Setting the scene

When we first heard that Enrico Letta, former Italian Prime Minister and President of the Jacques Delors Institute, was commissioned by the EU to draft a report on the future of the Single Market, we knew we had to meet with him. In November 2023, we had an engaging and productive meeting where we presented our key messages.

The discussion was insightful and constructive. We highlighted the unique challenges faced by Luxembourg companies due to the country’s small size and reliance on foreign products and services.

The lack of uniformity in implementing the EU’s directive on posting of workers and stringent local requirements creates imbalances in the Internal Market, resulting in high administrative costs and deterring some service providers. While many EU Member States have simplified declarations for short-term activities, Luxembourg’s rigid requirements for even brief tasks pose significant burdens.

We also delved into the energy price crisis, pointing out that financial aid only partially offset rising costs, leaving us at a disadvantage compared to our EU counterparts and non-EU competitors. Various EU Member States sought innovative solutions to support their industries, yet the fragmented approaches underscored the need for well-targeted, temporary state aid monitored by the Commission to avoid market distortions.

Moreover, we emphasized that inconsistent bureaucracy and fragmented reporting rules are a nightmare for companies operating across multiple EU Member States, complicating standards and compliance with this wave of legislation like the upcoming due diligence directive and all the others. Unsurprisingly, Letta was well aware of these issues and the critical role of a functioning EU Single Market for Luxembourg’s economy.

And now?

On April 17-18, Letta presented his report on the future of the Single Market to EU leaders. Entitled « Much More Than a Market, » his report makes a compelling case for expanding and enhancing the Single Market to address Europe’s significant challenges. Letta outlines how a unified market can drive investment through a « savings and investments union, » lower decarbonization costs, bolster Europe’s defence capabilities, and facilitate the growth of European companies.

Letta describes the EU Single Market as unsuited for a world where the EU’s share of the global economy is shrinking and faces competitors less willing to play by global norms. His report correctly identifies many of the EU’s most urgent problems, proposing solutions ranging from the need for high-speed rail and investments in outer space to a more unified health sector and improved EU law-making processes.

Beyond advocating for the Single Market, Letta’s report proposes numerous improvements. It emphasizes the need to tackle service provision barriers, integrate financial, electronic communications, and energy sectors, and focus on green and digital transitions. Proposals include introducing a fifth freedom for research and education, creating a Savings and Investments Union, reforming the state aid regime, scaling up European companies, and promoting sustainable transportation and healthcare. Crucially, Letta recognizes that the EU needs to invest significantly in green and digital transitions, necessitating an EU-level industrial policy to maintain a level playing field.

Following this presentation, the Council adopted conclusions on the future of the Single Market, stressing the need for a holistic strategy to improve its regulatory framework and maximize its benefits. Recognizing the achievements of the Single Market over 30 years, the Council called for a modernized strategy by June 2025 to address fragmentation and ensure equal benefits for all. Key areas include reducing administrative burdens, enhancing digital and green transitions, supporting SMEs, preventing over-regulation, and improving the enforcement of existing laws. The conclusions also highlight the importance of leveraging investment, enhancing workforce skills, and strengthening the Single Market’s global role.

Looking ahead

In light of Letta’s high-level report and the Council’s conclusions, the path forward seems clear. The call for a comprehensive and proactive European industrial policy framework is a step in the right direction. This framework should provide long-term predictability, incentives for investment, and a commitment to reducing bureaucracy and regulatory burdens. The renewed focus on the European Internal Market, the cornerstone of the EU and Luxembourg’s economy, is essential. A new competitiveness agreement is crucial to bridge the economic gap with international rivals and counter deindustrialization trends.

To move forward, deeper economic integration is necessary, and Letta’s key recommendations should be a guiding light for policymakers. Maximum harmonization and mutual recognition of legislations, especially in areas where the market faces challenges due to inconsistent EU policy application or over-transposition by Member States, must be prioritized. Ensuring uniformity in EU legislation will help avoid market fragmentation and strengthen oversight and enforcement.

Integration of energy, telecommunications, and transport markets is vital. Political commitment to better cross-border integration of these sectors is essential for Luxembourg’s dependency on them. The energy transition, requiring substantial infrastructure investments, particularly in networks, will significantly impact the competitiveness of industrial enterprises and the success of their decarbonization efforts.

Moreover, fostering European public investments through a competitive industrial strategy is essential to countering measures recently adopted by other global powers. A genuine European net-zero industrial policy is crucial to effectively combat deindustrialization. Policies that lead to the exodus of our core industries, as seen with aluminium production, would be a failure. Ensuring a proper Carbon Border Adjustment Mechanism (CBAM) accompanied by appropriate export compensation, evaluating these mechanisms during the transition period, and learning the right lessons are crucial steps.

Encouraging research and innovation activities in strategic areas with targeted support for SMEs and startups through public-private partnerships will also be pivotal. Mobilizing private and public resources more effectively and considering the creation of a European high-tech stock exchange to foster the growth of European companies, especially tech startups, will be essential. This should include financing beyond the traditional banking system, such as pension and insurance funds, venture capital, and private equity.

Revising merger control rules to reflect new technological and geographical market realities without impeding the creation of European champions is also necessary. Letta’s focus on establishing a common market for the defence industry, including harmonized regulations, strategic planning, and increased incentives for corporate cooperation, is commendable. Leveraging dual-use technologies to create new local capabilities in these areas will be important.

Finally, establishing a dynamic space sector is essential for Europe’s strategic autonomy. Space offers promising economic and technological growth prospects in Europe, addressing public security and defence needs while contributing to European sovereignty in developing the space economy.

These recommendations aim to solidify the Single Market as a cornerstone of European economic strength and global competitiveness. It now falls to our policymakers in the next EU legislature to engage with these ideas, prioritize them, and develop the best strategies for implementation.

Francesco Fiaschi
Head of European Affairs at FEDIL