on the UK’s entry into the EC, which had coincided with the 1973 downturn. The Labour Party remained largely hostile to Europe, and became more so after losing office. In 1980 Michael Foot became party leader, and his party adopted an official policy of seeking British withdrawal.
Economic growth per capita, 1950-90 (per cent per annum)
Source: Bolt et al. (2018a, 2018b)
Margaret Thatcher had succeeded Ted Heath as Conservative Party leader in 1975, and campaigned for a ‘Yes’ in the referendum. The Tories were still a pro-European party, but Mrs Thatcher had none of the emotional commitment to Europe of her predecessor. On the contrary, she mistrusted the Germans in particular, was suspicious of Catholicism, and detested the continental political tradition of bargaining and compromise.5 Compromise is indeed not what we first think of when we think of Margaret Thatcher, so it is on the face of it surprising that under her the British government became an enthusiastic supporter of the greatest deepening of European integration experienced since the 1950s. But that is what in fact happened, and the Single Market programme that was constructed on her watch continues to be the major achievement of the European Communities, and the European Union (EU) that succeeded them. Since the Single Market is fundamental to both the EU and Brexit, and since its nature and implications remain surprisingly poorly understood in Britain, it is important to spend some time examining it.
The 1992 Programme
‘I want my money back!’ When the French think of Mrs Thatcher and Europe, this may be the phrase that immediately comes to mind. The occasion was the European Council (that is to say, the meeting of European heads of state or government) held in Dublin in November 1979, shortly after she had come to power. Britain’s dismal economic performance during the 1970s, and earlier, was part of the problem for Mrs Thatcher: since Britain was the seventh poorest of the nine member states, why should she also be one of the largest net contributors to the European budget? The problem was that the Common Agricultural Policy, on which around 70 per cent of the European budget was spent in those days, was of much less benefit to the United Kingdom than it was to more agricultural economies such as France, the Netherlands or Italy.6 Nevertheless, the abrasiveness with which Mrs Thatcher put forward her demands was shocking to those present, and neither Valéry Giscard d’Estaing nor Helmut Schmidt felt obliged to respond politely.7
The battle over Britain’s budget contributions continued for the next five years, and in the end Mrs Thatcher did get her money back. However, the summit at which the Europeans finally conceded, held in Fontainebleau in June 1984, was notable for much more than a famous British victory. Europe was in those days undergoing a period of self-doubt, driven in large part by the economic stagnation of the period documented earlier. Unemployment in France, which had been just 2.7 per cent in 1973, and stood at 6.4 per cent in 1980, had risen to 9.5 per cent in 1984. Politically, integration seemed to have stalled, despite the accession of Greece to the European Communities in 1981, and the ongoing accession negotiations with Portugal and Spain. The 1970s recession had led governments across the EC to protect national industries by various means, using their own national health or safety regulations to make it difficult for foreign companies to sell into their markets, or refusing to spend public money on foreign goods. ‘Eurosclerosis’, both economic and political, was the order of the day.
By this stage, Giscard d’Estaing and Schmidt had been replaced by François Mitterrand and Helmut Kohl. Both men agreed that European integration needed a shot in the arm, and eliminating economic barriers between member states was one way of doing this. As a supporter of the free market, Mrs Thatcher was also very keen on getting rid of protectionist devices across the EC. The Fontainebleau summit agreed ‘to put in hand without delay a study of the measures which could be taken to bring about in the near future … the abolition of all police and customs formalities for people crossing intra-Community frontiers’. Jacques Delors, who became President of the European Commission in 1985 with the support of Mrs Thatcher, would waste no time in responding to the appeal made at Fontainebleau.
