SINGLE EUROPEAN MARKET 1 REF: SEM Oct 09

1. SINGLE EUROPEAN MARKET 1REF: SEM Oct 09

2. Introduction / origins • Realisation of 4 freedoms • Limited progress to common market - NTBs • Eurosclerosis • USA / Japan / NICs - threat • Casis de Dijon (ECJ 1979)

3. Aims include • Increase efficiency • supply side of economy • Aid integration • Benefit consumers

4. Cockfield White Paper 1985 • COMPLETING THE INTERNAL MARKET • Single European Act (SEA) 1986 • implemented 1987 • favourable circumstances • 3 types of barrier to be eliminated • physical • technical • fiscal

5. Cecchini Report 1988The European Challenge: 1992 The Benefits of a Single Market • Cost of not completing SEM • Results - various scenarios exist • Expected microeconomic benefits • upto 6.4% of GDP (welfare gains approach) • major gains • removal of technical barriers 2.4% • economies of scale 2.1% • reduced monopoly power 1.6% • others 0.3% • Reasons for these gains

6. Minimum Efficient Technical Scale (METS) • What is it? • technical economies available • cost gradient at half METS • Benefits of expanding output differs between industries • When a sector would benefit from EoS • SEM - opportunity to expand output

7. Specific industry data • Aircraft 20% 1/2 METS gradient • Electric motors 15% • Drink & tobacco 1-6% • See Griffiths & Wall, Intermediate Microeconomics

8. McDonald & Dearden - although many firms operate below METS, caution when use METS as guide to EoS benefits - other factors important eg management practices linked to production & costs • Study considers single product firms; not generally so in practice

9. Expected macroeconomic benefits Assume passive govt policy GDP Prices Employment +4.5% - 6% +1.8m various scenarios & results existed • Reasons for these gains • Emerson (1988)

10. Evaluation • Cecchini too optimistic? • economies of scale • brand loyalty • redistributive effects ignored? • External effects • Other estimates • Baldwin • Smith & Venebles • Psychological benefits important

11. Implementation • ‘Internal Market Scoreboard shows worsening national delays in implementing EU laws.’ (EU Commission, May 2003) • The implementation deficit (percentage of directives not written into national law after the deadline has passed) is an average of 2.4% per member state, up from 1.8% a year before. • Only 5 states achieved the target figure of 1.5% or less • You find recent data

12. Question Given the attitude of individual countries to the EU, what is surprising about this data? Also, Italy & France account for 30% of INFRINGEMENT cases

13. Areas of concern incl. important! • public procurement • tax harmonisation • company law eg takeovers • postal services • financial services • Lisbon Agreement (2000) considered necessary. Why?

14. EU Commission Report (1996) medium term Economic Evaluation of the Internal Market, European Economy Reports and Studies,4 • bears out optimism of Cecchini Report • employment 0.3m - 0.9m higher than if no SEM • GDP (1994) 1 - 1.5% higher • investment 2.7% higher • rise in intra EU trade • rise in FDI

15. Conclusions • SEM major economic & political implications • Possible Cecchini overestimation, but psychological benefits important • Little cost to EU budget • Work still to be done

16. Specific References • Will be given out separately

17. Appendix: Theorynotes • We will use the BE-COMP diagram (see Baldwin & Wyplosz, Ch6) • This is a simplification of the Cournot oligopoly problem with free entry & segmented markets • Ok if firm sizes are symmetric • If asymmetric can use a mathematical approach, see: http://hei.unige.ch/~baldwin/PapersBooks/BW/SecondEdition/2E_Chap6_math_appendix.pdf • Aids understanding of integration on market size, competition, efficiency, economies of scale, prices, etc

18. Other theory may incl: • See Hansen & Nielsen, Ch3: New Trade Theories for other models • Considers • Imperfect markets • Product differentiation • Market structures, firm size, • Full & partial market integration • Concludes: convincing, but outcome uncertain if assumptions relaxed & increased realism • Common market theory

19. BE-COMP diagram • Assume closed economy (initially) • COMP curve • COMP curve: competition • COMP curve shows how much P excceds MC (or mark up) as number of firms changes • P>MC in imperfect competition (see Lerner index) • Curve indicates number of firms mark up

20. Mark-up (m) mmono mduo BE (break-even) curve m’ COMP curve n=2 n=1 n’ Number of firms BE-COMP diagram(Initially, assume closed economy)

