Download - SINGLE EUROPEAN MARKET 2 REF: SEM 2 nov08
SINGLE EUROPEAN MARKET 2
REF: SEM 2 nov08
Introduction
• This lecture will build on the introduction to the SEM ( or the internal market), and consider– The European airline industry – Further evaluation of the SEM programme– The growth effects of the SEM
Example: The Airline industry and the single market
• Europe’s airline industry liberalised
• Aims included: – increase competition – benefit consumers– make EU airlines more cost competitive in
global terms
• See article and questions
Pre-liberalisation• High fares• High barriers to entry• Limited number of
airlines on a route
Post-liberalisation• Lower fares available• Greater consumer choice• Easier for new airlines to
compete on a route• Airlines (Ryanair, Ireland)
can now fly from one foreign country (UK) to another foreign country (France)
• Development of low cost carriers
European LCC routes 2000
European LCC routes 2006
Source: CAA Airport Statistics
Further evaluation of the SEM programme
• Employment & inflexible EU labour markets
• Market concentration & price convergence
• Is the EU more innovative?
• Is the EU more efficient?
– See data for EU Commission 1996, which supports Cecchini Report estimates in medium term
Mergers & takeovers (or acquisitions) Part of the restructuring process following integration
• M&A activity is high in EU.
• Most M&A is mergers within member state.– about 55% ‘domestic.’– Remaining 45% split between:
• one is non-EU firm (24%),
• one firm was located in another EU nation (15%),
• counterparty’s nationality was not identified (6%).
• Distribution of M&A quite varied:– Large States: share M&As
much lower than share of the EU GDP.
– Italy,rance,Germany 36% of the M&As, 59% GDP.
• Except UK.
– Small Staes have disproportionate high share of M&A
• Integration (relatively) largest changes in smallest states
M&A activity by nation, 1991-2002
B, 2.8%
DK, 2.6%
EL, 1.1%
E, 5.0%F, 13.5%
IRL, 1.7%
I, 6.2%
L, 0.5%NL, 6.5%
A, 2.1%
P, 1.2%
FIN, 3.9%
S, 5.3%
UK, 31.4%
D, 16.3%
Source Baldwin & Wyplosz
• UK’s share relatively large– Non harmonised takeovers rules.
• some members have very restrictive takeover practices, makes M&As very difficult.
• others, UK, very liberal rules.
– Lack of harmonisation means restructuring effects vary between member states.
• 1987-1992: M&A activity in maufacturing
• More recently most activity in service sector• See Allen (1998) & European Economy 2001
– On SEM reading list
More specific areas
• Look at the service sector• Example, see Pelkmans, ch7, Services market integration. & other
text books
• Also, Pelkmans for– ch5, Product market integration (section5.4)
– ch6, Product market integration (sec.6.6 &6.7)
– ch8, Network industries
Growth (dynamic) effects of the SEM
• We’ve seen common market theory can show us the possible effects of moving from a customs union to a common market– The SEM programme aimed to make a common
market a reality
• We’ve seen the SEM increases competition in Europe
• We now consider the growth effects of the SEM
Growth effects of the SEM• So far static allocation effects have been
considered• Baldwin (1989) argued dynamic gains may be 5
times greater than those in the Cecchini Report– Change rate at which new F of P (mainly K)
accumulated, leading to growth of output/worker
– Cecchini: liberalisation can’t permanently raise growth rates
– Baldwin: permanently raise growth rates
Basic diagram
Medium term
• Medium term growth bonus results in gains of up to 9% of GDP, compared to Cecchini’s 6.5%– Eg.Spain………………………………………
………………………………….......................
• European integration allocation effect
Notes:
raised efficiency
improved investment climate
raised investment in K
raised output per person
Long term
• Long term growth bonus can be added to this, leading to the growth rate being 0.25-0.75 percentage points higher.– Due to Technological progress (following
investment in the medium term)
Long term growth
• More difficult to determine empirically in EU• We can concentrate on medium term investment
booms associated with European integration, like after Spain joined the EU
• Some States, such as Greece, have not benefited (compared to Spain, Portugal, and Ireland) due to poor macroeconomic management, a poor investment climate, and lack of supply side reform.
Question
What opportunities and threats does the internal market pose for
(a) British firms
(b) Non-European firms?
Also, see video & questions
Conclusions
• Cecchini underestimated SEM benefits according to Baldwin
• Overall, the SEM is one of the EU’s most far reaching policies that has influenced many sectors of the economy
• The SEM had wide ranging political implications
Appendix: Theory
Medium & long term effects
• Capital (K) comprised of– Physical K– Human K– Knowledge K (technology)
• Medium term– Increased output / person stops at a new higher
level (as K / worker diminishes)
• Long term– Rate of growth (accumulation) permanently
higher– Mainly accumulation of knowledge K
(technological progress) as physical K suffers from diminishing returns
Medium term growth
• Analysis based on Solow’s growth model• Assume
– People save & invest a fixed % of income (s in diag.)– Constant % depreciation of K stock (d in diag.)– EU is a single, closed economy, with integrated K & L
markets
• Equilibrium K/L* where inflow of K = depreciation of K
• This allows us to find output/worker (Y/L*) at point B
Inflow of K (investment)s(GDP/L)
Depreciation / workerd (K/L)
K/L* K/L
Euro/L
A
Inflow of K (investment)s(GDP/L)
Depreciation / workerd (K/L)
K/L* K/L
Euro/L
A
BOutput/workerGDP/L
Y/L*
• Integration has 2 stages
• Stage 1:Integration raises efficiency, thus raises output/worker– GDP/L shifts up to GDP/L1– Y/L rises to Y/Lc at constant K/L*
Inflow of K (investment)s(GDP/L)
Depreciation / workerd (K/L)
K/L* K/L
Euro/L
A
BOutput/workerGDP/L
Y/L*
Inflow of K (investment)s(GDP/L)
Depreciation / workerd (K/L)
K/L* K/L
Euro/L
A
BOutput/workerGDP/L
Y/L*
GDP/L 1
Y/LcC
• Stage 2:– As GDP/L shifts up to GDP/L1, this leads to the inflow
of K (investment) curve shifting up, s(GDP/L) to s(GDP/L)1
– New equilibrium at point D, giving K/L1– Output/ worker rises ( Y/Lc to Y/L1) as we move from
point C to E (could take 10 years)• C to E shows up as faster than normal growth, before growth
returns to normal• Medium term growth bonus –reflects improved efficiency
stimulates I
Inflow of K (investment)s(GDP/L)
Depreciation / workerd (K/L)
K/L* K/L
Euro/L
A
BOutput/workerGDP/L
Y/L*
GDP/L 1
Y/Lc C
s(GDP/L)1D
EY/L1
K/L1
Depreciation / workerd (K/L)
K/L* K/L
Euro/L
A
BY/L*
GDP/L 1
Y/Lc C
s(GDP/L)1D
EY/L1
K/L1
Allocation effect
Medium term growth bonus
Induced K formation, resulting from integration
Long term growth
• More difficult to determine empirically in EU• We concentrate on medium term investment
booms associated with European integration, like after Spain joined the EU