Delors’s right-hand man in accomplishing this task was Arthur Cockfield, a member of the British government whose main function at that time was to act as Mrs Thatcher’s confidant. At Thatcher’s prompting he was sent to Brussels with the specific purpose of drawing up a plan to create a unified single European market: in January 1985 he became Commissioner for the Internal Market, Tax Law and Customs. The result was a White Paper published in June 1985 identifying 297 specific intra-European economic barriers that were to be eliminated by 1992 – hence the common use of the term ‘1992 programme’ to describe the process of creating what became known, not as the ‘Common Market’, but the ‘Single Market’.8
The White Paper identified three major types of barriers that needed to be eliminated. The first was physical barriers to trade, notably customs posts at frontiers requiring transporters to submit their cargoes for inspection when driving, flying or sailing between countries. Such barriers were condemned on unsentimental, pragmatic, Anglo-Saxon grounds: ‘The reason for getting rid entirely of physical and other controls between Member States is not one of theology or appearance, but the hard practical fact that the maintenance of any internal frontier controls will perpetuate the costs and disadvantages of a divided market.’ Time is money, and border delays cost money. At the same time, however, the White Paper recognized that there would be political benefits to eliminating border controls: ‘It is the physical barriers at the customs posts, the immigration controls, the passports, the occasional search of personal baggage, which to the ordinary citizen are the obvious manifestation of the continued division of the Community.’ Crucially, eliminating this first category of barriers required eliminating the other two, namely technical and fiscal barriers, since physical barriers existed ‘mainly because of the technical and fiscal divisions between Member States’. As we will see, this simple logic, spelled out by a Briton more than thirty years ago, is neglected by many in the UK today.
The second category of barriers to be eliminated was thus technical barriers, for example those technical barriers to trade in both goods and services resulting from different national health, safety, consumer or environmental regulations. According to a Commission study, industrialists rated these as the most important and costly barriers facing them at the time.9 Countries could tailor their regulations in such a manner as to discourage imports from other member states, but different regulations had a more systematic impact on the European economy as a whole. If a company wanted to sell children’s car seats across the EC, for example, and if each of the then ten member states had different technical standards that had to be met for the good to be legally sold in their markets, then the company would have to manufacture not one car seat, but ten different car seats, and sell each one not in a single European market of more than 300 million consumers, but in one specific national market, some of which were very small indeed.10 This was costly for several reasons. The first had to do with what economists call ‘economies of scale’. In many industries it is much cheaper per unit to produce larger quantities of goods than smaller quantities, for example because of high fixed costs of investment that can be spread out over a greater number of units. In a fragmented European market European companies tended to be excessively small, and hence inefficient and uncompetitive, especially when compared with their American and Japanese rivals. (It was Japan, rather than China, that scared onlookers in those days.) Second, fragmented national markets implied a lack of competition: instead of large pan-European companies competing against each other across the EC as a whole, you had small national companies enjoying a monopoly position in their own national market. The result was higher prices for consumers, and an even less competitive European economy.
The obvious solution was to ensure that products made in one country could be legally sold in all. This was done in a number of ways. First of all, the Commission was able to build on a famous court ruling from 1979, popularly known as the Cassis de Dijon case. The German Bundesmonopolverwaltung für Branntwein (Federal Monopoly Administration for Spirits) had attempted to prevent a French liqueur, Crème de Cassis de Dijon, from being sold in Germany, because the drink in question only had an alcohol content of 15 to 20 per cent. German legislation, on the other hand, required that liqueurs have a minimum alcoholic content of 25 per cent. The European Court of Justice ruled that the German regulation in question did not serve ‘a purpose which is in the general interest and such as to take precedence over the requirements of the free movement of goods’, and that it essentially served as a barrier to trade. There was no reason why a drink that was lawfully produced and marketed in one Member State should be excluded from another.11 In other words, the Commission was able to build on a body of law promoting the principal of ‘mutual recognition’ of national rules. This obviously simplified their task considerably, reducing the amount of legislation that had to be introduced in order to eliminate technical barriers to trade within the EC. But European legislation was still required in a number of areas, for example in order to establish essential health and safety standards that had to be respected across the EC. Precisely defined European technical standards could then provide firms with a way of proving that they complied with these. As we saw in Chapter 1, one of the core purposes of European integration has been to ensure that the benefits of trade do not come at the expense of regulatory races to the bottom. It is therefore not surprising that the Single European Act, which set in train the 1992 process, and was agreed in 1986, specified that ‘The Commission, in its proposals … concerning health, safety, environmental protection and consumer protection, will take as a base a high level of protection.’12
