Le Constant | EU Regulation | April 2026 Reading time: approx. 8 minutes

Intra-EU trade barriers are three times higher than those between US states — and Brussels is structurally unable to fix it.

The European Union has a single currency, a single central bank, and a single competition authority. It also has internal trade barriers for goods equivalent to a 44% tariff — three times higher than the equivalent barriers between Wyoming and Pennsylvania. For services, the figure is 110%. These are not fringe estimates from eurosceptic think tanks. They come from the IMF. And they go a long way toward explaining why the EU's much-celebrated single market has failed to close the productivity gap with the United States.

The conventional framing — EU good at rules, US good at scale — misses the most important structural difference between the two economies. The EU has built an elaborate regulatory fortress facing outward while leaving internal market fragmentation largely intact. Understanding why requires not just economics, but political economy.

A Market in Name Only

The numbers are worth dwelling on. According to IMF research published in October 2024 (Regional Economic Outlook for Europe), the average cost of selling goods across EU member states is equivalent to a tariff of around 44% — compared to roughly 15% between US states. The gap is even more dramatic for services: 110% intra-EU versus a fraction of that across American state borders.

IMF Managing Director Kristalina Georgieva put the same point more bluntly in June 2025: for every €100 of value added produced in EU countries, only around €20 of goods crosses internal EU borders. In the United States, the equivalent figure is $45. As for services, the ECB's January 2026 Economic Bulletin documents that intra-EU trade in services rose from 8% of GDP in 1999 to just 16% in 2024 — a level now virtually identical to the EU's trade in services with the rest of the world. Thirty years after the single market's launch, it has produced no measurable home-bias reduction for services.

Pierre-Olivier Gourinchas, the IMF's Chief Economist, summarized the stakes in his December 2024 "Europe's Choice" speech: reducing intra-EU trade barriers to US interstate levels could raise EU productivity by nearly 7 percentage points in the long term — a direct-effect estimate, as the IMF itself notes, that does not capture second-round gains from reallocation toward more productive sectors. That would, by his calculation, halve the current productivity gap between advanced EU economies and the United States.

These are not incremental gains. They represent the largest untapped lever in European economic policy — and one that requires no new spending.

The Fortress Faces the Wrong Direction

There is a paradox at the heart of EU trade policy that rarely receives the attention it deserves. The EU's effective external tariff on goods is approximately 3% (trade-weighted average, per IMF Chief Economist Gourinchas, December 2024). Intra-EU barriers are equivalent to 44%. Brussels has spent three decades erecting a relatively open external frontier while tolerating an internal market riddled with non-tariff barriers — divergent regulations, fragmented certification regimes, national licensing requirements, and protected professions.

Mario Draghi's September 2024 competitiveness report documents the cascading consequences. EU firms cannot reach the scale of their American competitors because their home market is not, in practice, a single market. The average mature US firm employs eight times as many workers as an average young US firm. In the EU, that scaling factor is two. Without scale, EU firms cannot afford the fixed costs of R&D and innovation — which explains why Europe's top corporate R&D spenders have remained concentrated in slow-growth automotive and pharmaceutical sectors while US leaders shifted to software and digital platforms.

The result is a vicious cycle. Fragmentation limits scale; limited scale limits innovation investment; limited innovation investment deepens the productivity gap; the productivity gap weakens the political case for the painful harmonization that could break the cycle.

One year after the Draghi report's publication, the European Policy Innovation Council assessed implementation: of 383 recommendations, only 43 — 11.2% — had been fully implemented. Some 87 recommendations had not been touched.

A Collective Action Problem Brussels Cannot Solve

To understand why the single market remains incomplete after more than three decades, Mancur Olson's The Logic of Collective Action (1965) remains the most useful framework. Olson demonstrated that when the benefits of a reform are diffuse — spread across millions of consumers and firms — while the costs are concentrated among identifiable incumbents, reform fails. The losers organize; the winners cannot.

The single market is a textbook case. Harmonization of product standards, professional qualifications, or financial regulations would benefit European consumers and productive firms broadly. But it threatens the regulatory sovereignty of 27 national governments, the rents of professional guilds operating behind national licensing walls, and the competitive advantages of firms that have learned to navigate complexity as a moat. Each member state has organized constituencies defending national exceptions. No constituency defends the aggregate gains of harmonization.

