Andr

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THE EUROPEAN UNION ECONOMY, SOCIETY, AND POLITY

• by
• Andrés Rodríguez-Pose
• London School of Economics
• Oxford University Press
• ISBN 0-19-874286-X

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Part I
ECONOMY
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Chapter 1
Competitiveness
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The stages of economic integration

• Free trade areas
• Free trade between members, different external
  tariffs
• Little or no institutional co-ordination
• Customs union
• Free trade between members and common external
  trade restriction
• Common regulatory bodies
• Common (or single) markets
• Removal of all barriers to free factor mobility
• Free mobility of goods, capital, labour, and
  services
• Greater level of regulation and strong
  institutions to monitor decisions adopted by
  member states

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The stages of economic integration (II)

• Economic union
• Harmonisation of economic policies (generally
  monetary or fiscal policy)
• Members give up powers. Strong central
  institutions which dictate common economic policy
• Complete economic integration
• All economic policy areas are harmonised
• The capacity of states to implement independent
  policies disappears
• Central institutions become the centres of
  economic decision-making

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The stages of economic integration in the EU
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Economic integration to achieve competitiveness

• Why did a customs union (the EC) decide to
  increase the pace of economic integration during
  the 1980s and 1990s?
• Increasing globalisation of the world economy
  (increased competition, especially from the US,
  Japan, and the NICs)
• More sophisticated systems to dodge trade
  barriers (multinational corporations)
• Belief that market fragmentation (nationally
  divided markets) was reducing economies of scale

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GDP per capita (2000) in Europe, the US and Japan
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The limits of European competitiveness

• The costs of the non-Europe (Cecchini, 1991)
• Physical barriers Intra-European stoppages,
  controls at border checkpoints, red-tape,
  different currencies
• Technical barriers Different national product
  standards and technical regulations across Member
  States
• Fiscal barriers Lack of fiscal harmonisation

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Physical barriers

• Custom related costs
• Customs controls, border stoppages
• Paperwork and red-tape
• Exchange of low-value added perishable goods
  suffered as a result
• High administrative costs and regulatory hassles
  
• Higher cost of red-tape of SMEs (higher
  proportion of their business volume, and lack of
  expertise and human resources)

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Physical barriers (II)

• Protected markets (II)
• Fear of foreign dependence leads to protection of
  national strategic sectors
• Many sectors fall under this umbrella
  petrochemical industries, shipbuilding, iron and
  steel, tobacco, car manufacturing,
  telecommunications, air transport,...
• Formation of monopolies (BT, Deutsche Telekom,
  SIP, Air France, Iberia,...) or oligopolies
• Cost of protection born by the consumer
• Lack of competition and underperforming
  industries
• And companies
• Higher prices for services than their competitors

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Physical barriers (III)

• Different currencies
• Transaction costs of changing currencies
• Higher costs of holding higher international
  reserves
• Costs associated to exchange rate volatility
• Higher interest rates in many countries

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Technical barriers

• Different product standards and technical
  regulations
• Problems and additional costs for consumers
• Cost for firms which had to adapt their products
  to different national standards
• Cost premium for SMEs
• Protected public-sector procurement
• Government supply and construction contrast
  restricted to national firms
• Or technical regulations discriminating against
  foreign bidders

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Fiscal barriers

• Different fiscal regimes
• Different regimes for companies
• Different VAT rates
• Different national accounting standards
• Duplication or multiplication of accounting
  standards for multinational companies
• Fiscal suspicion by national authorities in
  order to prevent tax evasion
• Premium for SMEs

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The expected benefits of economic integration

• Cecchini report (1988). Cost saving effects
• Static trade effect benefits reaped from
  allowing public authorities to buy from the
  cheapest suppliers
• Competition effect Downward pressure on prices
  as a result of greater competition
• Restructuring effect Reorganisation of
  industrial sectors and individual companies as a
  result of greater competition
• Other possible benefits
• Benefits on investment, innovation
  (rationalisation of RD expenditure) and growth
• Savings for the public sector (lower government
  subsidies for inefficient firms

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The expected benefits of economic integration (II)

• Combination of cost saving effects results in two
  kinds of benefits
• Direct benefits from the eradication of economic
  borders
• Indirect benefits from economic restructuring,
  increases in trade and competition and greater
  economies of scale
• Result
• The emergence of virtuous cycles of innovation
  and competition
• Lowering of prices for consumers
• Greater job creation

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Estimation of benefits

• Cecchini (1988) 4 to 7 of Europes GDP
• Baldwin

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The expected benefits of monetary union

• For all Member States adopting the Euro
• Price transparency across borders, inducing a
  greater competition effect
• Elimination of transaction costs of changing
  currencies
• Savings through holding lower international
  reserves
• Reduction of uncertainty caused by exchange rate
  volatility
• Specific benefits for peripheral economies
• Image premium and credibility in international
  markets
• Monetary and macroeconomic stability (lower
  inflation, deficit, debt, and interest rates)

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The possible impact of monetary union

• Possible impact
• Large benefits expected
• But Commission reluctant to issue estimates (as
  was the case of with the Single Market)

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The impact of economic integration

• Is European economic integration delivering the
  benefits predicted by its supporters?
• Has the EU experienced the increases in trade,
  the more efficient allocation of resources, and
  the greater growth and welfare gains expected?
• Have European economies become more competitive?

