Download Single European Market (SEM)

SINGLE EUROPEAN
MARKET 1
REF: SEM Oct 09
Introduction / origins
Realisation of 4 freedoms
Limited progress to common market NTBs
Eurosclerosis
USA / Japan / NICs - threat
Casis de Dijon (ECJ 1979)
Aims include
Increase efficiency
supply side of economy
Aid integration
Benefit consumers
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
Cecchini Report 1988
The 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
economies of scale
reduced monopoly power
others
Reasons for these gains
2.4%
2.1%
1.6%
0.3%
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
Specific industry data
Aircraft
20% 1/2 METS gradient
Electric motors
15%
Drink & tobacco 1-6%
See Griffiths & Wall, Intermediate
Microeconomics
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
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)
Evaluation
Cecchini too optimistic?
economies of scale
brand loyalty
redistributive effects ignored?
External effects
Other estimates
Baldwin
Smith & Venebles
Psychological benefits important
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
Italy
Portugal
Ireland
Austria
Greece
France
Luxembourg
Germany
Netherlands
Belgium
UK
Spain
Finland
Sweden
Denmark
3.9%
3.7%
3.5%
3.4%
3.3%
3.3%
3.2%
3.0%
2.0%
1.8%
1.5%
1.2%
1.0%
1.0%
0.6%
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
Areas of concern incl. important!
public procurement
tax harmonisation
company law eg takeovers
postal services
financial services
Lisbon Agreement (2000) considered
necessary. Why?
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
Conclusions
SEM major economic & political
implications
Possible Cecchini overestimation, but
psychological benefits important
Little cost to EU budget
Work still to be done
Specific References
Will be given out separately
Appendix: Theory
notes
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/Secon
dEdition/2E_Chap6_math_appendix.pdf
Aids understanding of integration on market
size, competition, efficiency, economies of scale,
prices, etc
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
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
BE-COMP diagram
(Initially, assume closed economy)
Mark-up (m)
mmono
mduo
BE (break-even) curve
m’
COMP
curve
n=1 n=2
n’
Number
of firms
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
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
Equilibrium : closed
economy
euros
Price
Panel b
Panel c
1 firm
Panel a
Demand curve
p’
ac’
=
P’
Mark-up
Home market
BE
E’
m'
E’
AC
COMP
MC
MC
x’
Sales
per firm
C’
Total
sales
n’
Number
of firms
(Long run)
Panel c
Shows firm size (sales per firm), x’
Where AC =ac’ (normal profits)
Equilibrium : closed
economy
euros
Price
Panel b
Panel c
E’
ac’
Mark-up
Home market
Panel a
Demand curve
p’
BE
E’
m'
E’
AC
COMP
MC
MC
x’
Sales
per firm
C’
Total
sales
n’
Number
of firms
(Long run)
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
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
euros
No trade (autarky) to free
trade integration
price
Home market only
(foreign market similar)
Mark-up
BE
D
E’
ac’
p’
E’
m'
E’
AC
COMP
MC
x’
Sales
per firm
n’
C’
Total
sales
Number
of firms
euros
No trade (autarky) to free
trade integration
price
Home market only
Mark-up
BE
D
BE
E’
ac’
p’
E’
m'
A
pA
E’
mA
A
AC
COMP
MC
x’
Sales
per firm
FT
n’
C’
Total
sales
2n’
Number
of firms
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
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
euros
No trade (autarky) to free
trade integration
price
Home market only
Mark-up
BE
D
BE
E’
ac’
p’
E’
m'
A
pA
E’
mA
A
AC
COMP
MC
x’
Sales
per firm
FT
n’
C’
Total
sales
2n’
Number
of firms
euros
No trade (autarky) to free
trade integration
price
Home market only
Mark-up
BE
D
BE
E’
ac’
p’
p”
E’
m'
E”
E’
E”
u’’
A
pA
mA
A
AC
COMP
MC
x’
Sales
per firm
FT
n’
C’ C”
Total
sales
n”
2n’
Number
of firms
More efficient firms, AC falls from ac’ to
ac”
euros
No trade (autarky) to free
trade integration
price
Home market only
Mark-up
BE
D
BE
E’
ac’
p’
p”
E’
m'
E’
E”
E”
A
pA
mA
A
AC
COMP
MC
x’
Sales
per firm
FT
n’
C’ C”
Total
sales
n”
2n’
Number
of firms
euros
No trade (autarky) to free
trade integration
price
Home market only
Mark-up
BE
D
BE
ac’
ac”
E’
p’
E”
p”
E’
m'
E’
E”
E”
A
pA
mA
A
AC
COMP
MC
x’ x”
Sales
per firm
FT
n’
C’ C”
Total
sales
n”
2n’
Number
of firms
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
euros
No trade (autarky) to free
trade integration
price
Home market only
Mark-up
BE
D
BE
ac’
ac”
E’
E’
p’
E”
p”
W
m'
E’
A
1
E”
E”
pA
mA
A
AC
COMP
MC
x’ x”
Sales
per firm
FT
n’
C’ C”
Total
sales
n”
2n’
Number
of firms