21. BE Curve • Break even curve ( zero economic (normal) profit curve) • If P >> MC (hi mark up) more firms survive • Firms are NOT always on the BE curve as they can earn > or < normal profits in SR • In LR firms will lie on BE curve as there is entry/exit

22. Equilibrium : closed economy • We can find equilibrium mark-up, price, size and number of firms • Panel a • COMP curve; mark-up = u’ when n’ firms • BE curve; n’ firms can break even when mark-up = u’ • Panel b • Equilibrium price (p’) = mark-up + MC • C’ = equilm level of consumption

23. Equilibrium : closed economy euros Price Mark-up Home market Panel a Panel b Panel c 1 firm Demand curve BE E’ m' E’ p’ ac’ = P’ AC COMP MC Number of firms n’ MC (Long run) Sales per firm Total sales C’ x’

24. Panel c • Shows firm size (sales per firm), x’ • Where AC =ac’ (normal profits)

25. Equilibrium : closed economy euros Price Mark-up Home market Panel a Panel b Panel c Demand curve BE E’ E’ m' E’ ac’ p’ AC COMP MC Number of firms n’ MC (Long run) Sales per firm Total sales C’ x’

26. Impact of European integration • European integration resulted in • Industrial restructuring • Bigger, fewer, more efficient (eg economies of scale) firms facing more effective competition and lower prices • 2 stages • Short run • Long run

27. STAGE 1 Short run: Competitive effect (E’ to A) • PRE integration: typical firm has 100% sales at home, 0% abroad; POST integration: 50-50 • Integration: no trade to free trade: BE curve shifts right to BEFT • New market share for each firm • At any given mark-up, more firms can break even

28. No trade (autarky) to free trade integration euros price Home market only (foreign market similar) Mark-up BE D E’ E’ E’ m' ac’ p’ AC COMP MC Number of firms n’ Sales per firm Total sales C’ x’

29. No trade (autarky) to free trade integration euros price Home market only Mark-up BE D BEFT E’ E’ E’ m' ac’ p’ A A mA pA AC COMP MC Number of firms n’ 2n’ Sales per firm Total sales C’ x’

30. Move from E’ to A: Firms losing money (below BE) • Competitive effect = markup falls • Mark-up UA< required for 2n’ firms to break even • Short run price impact p’ to pA

31. STAGE 2 Long run: Industrial restructuring (A to E’’) • Number of firms falls 2n’ to n” • Via mergers, takeovers, bankruptcy • Restores normal profits • Firms increase • Market shares • Output • Mark-up

32. No trade (autarky) to free trade integration euros price Home market only Mark-up BE D BEFT E’ E’ E’ m' p’ ac’ A A mA pA AC COMP MC Number of firms n’ 2n’ Sales per firm Total sales C’ x’

33. No trade (autarky) to free trade integration euros price Home market only Mark-up BE D BEFT E’ E’ E’ m' p’ ac’ E” E” u’’ p” A A mA pA AC COMP MC Number of firms n’ n” 2n’ Sales per firm Total sales C’ C” x’

34. More efficient firms, AC falls from ac’ to ac”

35. No trade (autarky) to free trade integration euros price Home market only Mark-up BE D BEFT E’ E’ E’ ac’ m' p’ E” E” p” A A mA pA AC COMP MC Number of firms n’ n” 2n’ Sales per firm Total sales C’ C” x’

36. No trade (autarky) to free trade integration euros price Home market only Mark-up BE D BEFT E’ E’ E’ ac’ m' p’ E” E” E” ac” p” A A mA pA AC COMP MC Number of firms n’ n” 2n’ Sales per firm x” Total sales C’ C” x’

37. Result: • Bigger, fewer, more efficient firms facing more effective competition • Welfare: gain = area W • Lower price (p’ to p’’) & rise in consumption (C’ to C’’) • No production loss or tariff rev loss • Ignores MT adjustment costs • Speed of adjustment • Slow (E’ – A – E’’) eg. European airlines • Fast (E’ – E’’) eg. Eur banking sector

38. No trade (autarky) to free trade integration euros price Home market only Mark-up BE D BEFT E’ 1 E’ E’ m' p’ ac’ E” W E” E” p” ac” A A mA pA AC COMP MC Number of firms n’ n” 2n’ Sales per firm x” Total sales C’ C” x’