2. The Internal Market and the Pre-Accession Phase

The importance of the internal market in realising the objectives of the Union

2.1 The Community's internal market is not an objective in itself, but rather one of the principal instruments for achieving a whole series of objectives: balanced and sustainable growth respecting the environment, high levels of employment and social protection, better standards of living and quality of life and economic and social cohesion.

2.2 The internal market serves these objectives by enhancing the economic performance of the participating economies in the Community. It achieves this by promoting a more efficient allocation of the factors of production; allowing a larger scale of production and the exploitation of resulting economies; improving economic performance through greater competition; and providing a stimulus to investment.

2.3 Economic integration achieved in a frontier-free internal market goes further than other forms of cooperation, such as free trade areas, customs unions and common markets which retain their physical frontiers. It thereby maximises its positive economic impact. The legislation which, taken globally, provides the legal framework for achieving these economic effects has therefore been chosen as an area to which the associated countries should give particular attention in their preparations for accession.

2.4 An internal market without internal frontiers relies on a high level of mutual confidence and on equivalence of regulatory approach. Any substantial failure to apply the common rules in any part of the internal market puts the rest of the system at risk and undermines its integrity. This is another reason for making particular efforts to establish the right conditions for such legislation to be applied.

2.5 The goal of alignment with internal market rules and practices does not preclude a selective and gradual approach, to reflect the conditions in each CEEC and to safeguard their efforts to complete the process of economic transition and achieve macro-economic stability. Indeed, it is essential that the associated countries should adapt the pace of their approximation programmes to the process of economic reform.

Principles

2.6 The internal market of the Union is defined by Article 7a of the Treaty as an area without internal frontiers in which the free movement of goods, persons services, and capital is ensured. It is also a market with a social dimension and one in which active competition is encouraged. Any systematic checks and controls that are necessary to ensure compliance with the rules take place within the market and not when national borders are crossed. The Treaty lays down the basic rules which ensure that these conditions can be achieved:

2.7 Also fundamental to the evolution of the Union's legal structure are the principles established by the European Court of Justice in its rulings interpreting the Treaty. One such principle was established by the Court in its landmark "Cassis de Dijon" ruling of 1979: the principle of mutual recognition. Any good circulating legally in one Member State must also be free to circulate in any other part of the Community, except where a Member State can demonstrate that the rules of the Member State of origin do not afford equivalent protection of the essential public good. The application of this principle ensures the free movement of many types of goods and services within the Community without recourse to legislation at the Community level.

2.8 Rulings of the Court have also been important in interpreting certain terms in the Treaty, such as measures having an "equivalent effect" to quantitative restrictions (Article 30 et seq) and the prohibitions, restrictions or limitations on free movement allowed on various public policy grounds (Article 36, Article 48.3 etc). Such interpretations have facilitated the creation and maintenance of the internal market without further legislation in a large number of non-harmonised sectors.

2.9 The application of these principles has involved the removal of physical, technical, fiscal and tariff barriers. The Treaty itself provides that the creation of the internal market must be a gradual process. The removal of physical controls at internal frontiers (itself not yet complete in relation to the free movement of persons) only became possible once Member States had agreed on arrangements to carry out by other means and in other places the controls which had been applied in many cases at the frontiers themselves.

2.10 The creation of the conditions for the free movement in the Community of goods and services, and to a lesser extent of persons and capital, could not be fully achieved only by applying the Treaty, the Court's interpretations of the Treaty and the principle of mutual recognition. More detailed secondary legislation has also been required where wide differences between rules and practices in the Member States represent obstacles to free movement. The Community legislator must respect the principle of subsidiarity, only legislating at the Community level where the same or better effect cannot be achieved at the national or regional level.

2.11 National rules generally pursue legitimate public policy goals shared by all Member States, for example public security (which includes combatting crime, fraud and illicit trade), the protection of public health and safety, the protection of the environment, consumer protection, the preservation of public confidence in the financial services sector and the guarantee of suitable qualifications for the performance of certain specialised professions. These policy goals must continue to be served and in most cases, national rules can be harmonised to create a single set of Community rules, or approximated to a level where Member States are prepared to apply the principle of mutual recognition. Achieving this through legislation at the Community level has meant challenging many national rules and practices.

2.12 The Commission is required, under Article 100a.3 of the Treaty, when preparing its proposals for harmonisation of national legislation concerning health, safety, environmental protection and consumer protection, to take as a base a high level of protection. Nevertheless, some Member States may wish to retain even higher national standards after harmonisation and Article 100a.4 allows this. In this and in other exceptional cases limitations on free movement may be justified, provided these are not disguised restrictions to trade and are proportionate and adequate to their purpose.

