theorie und politik der europäischen integration prof. dr. herbert brücker lecture 8 growth...

Theorie und Politik der Europäischen Integration

Prof. Dr. Herbert Brücker

Lecture 8

Growth effects and capital market integration

Theory and Politics of Eropean Integration

Theory and Politics of European Integration Growth effects and capital market integration

Prof. Dr. Herbert BrückerLehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer ArbeitsmärkteUniversität Bamberg | [email protected] | www.uni-bamberg.de/sowi/bruecker

Last Lecture

• EU trade and … · Facts

– Intra-EU trade– Extra-EU trade– Commodity composition of exports and imports– MFN tariff levels

· Contingent Protection· EU External Trade Preferences

– GSP– EU-Mediterranean Trade Area– CIS and Balkans– Former colonies– Non-regional PTA’s



Last Lecture

• … competition policies· EU competencies· Forms of anti-competitive behaviour

– collusion – cartels (e.g. vitamin cartel)– territorial price discrimination (e.g. Nintendo, pharmaceuticals)– abuse of dominant market position (e.g. Microsoft)

· Leftovers– merger control– state aid policy



Merger control

• Initially P=AC.• Merger implies lower AC to

AC’, but raises the price to P’.

CS=-a-b; ‘ripoff’ PS=+a+c• Net welfare = -b+c ;

ambiguous, ‘efficiency defence’

• Laissez-faire (in US and increasingly in EU); if free entry then eventually P driven down to AC’.• As in BE-COMP diagram.

euros

QuantityC’ C

P’

P=AC

ab

c

Demand curve

AC’

Williamson diagram



State aid economics

• Look at two cases:

• Restructuring prevention.

• Unfair competition.



Restructuring prevention

• Consider subsidies that prevent restructuring

• Specifically, each governments make annual payments to all firms exactly equal to their losses• i.e. all 2n’ firms in Figure

6-9 analysis break even, but not new firms

• Economy stays at point A• This changes who pays for

the inefficiently small firms from consumers to taxpayers.

Number of firms

Mark-up

COMP

BEFT

BE

2n’ n” n’

E’

A

1

E”'

A



Restructuring prevention: size of benefit

• Pre-integration: fixed costs = operating profit = area “a+b”• Post-integration: operating profit = b+c• ERGO: Breakeven subsidy = a-c • Net Benefit: b+c+a-c=a+b

Sales per firm

AC

Price

Totalsales

Demand curve

Number of firms

Mark-upeuros

x’

COMPBEFT

2n’

p’

C’ CA

pA

xA= 2CA/2n’

pA

a

b c

E’

AA

A

MC

E’



Restructuring prevention: welfare impact

Sales per firm

AC

Price

Totalsales

Demand curve

Number of firms

Mark-upeuros

x’

COMPBEFT

2n’

p’

C’ CA

pA

xA= 2CA/2n’

pA

a

b c

E’

AA

A

MC

E’

d

• Change producer surplus = zero (profit is zero pre & post)• Change consumer surplus = a+d• Subsidy cost = a-c• Total impact = d+c



Only some subsidise: unfair competition

• If Foreign pays ‘break even’ subsidies to its firms

• All restructuring forced on Home

• 2n’ moves to n”, but all the exit is by Home firms

• Unfair

• Undermines political support for liberalisation



EU policies on ‘State Aids’

• 1957 Treaty of Rome bans state aid that provides firms with an unfair advantage and thus distorts competition.

• EU founders considered this so important that they empowered the Commission with enforcement.



This lecture

• Growth effects …• Some facts on EU post-WWII growth• The neoclassical growth model (Solow-model)• Integration in the neoclassical growth model

• … and capital market integration• microeconomics of capital market integration



Growth effects

• European leaders have long emphasised a different the pro-growth aspects of European integration

• These operate in a way that is fundamentally different from the way allocation effects operate;

• they operate by changing the rate at which new factors of

production – mainly capital – are accumulated,

• hence the name ‘accumulation effects’.



Verbal logic of growth

• Growth in income per worker requires more output per worker

• Nation's labour force can produce more goods and services year after year only if they have more/better 'tools' year after year.• 'tools' means capital broadly defined:

· physical capital (machines, etc.), · human capital (skills, training, experience, etc.), · knowledge capital (technology).



Verbal logic of growth

• ERGO, rate of output growth linked to rate of physical, human and knowledge capital accumulation.

• Most capital accumulation is intentional and it is called investment.

• Thus: European integration affects growth mainly via its effect on investment in human capital, physical capital and knowledge capital.



Verbal logic of growth: summary

• European integration (or any other policy) → allocation effect → improved efficiency → better investment climate → more investment in machines, skills and/or technology → higher output per person.

• In neoclassical growth model medium run effects eventually peter out• Growth rate returns to its long-run rate

• In endogenous growth models long run effects raise long-run rate of technological progress, and, hence, the growth rate of output, capital stock and consumption forever



Facts: European Growth Phases, 1890-1992

Period Real GDP Real GDP per capita

Real GDP per hour

1890-1913 2.6 1.7 1.6

1913-1950 1.4 1.0 1.9

1950-1973 4.6 3.8 4.7

1973-1992 2.0 1.7 2.7

Whole Period

1890-1992 2.5 1.9 2.6



Facts: Growth in the WWII Reconstruction Phase.

The Set-Back: (Pre-war year when GDP equalled that of 1945)

Back-on-Track Year (Year GDP attained highest pre-war level)

Reconstruction Growth (rate 1945 to col. 2 year)

Austria 1886 1951 15.2%

Belgium 1924 1948 6.0%

Denmark 1936 1946 13.5%

Finland 1938 1945 n.a.

