Transcript Lecture 4: the Single European Market (SEM)

The Single European
Market (SEM)
Contents
• Origins of the Single Market
• Expected benefits of the CM
• Dynamic Effects of the Single Market
• Reassessment of the Single Market
• Latest developments
Origins
• Article 3, Treaty of Rome:
‘the elimination, as between
member states, of customs
duties and quantitative
restrictions on the import and
export of goods, and all other
measures having equivalent effect;
the abolition as between member
states, of obstacles to freedom
of movement for persons,
services and capital’
Origins…
• programme to create a
Common Market (CM)
• Initial date proposed: 1969
• Free trade but restrictions to
capital movements + mobility
barriers
• Official beginning: 1st January
1993
Origins…
• 1978: the Cassis de Dijon case
– The ECJ ruled that Germany could not ban
the importing of Cassis de Dijon on the
grounds that it did not conform to German
rules governing the sale of alcohol
– It meant mutual recognition of each other’s
rules and regulations
• 1979: the introduction of the European
Monetary System (EMS)
Origins…
• 1983
–The European Roundtable of
Industrialists (ERT): 46 Industrial
leaders propose CM plan including:
•Trade facilitation
•Opening public procurement
•Harmonisation of technical
standards
•Fiscal harmonisation
Origins…
• 1983
–Stuttgart Summit
•recognised that the failure to
establish a CM had resulted in
major problems for EC
companies.
• 1985
–White Paper ‘Completing the
Internal Market’
•Objective: The creation of a CM by
end of 1992
Origin…
• 1987
• The Single European Act
– Amended the Treaty of Rome to allow
majority voting in issues of the Single
Market
– Article 13:
•‘The internal market shall comprise
an area without internal frontiers in
which the free movement of goods,
persons, services and capital is
ensured in accordance with the
provision of this Treaty’
Freedoms of movement
• Free movement of goods
• Free movement of factors:
–Capital
–Labour
• Welfare increase principle the same
in all cases
Free Movement of Labour
• Once labour barriers are reduced, labour will
move from low to high wage countries.
• Wages in the former will tend to rise due to a
reduced supply of labour, while in the latter
they will tend to fall due to a rising labour
supply, i.e. wage equalisation.
– But: cultural/language barriers in EU
Free Movement of Capital
• If the rate of return on investment is
higher in one country than in another,
investment funds will tend to move to
the latter until the rate is equalised.
– But, the capital flows can be influenced by
uncertainty and different monetary and exchange
rate policies.
– The establishment of EMU with fixed exchange and
interest rates should remove such a distortion.
The Single European Act
• Programme towards a larger market
without frontiers
–Economic and social cohesion
–Common policy on
technological/scientific development
–EMS strengthening
–European social dimension
–Coordinated environment protection
Action focus for SEM
The elimination between EC states of:
•Physical
•Technical
•Fiscal barriers
New EC approach:
•‘approximation instead of standardization’
•the removal of internal frontiers
•a binding timetable
Allocation effects revisited
• Real world
– perfect competition vs. imperfect
competition
– understand why gains from customs union
not too high
–Fact: Intra-EU trade is 70-80% intraindustry, thus not driven by
comparative advantage.
–We need models with imperfect
competition.
Transaction costs and CMs
• Markets influenced by transaction
costs of firms
• Factors influencing the size of
transaction costs:
–Legal and regulatory framework
–Macroeconomic policy framework
–Fragmentation of markets
Understanding the European market
Observation
–segmented markets, with prices
independent across countries
–policies that raise cost of entering
specific market (e.g. licensing)
Understanding the European market
Evidence for fragmentation?
• Large variation in average prices
–for consumer goods 15.2%
around mean
–telephone and telegram 50%
around mean
• Conclusion?
–Too little competition, too many
firms operating at inefficient level
Effects of market integration
• Intensified competition, which
•Reduces firms monopoly power
•Lower prices
•Inefficient firms exiting
•Allows for more products to be
consumed
•Scale reduces costs of production
Effects of market integration…
• In sum:
Integration may turn previously
segmented markets in to a single
integrated market
Competition effects of SEM
Barriers to go by end 1992:
• Cost increasing barriers
– Fiscal barriers (taxes and subsidies)
– Quantitative barriers (quotas on steel)
– Different norms and technical regulations
– Real costs of trade (border checks, at 1.7%
of value of intra-EU trade)
Competition effects of SEM
• Market entry restrictions
–Protectionist public procurement
–Different service regulation (banking;
insurance)
–Capital controls (still in 8 out of 12
countries)
–Different legal frameworks
The Cecchini Report
• Study carried out for the European
Commission to estimate result of
completion of internal market
–A rosy view? Costs of integration?