2.13 Another reason for legislating at the Community level has been the need to create and maintain equal conditions for economic operators. Competition could be distorted if undertakings in one part of the Community had to bear much heavier costs than in another and there would be a risk of economic activity migrating to locations where costs were lower. Such costs include those imposed on governments and economic operators by measures of environmental, social and consumer protection. The implementation of high common standards of protection is among the Union's objectives and at the same time helps to ensure this "level playing field".

2.14 The internal market is also closely linked with other policy areas. The internal market could not have been created without the reinforcement, in successive revisions of the Treaty, of the provisions concerning other important policy areas. This is particularly the case for policies strengthening economic and social cohesion and for the environment and consumer protection. Concentration on the purely economic or market aspects of integration would have created an unbalanced Community unacceptable to a majority of Member States. The relationship between the internal market and other policy areas is further discussed in chapter 3.

Secondary legislation as a means of removing barriers

2.15 Legislation at the Community level has thus been necessary where differences in the Member States have been too great for the basic principles of the freedom of movement and mutual recognition to apply directly. This White Paper is mainly concerned with presenting and clarifying for the associated countries the resulting large body of secondary legislation. The way in which this is done is described in chapter 3 and the detailed presentation is in the Annex.

2.16 In accordance with the Treaty articles on which it is based, most internal market legislation is in the form of Directives. These are binding on the Member States, who take the necessary measures to put them into effect. (Where the Member States fail to take the necessary implementing measures in the time given, or do so in a way which is incomplete or inadequate, citizens can enforce their rights by invoking a Directive directly, provided the latter is worded clearly enough to leave the Member State no discretion, as several rulings of the Court of Justice have shown.) Directives are sometimes relatively detailed and leave only a limited amount of room for manoeuvre for the national legislator. In other cases, they establish only broad aims or essential conditions, with the result that national law may incorporate their requirements in different ways. This technique ensures to the greatest possible extent the preservation of traditional and preferred national approaches.

2.17 Regulations, which are Community acts directly applicable in the Member States, also form part of the body of the legislation on the internal market especially in the agriculture area and also for example concerning the coordination of social security provisions for migrant workers. There are also some Decisions, instruments which are binding on those to whom they are addressed.

Legislation ensuring the free movement of goods

2.18 The largest amount of internal market secondary legislation concerns the production and marketing of goods. These laws concern areas where the principle of mutual recognition could not apply because the divergences in national legislation were too wide and thus had "an equivalent effect" to tariffs or quantitative restrictions, so-called technical barriers to trade. Early Directives tend to establish a detailed set of Community rules which replace national rules. The more recent approach to technical harmonisation- the "New Approach" - has been to establish a limited number of essential requirements and leave more detailed rules to be made by other standard-making bodies on a voluntary basis.

2.19 In certain product areas, especially food and medicines, as well as products which are potentially hazardous but are in general use, such as motor vehicles, the old approach of full harmonisation is still considered the more appropriate. This legislation also establishes rigorous testing and certification requirements, as well as market surveillance measures in some cases. Another problem addressed by Community legislation concerns the harmonisation of differing national rules on matters such as the denomination of certain products, their labelling and/or their packaging.

2.20 These rules, taken together with the principle of mutual recognition, ensure that a producer, manufacturer or importer anywhere in the Community can introduce a product on to the market and can confidently market it anywhere else in the EU without falling foul of local rules. A Member State forming part of the internal market must not only be able to create the conditions for the production of goods which correspond to Community standards (this applies to any countries which export to the EU), but must also be able to guarantee that all goods on its market meet those standards. It must also be able to guarantee free movement within its territory for all goods from other Member States. The system thus requires not only the right legislation in all the Member States, but also the full framework of technical and other structures necessary to ensure the effective implementation of such legislation. Those structures - be they testing laboratories, metrology institutes, or customs posts at the external border of the Community - all need to win the confidence of the Community as a whole if the principle of mutual recognition is to be applied.

Legislation ensuring the free movement of services

2.21 A further major category of secondary legislation concerns the conditions under which certain services can be offered. It was necessary because Member States' legislation - even if it did not overtly discriminate against non-nationals - varied too much to allow free movement to be achieved by applying the principle of mutual recognition. Much of this legislation concerns the financial services sector, laying down minimum prudential requirements, for example, for the authorisation of banks or insurance companies. It also serves to open up national markets in areas which have traditionally been dominated by national monopolies, such as telecommunications and certain parts of the transport and energy sectors.

