The Single European Market (SEM)

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• The Single European Market (SEM)

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Contents

• Origins of the Single Market
• Expected benefits of the CM
• Dynamic Effects of the Single Market
• Reassessment of the Single Market
• Latest developments

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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

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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

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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 others rules
  and regulations
• 1979 the introduction of the European Monetary
  System (EMS)

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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

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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

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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

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Freedoms of movement

• Free movement of goods?
• Free movement of factors
• Capital
• Labour
• Welfare increase principle the same in all cases

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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

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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.

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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

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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

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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 intra-industry,
  thus not driven by comparative advantage.
• We need models with imperfect competition.

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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

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Understanding the European market

• Observation
• segmented markets, with prices independent across
  countries
• policies that raise cost of entering specific
  market (e.g. licensing)

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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

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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

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Effects of market integration

• In sum
• Integration may turn previously segmented
  markets in to a single integrated market

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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)

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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

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The Cecchini Report

• Study carried out for the European Commission to
  estimate result of completion of internal market
• A rosy view? Costs of integration?

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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

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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)
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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 5.8 6.4 Note (a) low
estimate (b) high estimate based on Cecchini
(1988) and Emerson (1988)
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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

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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

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Estimated macro-economic benefits of creating the
SEM

• GDP () Prices () Employment External
  Balance
• (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 /- 30

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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

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Omissions of Report

• Institutional setting
• Need for policies on social issues - for even
  distribution of benefits
• Effects on outside world
• Positive growth versus protectionism

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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

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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!?

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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

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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 andsuccess

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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!

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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)

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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)

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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

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

• See
• SOLVIT
• Also check
• Improving the Single Market

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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

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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.