The Cecchini Report
• A 4 stage assessment of benefits
from:
•Removing barriers to trade (e.g. frontier
controls)
•Removing technical barriers
•The creation of scale economies
•Reducing X-inefficiency and monopoly
power
Estimates of the benefits of removing barriers to
create the SEM
_______________________________________________________
ECU (billion)
as % of GDP of the EC
_______________________________________________________
(a)
(b)
(a)
(b)
Barriers affecting
8
9
0.2
0.3
trade (customs)
Barriers affecting
production (subsidies)
57
71
2.0
2.4
Barriers affecting the
reaping of economies of scale
(national procurement)
60
61
2.0
2.1
Estimates of the benefits of removing barriers to
create the SEM
_______________________________________________________
ECU (billion)
as % of GDP of the EC
_______________________________________________________
(a)
(b)
(a)
(b)
Barriers which
46
46
1.6
1.6
prevent competition
(subsidies, technical
specifications)
Total benefits
171
187
Note: (a) low estimate (b) high estimate
based on Cecchini (1988) and Emerson (1988)
5.8
6.4
Benefits revisited
• Improved supply-side of the
EC economy:
–higher aggregate demand by
increasing real purchasing power
–increased investment
–improved competitiveness of EC
relative to rest of the world
Benefits
• Improvements in public sector
budgets:
–reduction in cost of public
procurement
–growth of GDP and tax revenue
–more public expenditure and reduced
unemployment through restructuring
Estimated macro-economic benefits of
creating the SEM
GDP (%)
Balance
+ 4.5
•
•
Prices (%)
- 6.1
Employment
(millions)
+ 1.8
External
(%) of GDP
+ 1.0
Time scale 6 + years from full
implementation of programme (1.1.93)
Estimates subject to a margin of error +/30%
Omissions of Report
• Location of activities:
– Peripheral location and low productivity
trap
Difficult to face higher competition
• Income redistribution:
– Pressure on wages through
competitionneed for extra social
provisions
Omissions of Report…
• Institutional setting:
– Need for policies on social issues - for even
distribution of benefits
• Effects on outside world
– Positive growth versus protectionism
Dynamic Effects of SEM
• Efficiency increase
– then: boost in savings and investment
• Static gain in GDP: from 1992
+ Expanded through continuous increase in
annual growth rate
• Baldwin estimation: extra 0.2-0.9% per
annum (so far: about 0.1%) on top of
static effects
Dynamic Effects of Single Market
• Translation into medium term effect:
– Dynamic effects add 30% to 100% to static effect
• Reality:
– New evaluation needed
– Reasons:
• Need to distinguish sector effects
• The distinction between what happened and
what would be without Single Market
• Political changes: e.g. German unification
• Long term effects!?
Dynamic Effect of Single European
Market
• Long term: growth of product per
worker is continuing
– Increasing returns to reproducible
factors (explosive growth)
– Constant returns to reproducible factors
(ongoing growth)
Thus:
Integration can have permanent
growth effect
SEM – A 1996 Review by the Commission
• Effect of frontier control removal
– need of new taxation system
• Technical regulations
– slow acceptance of mutual recognition
• Public procurement
– lack of European standards and…success
SEM – A 1996 Review by the Commission
• Accumulation effect:
– Estimated at 1.1-1.5% of GDP
– Extra 300,000-900,000 extra jobs
• Location effects
– Convergence of states
But: geography, institutions, quality,
technology matter!
10 years anniversary of SEM
• New Review by Commission in 2002
– Effects of SEM between 1992-2002:
•GDP: 1.8% higher (164.5bn Euro higher)
•Employment: 1.46% higher (2.5 million
extra jobs)
•FDI: intra-EU 15 times increase between
1995 and 2000 (from third countries 4
times higher)
10 years anniversary of SEM…
– Effects of SEM between 1992-2002
(continued):
•Downward price convergence (3.6%)
•Productivity immediately after 1992: up
2%
•Cross-border procurement: increase from
6% (1987) to 10% (1998)
•Export goods price convergence (50% of
all in EU)
10 years anniversary of SEM…
–Areas with scope of further
integration:
•Financial Markets (extra 1% of GDP,
and extra 0.5 million jobs)
–Higher liquidity increases companies
value added by 0.74%-0.92%
•Network industries (utilities): lower
costs
Conference organised by ANO pro Evropu,
Prague, 13 October 2006
Any Problems with SM implementation?
See:
SOLVIT
Also check:
Improving the Single Market
Readings
• El-Agraa, ch*.11, ch. 7
• Baldwin, R. E., 1989. ‘The growth
effects of 1992’, in Economic Policy,
October.
(individual article copy also available in
library)
• Baldwin and Wyplosz, ch. 6, 7
Readings
• European Commission, 2003. The Internal Market –
Ten years without frontiers.
• European Commission, 1996. ‘Economic Evaluation of
the Internal Market’, European Economy. Reports and
Studies No. 4, Luxembourg: Office for Official
Publications of the European Communities.
• Checchini, P., 1988. The European Challenge: 1992.
The Benefits of a Single Market, Aldershot: Wildwood
House.