France 1891 1949 19.0%

Germany 1908 1951 13.5%

Italy 1909 1950 11.2%

Netherlands 1912 1947 39.8%

Norway 1937 1946 9.7%

Sweden These nations grew during WWII

Switzerland

UK



Facts: GDP per capita & Rankings, 1950 and 1973 (1990 international dollars).

1950 GDP (1990 $)

European Rank 1950

Change in Rank 1950-1973

GDP Growth Rate

EEC average

4,825 8.0 + 1.2 4.2

EFTA average

6,835 3.6 -1.4 3.0

France 5,221 7 + 2 4.0

Germany 4,281 9 + 5 5.0

Italy 3,425 13 + 2 4.9

UK 6,847 2 -5 2.4



1950 GDP (1990 $) European Rank 1950 Change in Rank 1950-1973

GDP Growth Rate

EEC average 4,825 8.0 + 1.2 4.2

Netherlands 5,850 5 -1 3.4

Belgium 5,346 6 -2 3.5

France 5,221 7 + 2 4.0

Germany 4,281 9 + 5 5.0

Italy 3,425 13 + 2 4.9

EFTA average 6,835 3.6 -1.4 3.0

Switzerland 8,939 1 0 3.1

UK 6,847 2 -5 2.4

Sweden 6,738 3 + 1 3.1

Denmark 6,683 4 + 1 3.1

Norway 4,969 8 -4 3.2

Finland 4,131 10 0 4.2

Austria 3,731 11 + 2 4.9

Others average 2,401 14.3 -0.3 5.2

Ireland 3,518 12 -3 3.1

Spain 2,397 14 + 1 5.8

Portugal 2,132 15 + 1 5.6

Greece 1,558 16 0 6.2

For Comparison USA 9,573 2.4

Japan 1,873 8.0



• Shows medium run growth effects in simple diagram

• To simplify, start with whole EU as a single, closed economy with fully integrated capital and labour markets and the same technology everywhere.

Neoclassical growth: The Solow diagram



The Solow diagram

A

B

K/L

euros/L

GDP/L

s(GDP/L)

K/L)Y/L*

K/L*K/Lo

Io

Do



Induced capital formation

CE

D

B

K/L

euros/L

GDP/L

s(GDP/L)

K/L)

GDP/L’

A

s(GDP/L)’

Y/LcY/L’

Induced capital formation effect, i.e. medium-run growth bonus

Allocation effectY/L*

K/L*



C

D

B

K/L

GDP/L

s(GDP/L)

K/L)

K/L’

A

s’(GDP/L)

Y/L’

Medium-run growth bonus

Y/L*

K/L*

Integration induced investment rate rise



K/L =Knowledge/L

euros/LGDP/L

s(GDP/L)

K/L)

Y/L*

K/L*

B

A

Long-term endogenous growth



Long-term growth impact of integration

K/L =Knowledge/L

euros/L

GDP/L

s(GDP/L)

K/L)

Y/L*

K/L*

B

A

s’(GDP/L)

C



Long-term growth impact of integration

K/L =Knowledge/L

euros/L

GDP/L

s(GDP/L)

K/L)

Y/L*

K/L*

B

A

s’(GDP/L)

C

Integration improves efficiency → improves investment climate → higher investment rate (s rises to s’) → faster growth (knowledge capital accumulates more rapidly)



Empirical evidence: Are growth and integration related?

• Prima facie evidence• EEC countries grew at 4.2% p.a. 1950-73• EFTA countries grew at 3.4% p.a. 1950-73• Poor countries grew at 4.2% p.a. 1950-73

• Econometric evidence• Medium term growth bonus, but no long-run effects (Badinger

2005a, 2005b, Coe/Moghadem 1993; Italianer 1994, Henrekson 1997)

• EU Eastern enlargement: CGE simulation evidence• GDP level effect of 0.2-0.3% for EU-15• GDP level effect of 2-4% for NMS-10• Germany: GDP level effect of 0.4-0.6% (Keuschnigg/Kohler 2002)



Microeconomics of capital market integration

MPK

Ko

ro

Ko+ K*oK*o

r*oMPK*

euros euros

A

K’Capital flow

r’r’




• ‘Native’ capital-owners in Home lose area ‘A’;

• Home labour gains area A+ B;

• Total economic impact on Home citizens equal to area B

MPK

Ko

ro

Ko+ K*oK*o

r*oMPK*

euros euros

K’Capital flow

r’r’A B

C D

E

F




• Foreign capital still employed in Foreign gains F;

• Foreign labour loses D+F; • total impact on Foreign-based

factors is -D.

MPK

Ko

ro

Ko+ K*oK*o

r*oMPK*

euros euros

K’Capital flow

r’r’A B

C D

E

F




• if we count the welfare of Foreign capital owners whose capital now works in Home (gains C+D), so overall Foreign welfare gain is C.

MPK

Ko

ro

Ko+ K*oK*o

r*oMPK*

euros euros

K’Capital flow

r’r’A B

C D

E

F



NEXT LECTURE

• The Integration of European Labour Markets• Reading: Baldwin/Wyplosz (2006), 2006, Ch. 7• Boeri, T./H. Brücker (2005), Why Are Europeans So

Tough on Migrants?, Economic Policy, 44, 631-703.• December 11.

theorie und politik der europäischen integration prof. dr. herbert brücker lecture 8 growth...

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