SINGLE EUROPEAN MARKET 1 REF: SEM Oct 09. Introduction / origins zRealisation of 4 freedoms zLimited...

SINGLE EUROPEAN MARKET 1

REF: SEM Oct 09

Introduction / origins

Realisation of 4 freedomsLimited progress to common market

- NTBsEurosclerosisUSA / Japan / NICs - threatCasis de Dijon (ECJ 1979)

Aims include

Increase efficiency supply side of economy

Aid integrationBenefit consumers

Cockfield White Paper 1985

COMPLETING THE INTERNAL MARKETSingle European Act (SEA) 1986

implemented 1987 favourable circumstances

3 types of barrier to be eliminated physical technical fiscal

Cecchini Report 1988The European Challenge: 1992 The Benefits of a Single

Market

Cost of not completing SEMResults - various scenarios existExpected 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

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 dataAircraft 20% 1/2 METS

gradientElectric 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 benefitsAssume passive govt policyGDP Prices Employment+4.5% - 6% +1.8m

various scenarios & results existedReasons for these gainsEmerson (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 3.9%Portugal 3.7%Ireland 3.5%Austria 3.4%Greece 3.3%France 3.3%Luxembourg 3.2%Germany 3.0%Netherlands 2.0%Belgium 1.8%UK 1.5%Spain 1.2%Finland 1.0%Sweden 1.0%Denmark 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 Reportemployment 0.3m - 0.9m higher than if no

SEMGDP (1994) 1 - 1.5% higherinvestment 2.7% higherrise in intra EU traderise in FDI

Conclusions

SEM major economic & political implications

Possible Cecchini overestimation, but psychological benefits important

Little cost to EU budgetWork still to be done

Specific References Will be given out separately

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

http://hei.unige.ch/~baldwin/PapersBooks/BW/SecondEdition/2E_Chap6_math_appendix.pdf

http://hei.unige.ch/~baldwin/PapersBooks/BW/SecondEdition/2E_Chap6_math_appendix.pdf

Other theory may incl:

See Hansen & Nielsen, Ch3: New Trade Theories for other models Considers

Imperfect markets Product differentiationMarket 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 ()

COMPcurve

BE (break-even) curve

’

n’

mono

duo

n=1 n=2 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 SRIn 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


Sales per firm

AC

Price

Totalsales

Demand curve

Number of firms

Mark-upeuros

x’

COMP

BE

n’

C’

E’ac’=P’

E’'p’

MC

Home market

(Long run)

MC

Panel aPanel bPanel c1 firm

Panel c Shows firm size (sales per firm), x’

Where AC =ac’ (normal profits)


Sales per firm

AC

Price

Totalsales

Demand curve

Number of firms

Mark-upeuros

x’

COMP

BE

n’

C’

E’ac’E’ E’

'p’

MC

Home market

(Long run)

MC

Panel aPanel bPanel c

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 1Short 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

No trade (autarky) to free trade integration

Sales per firm

AC

price

Totalsales

Number of firms

Mark-up

euros

x’

COMP

BE

n’

E’

C’

E’

MC

p’ 'ac’

Home market only(foreign market similar)

E’

D


Sales per firm

AC

price

Totalsales

D

Number of firms

Mark-up

euros

x’

COMP

BEFT

BE

2n’ n’

E’

C’

E’

AA

MC

p’

pA

'

A

ac’

Home market only

E’

Move from E’ to A: Firms losing money (below BE) Competitive effect = markup falls Mark-up UA < required for 2n’ firms to

break evenShort 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


Sales per firm

AC

price

Totalsales

D

Number of firms

Mark-up

euros

x’

COMP

BEFT

BE

2n’ n’

E’

C’

E’

AA

MC

p’

pA

'

A

ac’

Home market only

E’


Sales per firm

AC

price

Totalsales

D

Number of firms

Mark-up

euros

x’

COMP

BEFT

BE

2n’ n” n’

E’

C’ C”

E’

A

E”

A

MC

p”

p’

pA

'

A

ac’

Home market only

E”

E’

u’’

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


Sales per firm

AC

price

Totalsales

D

Number of firms

Mark-up

euros

x’

COMP

BEFT

BE

2n’ n” n’

E’

C’ C”

E’

A

E”

A

MC

p”

p’

pA

'

A

ac’

Home market only

E”

E’


Sales per firm

AC

price

Totalsales

D

Number of firms

Mark-up

euros

x’

COMP

BEFT

BE

2n’

x”

n” n’

E’

E”

C’ C”

E’

A

E”

A

MC

p”

p’

pA

'

A

ac”

ac’

Home market only

E”

E’

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 costsSpeed of adjustment

Slow (E’ – A – E’’) eg. European airlines Fast (E’ – E’’) eg. Eur banking sector


Sales per firm

AC

price

Totalsales

D

Number of firms

Mark-up

euros

x’

COMP

BEFT

BE

2n’

x”

n” n’

E’

E”

C’ C”

E’

A

1

E”

A

MC

p”

p’

pA

'

A

ac”

ac’

Home market only

E”

E’

W

SINGLE EUROPEAN MARKET 1 REF: SEM Oct 09. Introduction / origins zRealisation of 4 freedoms zLimited...

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