Finally, eliminating physical barriers also required eliminating the third category of barriers considered in the White Paper: fiscal barriers requiring frontier controls for tax-related reasons. Tariffs had of course already been eliminated, but states raised (and still raise) substantial amounts of money via indirect taxation – that is to say, by taxing the sale of goods and services (rather than workers’ wages, landowners’ rents, or investors’ profits). Indirect taxes in Europe come in two main forms: Value Added Tax or VAT, and excise duties, which are straightforward taxes on the consumption of particular goods such as alcohol, tobacco and fuel. Since member states set different tax rates, there were strong incentives to check goods crossing national borders in order to ensure that tax revenue was not lost. For example, a state with a relatively high excise tax on tobacco would have an incentive to stop shoppers from buying their tobacco abroad. Less obviously, since the subject is inherently complicated (but hopefully not excessively so), border formalities were also required because of VAT. Since the issue is important for Brexit, although it is rarely if ever discussed, a brief detour is necessary.
We Have to Talk about VAT
VAT is a gift from France to the world. True, it was invented by a German, or possibly an American, but it was Jean-Baptiste Colbert, Louis XIV’s Finance Minister, who famously said that ‘The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing’, and it was France that first adopted a value added tax, in 1954.13 VAT is a sales tax. Unlike excise taxes, sales taxes are levied not on the sales of particular items, but on the sales of goods and services more generally. They come in different forms: turnover taxes, retail sales taxes and VAT. If Europe has converged on VAT as the sales tax of choice this is not just because of the French example, but because of the logic of European economic integration.
To see the differences between these different sales taxes, and begin to understand the potential problems that VAT poses for Brexit, let us start with a very simple example. Let us imagine that a farmer produces €1,000 worth of barley, which he sells to a brewer. To keep things really simple, imagine that the farmer incurs no costs: his value-added (the difference between the cost of his inputs and the value of his output) is equal to €1,000. Let us then imagine that the brewer produces beer that he sells to a pub for €3,000. His only inputs are the barley he bought from the farmer. His value-added is equal to €3,000 minus the cost of the barley (€1,000), or €2,000. Finally, let us assume that the publican sells the beer to his customers for €6,000. His value-added is equal to €6,000 minus the cost of the beer (€3,000), or €3,000.
Now let us imagine that the government wishes to impose a sales tax of 10 per cent. A turnover tax would tax the sales of every company in the above example at the rate of 10 per cent – there would be a 10 per cent tax on the sales of the farmer, a 10 per cent tax on the sales of the brewer, and a 10 per cent tax on the sales of the publican. Do you see the problem? If the publican were to buy the businesses of the brewer and the farmer (that is to say, if the production in this example were to become ‘vertically integrated’ and take place within one big firm), the only sales for the government to tax would be the final sales to the consumer. If the three businesses remain separate, on the other hand, not only are the final sales to the consumer taxed, but so are the two intermediate sales in the example (the farmer’s sales of barley to the brewer, and the brewer’s sales of beer to the publican). A turnover tax of this sort would therefore give a strong artificial incentive to companies to vertically integrate, and hand a strong artificial advantage to bigger firms over smaller firms. For this reason, turnover taxes are generally regarded as inefficient and undesirable.14
A retail sales tax avoids this problem. It only taxes sales to final consumers: sales to other businesses are exempt from tax. In this example, a retail sales tax would involve a 10 per cent tax being levied on the sales of the publican to his customers, who are the final consumers. The publican would add 10 per cent to the price charged to his clients, who would thus end up paying €6,000 plus 10 per cent, or €6,600, and he would send the €600 in tax to the government. A certification scheme would need to be put in place proving that the publican and the brewer were businesses, and that the sales of beer to the pub, and barley to the brewery, were thus tax-exempt.15 There would be no artificial, tax-based reason for the pub, the brewery and the farm to merge, since the sales from farm to brewery and from brewery to pub are tax-exempt in all circumstances.
