single european market 1 ref: sem oct 09
DESCRIPTION
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 - PowerPoint PPT PresentationTRANSCRIPT
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
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
Equilibrium : closed economy
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)
Equilibrium : closed economy
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
No trade (autarky) to free trade integration
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
No trade (autarky) to free trade integration
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’
No trade (autarky) to free trade integration
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”
No trade (autarky) to free trade integration
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’
No trade (autarky) to free trade integration
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
No trade (autarky) to free trade integration
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