This asymmetry is structural, not accidental. The Commission's own enforcement record confirms it. According to a Financial Times analysis cited by multiple academic sources, formal action for breaches of EU law opened against member states fell by 80% in the first three years of the Von der Leyen Commission. The average infringement case now takes 44.5 months to resolve — up 28% compared to 2019, according to the Single Market Scoreboard of December 2025.

The single market's "mutual recognition" principle — under which goods legally sold in one member state should be marketable in all others — has quietly collapsed in practice. Divergent national implementation of EU directives has created a situation where companies routinely face different compliance requirements in each market they enter, regardless of what Brussels has formally mandated.

The Honest Counterargument

The standard critique of the "44% tariff equivalent" figure deserves serious treatment. Lorenzo Bini Smaghi, former ECB Executive Board member, has argued in a commentary for the Institute for European Policymaking at Bocconi University that the IMF estimate conflates genuine regulatory barriers with consumer preferences — what economists call home bias.

Italian wine is consumed disproportionately in Italy; French wine in France. If Italians prefer Italian wine for reasons of taste and culture rather than because of trade barriers, a gravity model of trade will nonetheless register lower-than-expected bilateral trade flows and attribute them to "barriers." Bini Smaghi's critique is methodologically serious: the IMF working paper does not adequately distinguish between policy-induced frictions and legitimate preference heterogeneity.

There is a broader version of this argument. EU member states are not US states. They are distinct political communities with their own legal traditions, social contracts, and democratic choices. German consumers' preferences for strict product liability rules, or French workers' expectations about labor market protections, are not irrational distortions to be engineered away. Forced harmonization at the wrong speed or on the wrong terms imposes real costs on real people.

This is a genuine tension, not a rhetorical one. The classical liberal case for the single market is not a case for regulatory uniformity imposed from above. It is a case for the removal of barriers that cannot be justified by genuine policy differences — unnecessary certification duplication, discriminatory licensing requirements, protectionist procurement practices — while preserving space for legitimate institutional diversity.

Even accepting Bini Smaghi's critique at face value, however, the ECB's own January 2026 analysis — using a different methodology — estimates intra-EU goods trade costs at 67% and services at 95%. The methodological dispute shifts the precise figure; it does not change the structural diagnosis.

The Productivity Arithmetic

The productivity consequences are not theoretical. IMF firm-level data shows that EU companies with high growth potential systematically prefer seeking financing from US venture capitalists and scaling in the US market — where they can generate wide market reach and achieve profitability faster. Between 2008 and 2021, 147 "unicorns" were founded in Europe. According to the Draghi report, close to 30% of them relocated their headquarters abroad — the vast majority to the United States.

Capital market fragmentation reinforces goods and services fragmentation. The total market capitalization of EU stock exchanges stood at approximately $12 trillion in 2024 — 60% of participating countries' GDP. The two largest US stock exchanges together had a market capitalization of $60 trillion — over 200% of US GDP. For innovative EU firms requiring equity financing for intangible investments, the absence of a deep integrated capital market is not a minor inconvenience. It is an existential constraint.

Labor mobility compounds the problem. Migration costs between EU countries are estimated to be eight times higher than between US states — driven by pension non-portability, qualification non-recognition, and language barriers that policy cannot easily address. The result is that talent cannot flow to where it is most productive. Innovation clusters cannot form at the scale that made Silicon Valley or Boston's Route 128 possible.

These three fragmentation effects — goods, capital, labor — interact and reinforce each other. A firm that cannot reach scale in its home market cannot attract the equity capital needed for R&D. A firm that cannot attract equity capital cannot hire the specialized talent it needs. A firm that cannot hire specialized talent cannot compete at the frontier. Europe's productivity gap is not one problem. It is three interlocking problems with a common cause.

What Reform Would Actually Require

The Draghi report proposed a "28th regime" — an optional EU-wide regulatory framework that firms anywhere in the EU could opt into, bypassing national regulatory complexity. The concept echoes the classical liberal logic of institutional competition: offer a better set of rules, let firms choose, and let demonstrated superiority discipline national regulators over time.

It is a good idea. It is also unlikely to be implemented in any meaningful form. The 28th regime threatens precisely the constituencies most capable of blocking it: national regulators whose authority it circumvents, professional associations whose rents it undermines, and member state governments whose sovereignty it erodes. The collective action problem reasserts itself at the design stage.