Finally, let us imagine that the government imposes a 10 per cent value added tax. Like the turnover tax, this is imposed on the sales of each of the three businesses in the example above. However, it does not give rise to an artificial incentive for the three to merge. The farmer sells his barley to the brewer for €1,000 plus 10 per cent, or €1,100. He provides the brewer with an invoice stating that this total sum included a VAT payment of €100, and sends the €100 to the government. He ends up with €1,000 for himself, just as if there had not been a tax at all. The brewer sells his beer to the publican for €3,000 plus 10 per cent, or €3,300. Again, he provides the publican with an invoice stating that €300 of this total sum consisted of VAT. He then sends the government the money that he collected in VAT, €300, minus the money that he paid in VAT when buying the barley (€100), or €200. It is this ability of businesses to deduct from the taxes due on their sales the money that they paid in tax when buying inputs that defines a VAT. You will notice that the money that the brewer sends to the government (€200) is equal to 10 per cent of his value-added (€2,000), hence the name of the tax. Also notice that the brewer ends up with €2,000 after all of these transactions have been undertaken, just as if there had not been a tax at all (he takes €3,300 from the pub, sends €200 to the government, and pays €1,100 to the farmer). Finally, the pub sells €6,000 worth of beer to the final consumers, and again charges 10 per cent in tax. The customers pay €6,600 for their beer. The pub sends to the government the amount it received in VAT on these sales (€600) minus the money that it paid in VAT when buying the beer (€300), or €300. Again, you will notice that €300 is 10 per cent of the pub’s value-added (€3,000), and that the pub ends up with €3,000 (taking €6,600 from its customers, sending €300 to the government, and paying €3,300 to the brewer) – just as if there had not been a tax at all.
The total tax take in this example is €600 – the sum of the €100 sent by the farmer to the government, the €200 sent by the brewer, and the €300 sent by the publican. The three businesses are as well off as they would have been without a tax, since it is not they who pay the tax.16 Rather, it is the final consumers who effectively pay the tax, since they are charged €600 more than they would have been in its absence. In other words, the VAT in this example ends up having precisely the same effects on all three businesses and on the final consumers as a retail sales tax. So why bother with what seems like a very complicated way of achieving exactly the same thing? The major perceived advantage of VAT is that retail sales taxes are collected only when goods are sold to final consumers: in the example above, the entire €600 would be collected in one go when the pub sells beer to its customers. In contrast, VAT is collected in stages – three stages in our example. This makes it less easy to evade, or at least to evade entirely. Another practical issue regards who pays the retail sales tax. In principle, it is only the final consumer: that is the whole point of a retail sales tax. However, in practice this seems difficult to achieve: one study found that on average 40 per cent of American states’ retail sales taxes were paid by businesses rather than consumers.17 This implies that retail sales taxes can give rise to the distorting incentives described above, but it also implies that value-added taxes have important practical advantages when it comes to international trade – which is where European integration comes in.
The 1947 General Agreement on Tariffs and Trade, which we encountered in Chapter 2, did not just deal with tariffs and quotas. It also specified that countries could not impose indirect taxes on imported goods that were higher than those imposed on equivalent domestic goods – such behaviour would obviously constitute (badly) disguised protectionism.18 This means in practice – again taking our example above – that a pub in France would need to impose the same sales tax (or indeed excise duty, since we are talking about alcohol) on Belgian and French beer. The GATT also prohibited export subsidies for non-primary products: countries were not allowed to give their companies unfair competitive advantages in other markets by subsidizing their sales abroad.19 At the same time, however, countries were allowed to exempt their exports from domestic sales taxes. Otherwise, a good being exported would have to pay not only the domestic sales tax in the exporting country, but the domestic sales tax in the importing country – leaving it at an obvious disadvantage relative to local competitors in the importing country, whose goods would only be taxed once. What if domestic sales taxes had already been paid on a good being exported, because they had been paid on inputs used in the production of that good? For example, what if the Belgian brewer had already paid sales taxes on his purchases of barley? In that case, it was permissible to refund him those taxes before he exported his beer.