Legislation ensuring the free movement of persons

2.22 Article 8a of the Treaty enshrines the large concept of "free movement and right of residence of persons" as a fundamental right which is not linked to an economic objective pursued by the citizen, but which is subject to the relevant secondary legislation. This legislation is divided into rules which ensure harmonious development of the labour market and prevent distorsions of competition and those which establish the conditions of access for citizens from other Member States. Most of the relevant Community legislation deals with the latter aspect, dealing with matters such as residence permits, right of entry, restrictions on extradition and family allowances. (This part of the Community "acquis" cannot be considered as part of the present exercise of progressive alignment, although its importance for the establishment of the internal market after accession is beyond doubt.)

2.23 Parts of the legislation concerning the free movement of persons is closely linked to the freedom to provide services, especially those services which require minimum professional qualifications. As with goods, the Community started by seeking close harmonisation, so that Community rules could replace national rules for professions such as architects, doctors and nurses. More recent Directives take a horizontal approach and lay down general conditions which permit the principle of the mutual recognition of diplomas to operate.

2.24 Legislation is also necessary to ensure that a worker moving in the Community can continue to enjoy full social rights. This does not mean just pecuniary rights, but also rights in the fields of education and health. The social security systems of the Member States have not been harmonised, but under Article 51 of the Treaty they have to be coordinated to ensure that migrant workers are not deprived of their acquired rights as a result of their mobility.

2.25 Company law also falls under this chapter. Article 58 of the Treaty requires that companies should be treated in the same way as natural persons for the purposes of free movement. Community law irons out some of the major differences in national laws about the way companies are set up and run. Community law does not, however, yet ensure full "free-movement" for companies in matters such as cross-border mergers and takeovers and transfers of seat.

Legislation ensuring the freedom of capital movements

2.26 The free movement of capital is not only justified in economic terms, but also because it is a condition for the free movement of financial services and of persons. Full liberalisation of capital movements, however has only been achieved recently within the Community, controls having been an instrument of macro-economic policy for most Member States. Articles 67-73, which governed this area up to the end of 1993, are couched in more cautious language than other free movement provisions and Article 73 provided for a safeguard mechanism in case of disturbances of the capital market. Secondary legislation allowed the progressive removal of controls in the Member States. As of 1994, Articles 73b- 73g, imposing a broader prohibition on restrictions, replace the original provisions and are of direct application.

Competition policy

2.27 Competition policy is fundamental to the establishment of the internal market. Without "the institution of a system ensuring that competition in the common market is not distorted" (Article 3g) , the internal market would be unworkable.

2.28 The removal of barriers to trade requires the establishment and enforcement of a new set of transparent rules to regulate competition. In the absence of such rules, the desired optimal allocation of resources would be frustrated by anti-competitive behaviour. Competition rules need to regulate both company and state behaviour in four main areas:

2.29 An active competition policy helps create healthy economic structures and avoid abnormal profits. It is essential to the creation of the internal market in policy sectors such as energy, transport and telecommunications. In competition policy as in other areas, the requirement is not confined to the adoption of laws and structure building. There has to be a continued effort to enforce the policy, to make it widely known and accepted and to create the expectation that it will be applied. Only then does the market realise its full potential.

Implementation and enforcement

2.30 At the Community level, it is the responsibility of the Commission and of the Court of Justice to ensure the enforcement of Community law, but the actual implementation and enforcement on the ground of Community law, whether it is directly applicable in the Member States or transposed into national legislation, is based on the existence of appropriate judicial and administrative machinery in the Member States. Constitutionally, the Member States are states subject to the rule of law, with a separation of public powers guaranteeing the independence of the judiciary. The judicial system needs to guarantee access to justice for the individual citizen, in particular with regard to decisions of the public authorities. The decentralised economic system which is characteristic of market economies also requires that access to justice be reasonably rapid. Ensuring that Community law is effectively applied also depends on a variety of specific administrative structures and technical and professional bodies in the private sector.

Conclusion

2.31 The principles governing the internal market are in essence simple, but the rules and structures required to make them a functioning reality are numerous and complex. They dismantle the barriers to free movement, ensure that other important public policy goals are not neglected in the process, prevent the creation of new obstacles and ensure that neither public authorities nor private bodies take short-sighted or self-serving actions which interfere with fair and active competition. While the resulting picture is still marked by imperfections, the Union is committed to the completion of the internal market and to maintaining it in good working order.

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