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Trade

• Sizeable increase in trade across the EU
• Greater expansion in absolute terms than in other
  developed areas of the world
• But not in relative terms, where the US has
  expanded more (but not Japan)
• This means that in a world context the evolution
  of European trade has been rather disappointing,
  especially in comparison with countries like
  Canada or Mexico, which have undergone milder
  processes of integration

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Exports of goods and services as a share of GDP
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Trade at a national level

• Several countries have experienced significant
  increases
• Countries with relatively open economies Ireland
• Countries which were relatively closed Finland,
  Sweden, Spain, or Italy
• The trend is far from universal
• Germany, Greece, and Portugal have seen their
  exports as a share of GDP decline
• Luxembourg, Greece, and Portugal have seen a
  decline in their import share
• The lack of a clear pattern in the evolution of
  trade suggests that no greater territorial
  specialization is evident

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Changes in trade patterns

• Increase in intra-industry trade
• But, stability of inter-industry trade
• This has prevented a further concentration of
  capital intensive industries in core countries to
  the detriment of the periphery
• Former lagging countries such as Ireland and
  Spain have profited from integration to expand
  trade and attract capital intensive industries
• Portugal and Greece have been less successful
• The level of intra-industry trade suggests that
  the expected specialization may be starting to
  happen

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Foreign direct investment

• Early stages of integration seem to have had a
  lower impact on FDI than on trade
• Net inflows of FDI oscillate with economic cycles
  
• Flows of FDI reached their peak around 1990
• After the implementation of the Single Market
  they followed a downward trend
• In international comparisons the EU does not
  score favourably
• When compared to the US, net inflows of FDI into
  the EU have declined with respect to the period
  before 1993.
• FDI flows among the member states have lost some
  importance...
• But, outflows to the rest of the world have
  increased.

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FDI net inflows
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Economies of scale

• Ex-ante reports highlighted that economic
  integration was to bring about a more efficient
  concentration of resources
• And a restructuring of companies
• Number of mergers and acquisitions has increased
  by more than two and a half times between 1987
  and 1998
• The bulk of this happened in anticipation of the
  Single Market
• Transnational MAs have taken off after the
  Single Market and in anticipation of EMU.

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Economies of scale (II)

• Three stages in the process
• National MAs started to take place during the
  late 1980s in anticipation of the Single Market
• European MAs the percentage of MA involving at
  least one foreign company almost doubled between
  1990 and 1998.
• Trans-national MAs Increasingly MAs are
  global. In 1998 one third of all MAs involved at
  least one non-EU partner.
• During the 1990s there has been an important
  increase in the volume of the deals.
• The total volume of deals has been multiplied by
  six between 1991 and 1998
• Greater expansion in outward MAs

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Mergers and acquisitions (1987-98)
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Economies of scale (III)

• European companies have become more ambitious and
  aggressive
• Probably in connection to the launch of the Euro
• But also as a result of the emergence of new TNCs
  in Europe resulting from previous mergers
• New mergers increasingly involve companies from
  two different European countries
• Orange and Mannesman
• Vodafone and Mannesman
• And also truly global MAs
• Daimler-Chriysler
• Terra Lycos
• Repsol-YPF

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Volume of cross-border MA's (Billion US)
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Volume of cross-border MA's ()
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Economies of scale (IV)

• But have EU companies become the leading actors
  in international MAs?
• Despite the increase in numbers and size, EU
  companies have lagged behind the US...
• And during much of the 1990s also behind Japan
  and the Asian Dragons
• Only the Asian crisis of 1997/98 changed the tide
• And a diminishing number of European companies
  can be found among the top 50 in the world

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Location of the world's largest 50 corporations
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Productivity

• European labour productivity has been reducing
  the gap with the US in the post-war decades
• Convergence came to an end in the second half of
  the 1980s
• Increasing technology gap between the US and the
  EU
• Permanence of fragmented markets in Europe
  (monopolies which prevented access to new
  technologies)
• Rigidity of European labour markets (which kept
  the young out of work)
• Productivity has grown faster in the US in the
  1990s
• Some encouraging signs for EU (advantage in
  mobiles)

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Labour Productivity Growth
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Productivity in selected EU countries
Source World Bank World Development Indicators
(2000).
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Growth

• On average, the EU has had slightly greater
  growth than the US and lower than Japan during
  the post-war decades
• Precisely at the time of European economic
  integration, the roles have been reversed
• Greater growth in the US (double that of the EMU
  area)
• Lower in Japan
• Strong internal divergence in growth patterns in
  the EU
• Extremely high growth in Ireland and Luxembourg
• Moderate in Austria, Denmark, the Netherlands and
  Portugal
• Low elsewhere in the EU

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Average growth in the EU, US, and Japan
(1960-2000)
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Conclusion

• The impact of economic integration on the
  economic performance of the EU has not been as
  spectacular and immediate as predicted by ex-ante
  studies
• The gap between the EU and the US has increased
  in many areas (growth, productivity, trade, MAs)
• Different economic cycles may have a lot to say
  about diverging economic performances
• However, economic integration may be setting the
  bases for a quicker adaptation by the EU in the
  future to new economic challenges