More fundamental reforms — completing the capital markets union, creating a genuine single market in services, removing barriers to professional mobility — have been announced, re-announced, and partially implemented across five Commission mandates. The Commission is now targeting 2028 for single market completion, a goal that was also the target in 1992.

The IMF's advice is pointed: stop letting the perfect be the enemy of the good, prioritize speed, and accept that EU-level reforms must override national preferences where the collective gains are sufficient. That advice is economically correct and politically utopian. No Council of member state governments will vote to override national preferences on the scale required. The unanimity requirements that govern key areas of single market policy are a structural veto for every incumbent interest that benefits from fragmentation.

Conclusion

The EU's single market failure is not primarily a technical problem. Technical solutions — mutual recognition, regulatory harmonization, common standards — have been available for decades. It is a political economy problem of the kind Mancur Olson described sixty years ago: concentrated costs, diffuse benefits, and organized losers defeating unorganized winners.

The 44% tariff equivalent — whatever its precise methodological status — captures something real: the EU's internal market is dramatically less integrated than its institutional architecture implies. The productivity gap with the United States is not primarily the product of culture, demographics, or entrepreneurial spirit. It is the product of a market that does not, in practice, function as advertised.

Europeans pay for this fragmentation every day, in higher prices, fewer high-growth firms, and a capital market that exports its most innovative companies to California. The cost is diffuse, silent, and therefore politically invisible. That is precisely why it persists.

A single market that delivers its theoretical benefits would be the most powerful pro-growth reform available to Europe — requiring no new taxes, no new spending, no new debt. That it remains, after thirty years, largely theoretical is the most important economic fact about the European Union that almost no one discusses.

Sources

Primary Sources — IMF, Regional Economic Outlook for Europe: A Recovery Short of Europe's Full Potential, October 2024 — IMF, Pierre-Olivier Gourinchas, "Europe's Choice: Policies for Growth and Resilience," December 16, 2024. imf.org/en/news/articles/2024/12/15/sp121624 — IMF, Kristalina Georgieva, "Deepening the European Single Market," Eurogroup address, June 19, 2025. imf.org/en/news/articles/2025/06/19/sp061925 — Draghi, Mario. The Future of European Competitiveness. European Commission, September 2024. commission.europa.eu/topics/competitiveness/draghi-report_en

Secondary and Analytical Sources — ECB Economic Bulletin, Issue 8/2025, "What is the untapped potential of the EU Single Market?," January 2026. (67% goods / 95% services; services trade parity data) ecb.europa.eu/press/economic-bulletin/articles/2026 — CEPR VoxEU, Cerdeiro & Rotunno, "EU barriers to scaling up: The case of fragmented product markets," February 2026. cepr.org/voxeu/columns/eu-barriers-scaling — Bini Smaghi, Lorenzo. "Europe's Internal Tariffs: Why the IMF's 44% Estimate Doesn't Hold Up." IEP@Bocconi, 2025. iep.unibocconi.eu — European Policy Innovation Council (EPIC), Draghi Observatory & Implementation Index, September 2025. thinkepic.eu — European Commission, Single Market and Competitiveness Scoreboard, December 2025. (44.5 months average infringement case duration) single-market-scoreboard.ec.europa.eu — Garicano, Luis. "The Myth of the Single Market." Silicon Continent, May 2025. siliconcontinent.com (source for FT infringement analysis) — Bruegel / Zettelmeyer, Jeromin. "Draghi on a Shoestring: The European Commission's Competitiveness Compass," 2025. bruegel.org

Theoretical Framework — Olson, Mancur. The Logic of Collective Action. Harvard University Press, 1965.

Note on Methodological Uncertainty The 44% tariff-equivalent estimate (IMF 2024) is contested on methodological grounds: gravity model estimates of trade barriers cannot easily distinguish regulatory barriers from cultural home bias. Alternative estimates range from 44% (IMF, manufacturing only) to 67–78% (ECB/CEPR, broader goods coverage, different elasticity assumptions). Both the IMF and ECB estimates measure ad valorem equivalent costs that may partly reflect cultural preferences for locally produced goods rather than policy-induced barriers; the structural diagnosis — that intra-EU trade costs substantially exceed intra-US costs — is robust across both institutions and both methodologies. The ~7% productivity gain estimate from the IMF is a direct-effect calculation and should be read as a lower bound, since it excludes second-round gains from sectoral reallocation. The 3% external tariff figure is a trade-weighted average per IMF (Gourinchas, December 2024); sectoral rates vary significantly above and below this mean.