Lecture the Single European Market SEM

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Lecture the Single European Market SEM Powered By Docstoc
					The Single European
Market (SEM)
• Origins of the Single Market

• Expected benefits of the CM

• Dynamic Effects of the Single Market

• Reassessment of the Single Market

• Latest developments
• 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’
• programme to create a
  Common Market (CM)
• Initial date proposed: 1969

• Free trade but restrictions to
  capital movements + mobility
• Official beginning: 1st January
• 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)
• 1983
 –The European Roundtable of
  Industrialists (ERT): 46 Industrial
  leaders propose CM plan including:
   •Trade facilitation
   •Opening public procurement
   •Harmonisation of technical
   •Fiscal harmonisation
• 1983
  –Stuttgart Summit
    •recognised that the failure to
     establish a CM had resulted in
     major problems for EC
• 1985
  –White Paper ‘Completing the
   Internal Market’
    •Objective: The creation of a CM by
     end of 1992
• 1987
• The Single European Act
   – Amended the Treaty of Rome to allow
     majority voting in issues of the Single
   – 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:


• 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:
    •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
  – understand why gains from customs union
    not too high

      –Fact: Intra-EU trade is 70-80% intra-
       industry, thus not driven by
       comparative advantage.
      –We need models with imperfect
     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

 –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
    •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;
 –Capital controls (still in 8 out of 12
 –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

   •Removing barriers to trade (e.g. frontier
   •Removing technical barriers
   •The creation of scale economies
   •Reducing X-inefficiency and monopoly
      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              57   71        2.0   2.4
production (subsidies)

Barriers affecting the          60   61        2.0   2.1
reaping of economies of scale
(national procurement)
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

 Total benefits               171    187               5.8   6.4

 Note: (a) low estimate (b) high estimate
         based on Cecchini (1988) and Emerson (1988)
      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
• Improvements in public sector

 –reduction in cost of public
 –growth of GDP and tax revenue
 –more public expenditure and reduced
  unemployment through restructuring
Estimated macro-economic benefits of
          creating the SEM
    GDP (%)   Prices (%)   Employment          External
                            (millions)    (%) of GDP
    + 4.5     - 6.1               + 1.8         + 1.0

•   Time scale 6 + years from full
    implementation of programme (1.1.93)
•   Estimates subject to a margin of error +/-
          Omissions of Report
• Location of activities:
  – Peripheral location and low productivity
  Difficult to face higher competition

• Income redistribution:
  – Pressure on wages through
    competitionneed for extra social
          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
• Long term: growth of product per
  worker is continuing
  – Increasing returns to reproducible
    factors (explosive growth)
  – Constant returns to reproducible factors
    (ongoing growth)
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
   •Downward price convergence (3.6%)
   •Productivity immediately after 1992: up
   •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

  •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
Conference organised by ANO pro Evropu,
Prague, 13 October 2006
 Any Problems with SM implementation?

Also check:

       Improving the Single Market
• El-Agraa, ch*.11, ch. 7

• Baldwin, R. E., 1989. ‘The growth
  effects of 1992’, in Economic Policy,
  (individual article copy also available in

• Baldwin and Wyplosz, ch. 6, 7
• 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