IMF Working Papers

Focusing on a cross-border perspective, this paper identifies four key binding constraints that hinder firms’ ability to innovate and scale up within the EU single market—fragmented regulations, inefficient financial intermediation, limited labor mobility, and fragmented energy market. To address these constraints and facilitate firms’ cross border scale up, investment and innovation, the paper proposes key action areas for deepening the integration of the single market, including lowering regulatory fragmentation, advancing the capital markets union, enhancing labor mobility within the EU, and integrating the EU energy market. Through illustrative scenarios, the paper highlights that a few actionable steps along these dimensions could lead off the process of deeper integration and deliver a meaningful initial payoff by increasing the EU GDP level relative to baseline by around 3 percent over 10 years—a sizable improvement considering that the EU potential growth is projected to be just above 1 percent annually over this horizon.