Economic resilience, the Single Market and EMU: a selfreinforcing interaction

Convergence towards resilient economic structures entails three elements, i.e. a reduction in the economy's vulnerability to shocks, an increased capacity to absorb shocks and greater ability to swiftly recover from them. These features are key for the smooth functioning of Europe’s Economic and Monetary Union, because exchange rates cannot be used as a channel to smoothen macroeconomic shocks in a currency union. The capacity of each national economy to adjust swiftly and effectively to shocks is vital to prevent the building up of unsustainable divergences between currency union members. This section discusses how completing the Single Market (more particularly deepening goods and services markets) can strengthen economic resilience in the EMU. The section starts with a brief overview of the remaining malfunctionings in goods and services markets, looking at some specific sectors. Next, it examines factors related to the deepening of the Single Market that affect the economy's vulnerability to shocks (such as the structure of the economy). It then investigates how completing the Single Market can strengthen shock absorption capacity through increased product diversification and price flexibility. Subsequently, it explores how the recovery following a shock may be accelerated by convergence towards best practices in terms of market openness, insolvency frameworks and business regulations within the Single Market. Finally, the section suggests that completing the Banking Union and making significant progress towards the Capital Markets Union are fundamental to realising the full benefits of further integrating goods and services markets. It also argues that completing the Single Market should also be complemented by well-designed automatic fiscal stabilisers and private financial risk-sharing mechanisms.