EU and EEA: Europe as a single market

You order trainers from a German online shop, your cousin studies in Graz, and people who commute across the border every morning work at the business next door. All perfectly normal – today. Just over eighty years ago, this was unthinkable: between 1914 and 1945, the countries of Europe devastated one another in two world wars.

After 1945, a major question therefore arose: how can we stop neighbours ever shooting at one another again? The answer Europe found was unusual: not just peace treaties, but economic interdependence. The idea was that if factories, raw materials and markets were linked across borders, war would always damage a country's own economy too. Countries that trade closely with one another simply have too much to lose.

The first step was a clever choice: in 1952, six countries – including former wartime enemies France and Germany – pooled their coal and steel industries. These were precisely the industries needed for tanks and guns at the time! Countries that produce together and inspect one another's books cannot secretly build up arms against each other. Over the decades, this beginning grew into today's European Union (EU) with 27 member states. The member states adopt shared rules through joint institutions such as the European Parliament and the European Commission – for this module, you only need to know those names.

The results of the basic idea can be stated plainly: there has been no war between the member states of this union since it was founded. Step by step, the idea of peace also developed into something that still shapes your everyday life: a huge single market.

At the heart of economic integration is the single market, also called the internal market. ‘Internal’ means ‘inside’: the participating countries treat one another economically as though they were one country – trading across a border should feel like trading within a country. To make this work, the single market guarantees four freedoms:

• Free movement of goods: Products can cross borders without customs duties or extra paperwork. Your online order for 89 CHF from Germany therefore arrives like a domestic order – without an extra customs bill.
• Free movement of services: Work that does not involve selling goods can also be sold across borders. A graphic designer from Vaduz designs the website of a café in Wien; a painting company takes on jobs in a neighbouring country.
• Free movement of people: People can study, start an apprenticeship or work in another member country – without special permit barriers. A semester abroad or an internship in Berlin? That is exactly what this freedom is for.
• Free movement of capital: Money can flow across borders. A saver buys shares in a Norwegian company; a business builds a factory in Portugal.

A memory aid for two freedoms that are often confused: if a person moves to work or study somewhere else, it is movement of people. If a company provides a service across a border, it is movement of services.

Why is this shared market so important economically? You know the reasoning from “Competition: monopoly and competitive markets”: more suppliers mean more competition – more choice and generally better prices for you. For businesses, the other side of this is that instead of serving only a small domestic market, they can reach around 450 million potential customers. For businesses from a very small country in particular, this makes all the difference.

Now for the distinction you need to understand in this module. The European Union is a close union of 27 states whose cooperation goes far beyond the economy. But not every country that participates in the single market is an EU member – this is where the EEA comes in:

Since 1994, the European Economic Area (EEA) has extended the single market to countries that are not in the EU: Iceland, Liechtenstein and Norway. These three countries adopt single market rules and participate fully in the four freedoms – without being EU members. Liechtenstein joined the EEA in 1995, after voters approved membership.

And Switzerland? It is neither an EU nor an EEA member: in a referendum in 1992, Swiss voters narrowly rejected joining the EEA. Since then, Switzerland has arranged its access to the European market through its own bilateral agreements with the EU – a whole folder of separate agreements rather than overall membership.

You now have the map from the diagram in mind:

• EU membership automatically means being part of the single market.
• EEA = the EU states plus Iceland, Liechtenstein and Norway – one shared single market.
• Switzerland: neither EU nor EEA – its own agreements with the EU.

For everything that follows, remember: being an EEA member does not mean being an EU member. Confusing the two prevents you from understanding Liechtenstein's position – which is even more unusual.

Liechtenstein is in a position that is unique in Europe – viewed purely as a factual example, it offers a lesson in skilful policymaking by a very small country:

A partnership with Switzerland for a hundred years. After the First World War, an economically weakened Liechtenstein sought a strong partner: the customs treaty with Switzerland was signed in 1923, and since 1924 the two countries have formed a shared customs area – there are no checks on goods between them, and they act jointly on customs matters in relation to the rest of the world. Liechtenstein has used the Swiss franc since the 1920s; this is formally governed by the currency treaty of 1980.

A partnership with Europe since 1995. Joining the EEA added a second connection: full access to the European single market and its four freedoms.

What makes this special is that Switzerland itself is not in the EEA. Liechtenstein is therefore the only country that belongs to both economic areas at the same time – the Swiss customs area and the EEA single market. Special rules are needed to make this work in everyday life: for example, the rules under which goods enter the country and are resold are monitored. A special arrangement also applies to the movement of people: the small country is allowed to limit immigration – while Liechtenstein citizens can work and study anywhere in the EEA.

Why all this effort? Think of the location factors from “Economic policy and business location” – above all, market access: a business in Liechtenstein sells its products without customs barriers to Switzerland and throughout the EEA. For a country with around 41'400 residents but around 46'400 jobs, this access to both markets is a major advantage as a business location: the tiny home market would be far too small for its many industrial and service businesses.

Here too, a factual description includes the downside: two economic areas mean two sets of rules – which makes administration and agreements complex. The dual role also depends on good relations with both partners. A very small country cannot force others to grant it a special position – it has to maintain that position through good relations.