But in practice calculating the sales taxes that had already been paid by a producer could be tricky, even with retail sales taxes – as we have seen, these are often in fact paid on sales of inputs to businesses rather than on sales to final consumers. And turnover taxes were even less transparent from this point of view. Exactly how many sales taxes had already been paid per litre of beer, let alone on a motor car? By the 1950s France had a VAT, but other countries had a variety of sales and turnover taxes that made such calculations very difficult. If you couldn’t accurately calculate the taxes embodied in a product that had to be refunded to the exporter, you had to estimate them – and this gave governments the opportunity to overestimate, to over-refund, and in effect to subsidize their companies’ exports. This is why the Treaty of Rome decreed that ‘The Commission shall consider how the legislation of the various Member States concerning turnover taxes, excise duties and other forms of indirect taxation, including countervailing measures applicable to trade between Member States, can be harmonized in the interest of the common market.’
Eventually, the member states converged on the value added tax as the ideal solution to these problems, and in 1967 they agreed to replace existing sales taxes with VAT. Ever since then, new member states have been obliged to adopt a VAT system, if they have not already done so. With VAT, it becomes straightforward to calculate and deduct sales taxes that have been previously paid by producers from the value of goods being exported. Let us take the example of the Belgian brewer selling to France, and let us assume that the structure of the brewing industry is exactly the same as before. However, let us also assume that the Belgian VAT rate is 20 per cent. The Belgian brewer has €3,000 worth of beer to sell, and has paid €1,200 to the farmer for his barley, of which €200 (20 per cent of €1,000) was VAT. If he sold his beer to a pub in Belgium he would charge €3,600, remit €400 (equal to €600 minus €200) to the government, and keep €2,000 for himself. What if he sells to a pub in France? Sales to other countries are ‘zero rated’, that is to say no VAT is charged on them. The Belgian brewer would thus sell his beer to the French pub for €3,000. He would then be reimbursed for the VAT he had paid when buying the barley, namely €200. Once again, he gets to keep €2,000. Crucially, it is very easy for the tax authorities to see how much the Belgian brewer should be reimbursed, since this is simply the amount stated on the invoice given to him by the Belgian farmer. As for the French pub, when buying the beer from the Belgian brewer it would immediately pay the French state the tax due on that purchase, but calculated at the French rate. If that rate is 10 per cent, as in the earlier example, this would amount to €300, which is the same as would have been paid if the French pub had bought its beer from a French brewer.
In principle this all works very efficiently. In practice there is scope for fraud, based on the fact that the Belgian brewer is being paid money by the Belgian government, and is not sending the government any sales-related VAT to offset this. You therefore need to make sure that the beer in question is indeed being exported, rather than being sold illegally in Belgium. You also need to make sure that French VAT is paid on the beer when it is imported into France. Before the advent of the Single Market, border controls were an important part of the administrative apparatus required to ensure that fraud was not occurring, that the goods that were supposed to be exported were in fact being exported, and that all taxes that were legally due were paid. The VAT on exports was refunded at the export stage; border controls ensured that all goods that were supposed to be exported were in fact exported; and the VAT on imports was levied at the border by customs authorities. However, all this required physical border formalities, and as we saw earlier the 1992 programme sought to do away with these. What was the solution?20
Back to 1992
The Cockfield White Paper had warned that ‘The removal of fiscal barriers may well be contentious’ and so it proved. In the end, a transitional arrangement was put in place that survives to this day. First of all, individual shoppers were allowed to cross borders, buy goods for their personal use, and return home unhindered. High-tax member states thus accepted that they would lose a certain amount of tax revenue, but since this is individual citizens buying for their own consumption rather than businesses, the losses are for the most part small, and acceptable given the benefits to everyone of abolishing frontier controls. Second, there was some limited harmonization of tax rates. The general VAT rate was to be no lower than 15 per cent, although exceptions could be made on a limited number of products. And third, physical controls at the border were replaced by the self-reporting of firms.
In order for the exporting firm to receive its VAT rebate, it had to provide the authorities with the VAT identification number of its customer in the other member state. That customer would then pay the import VAT due when making their next periodic VAT return. (In France, for example, businesses have to submit monthly returns unless they are below a certain size, in which case they can submit them quarterly.)21 Instead of customs controls at the frontier, there is the VAT Information Exchange System (VIES), which collates all of the information provided by exporting and importing firms regarding their sales to and purchases from other member states and provides this to member state tax authorities. As we will see later in the book, this point is crucial for Brexit: without the VIES, inspections at borders would become both essential and inevitable.
The Politics of the Single Market Programme
Abolishing the 297 barriers identified in Cockfield’s White Paper was an immense political undertaking, involving as it did twelve member states (Portugal and Spain having joined the European Communities in 1986) whose elected politicians were responsible to their voters and had many vested interests to worry about. As we saw in Chapter 3, ever since the 1960s the so-called Luxembourg Compromise had ensured that member states could veto European legislation whenever what they regarded as vital national interests were at stake. Since the whole point of many of the barriers to be eliminated was that they sought to protect politically influential vested interests, allowing each member state the right to veto every change required to construct a Single Market would have doomed the process from the beginning. The Single European Act therefore specified that when it came to matters concerning the construction of the Single Market, decisions should be made by qualified majority voting – a system that requires not only that a certain proportion of the member states vote in favour, but that they represent another specified proportion of the population of the member states as a whole. (The precise rules have varied over time: a qualified majority today requires at least 55 per cent of member states, representing at least 65 per cent of the total EU population, to vote in favour.)22 In this manner, bigger member states have considerably more power in reaching decisions than smaller ones.
There were two major exceptions to the principle of qualified majority voting, reflecting their political sensitivity (not least in Britain): decisions regarding taxation and the free movement of people still had to be taken unanimously.23 Nonetheless, the Single European Act represented a major step towards a more supranational Europe, in that it allowed for the possibility that a member state would find itself in a position where it had to implement legislation with which it disagreed. Furthermore, there was always the risk that as time progressed the list of policy areas deemed to be relevant to the Single Market would expand. And yet Mrs Thatcher and the British government were at the time strongly in favour of this shift towards majority voting, in that it helped to create a competitive and freer market across Europe: ‘Thatcherism on a European scale’ as the slogan went. As Hugo Young says, ‘Everyone in the Thatcher Cabinet backed it, and so did almost everyone in the Thatcher Party – storing up trouble for the day when it became an inconvenient memory. For their eyes weren’t open, and they couldn’t really face the consequences of what they had done.’24
Qualified majority voting accomplished what it was supposed to do. The legislative programme identified by the White Paper was speedily accomplished, and the Single Market became a reality, at least insofar as goods are concerned – the Single Market for services has remained a work in progress, much to the occasional irritation of British politicians given the importance of services to the UK economy. The remaining capital controls between member states also came down, meaning that there were no restrictions on the ability to buy and sell financial products across borders – much to the benefit of the City of London. But symbolically, as the White Paper anticipated, the most visible consequence of the Single Market programme was the abolition of frontier controls. On 1 January 1993 these came down between the twelve member states of the European Communities – or the European Union as it was now called. That is another story to which we shall return later in this book.
One of the borders along which frontier controls were dismantled was that between Ireland and Northern Ireland, and it is to Ireland that we now must turn.