The Internal Market and Competition

1
The Internal Market and Competition
Lecture structure
The Single MarketSchengenCompetition
Douane
2
Three domains of public policy

• Expenditure
• Distributive
• Re-Distributive
• Macroeconomic policies
• Regulation

3
Two outcomes of economic policies

• Redistribution vs.
• Efficiency (Pareto optimality)
• Free markets efficient in theory (market failure)
• Make markets bigger to gain efficiency (win-win)!
• Economies of scale
• Mutual benefits through absolute and relative
  advantages

Benefit B
Benefit A
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Economies of Scale and Trade
Can sell max. 100 units of X Old machine Sell
unit for 1 Costs 80 cent/unit
Cannot produce X (but usualy Y,Z)
Country B
Country A
5
Economies of Scale and Trade
Can now sell 200 units of X Buy new machine
Sell unit for 90 cent Costs 40 cent/unit
Cannot produce X (but usualy Y,Z) Gets X cheaply
Country B
Country A
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Absolute Advantage (Smith)

• Absolute advantage
• 1 unit of labour in Scotland 80 units of wool or
  20 units of wine
• 1 unit of labour in Spain 50 units of wool or 75
  units of wine
• Each country has one absolute advantage
  (efficient producers)
• Specialisation (economies of scale) and trade are
  beneficial

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Comparative Advantage (Ricardo)

• Country does not have to be the most efficient
  (cheapest) producer
• Its sufficient to be the cheapest producer in
  terms of opportunitiy costs
• Opportunity costs of X reduced production of Y

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Comparative Advantage

• A can produce 100 units of wine or 200 units of
  cheese
• B can produce 200 units of wine or 200 units of
  cheese
• Opportunity cost of 1 unit of wine
• In B not produce 1 unit of cheese
• In A not produce 2 units of cheese
• Opportunity cost of 1 unit of cheese
• in B not produce 1 unit of wine
• In A not produce 0.5 units of wine
• A has relative advantage in cheese production, B
  in wine production
• Both countries can gain from specialisation and
  trade

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Before Trade
10
After Trade
total consumption of (cheaper) wine can increase
without (opportunity) costs (foregone cheese
consumption)!
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Historical blueprints

• Hanseatic league (11th-15th century) water and
  land trade, fairs in France, Storage houses in
  Russia, Denmark, cash cheques instead of money,
  common rules
• German Zollverein (1834) - Economic Routes to
  Political Unity?
• Customs and Currency Unions BeLux (1921/23)
  BeNeLux (1944/47)
• Post War Europe Mixed Economies, Interdependence
  and Multilateralism
• Pressures for Integration economic or political?

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The Four Freedoms of the European Single Market
13
The Single Market Programme
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The stages of economic integration in the EU
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Economic integration to achieve competitiveness

• Why did a customs union (the EC) decide to
  increase the pace of economic integration during
  the 1980s and 1990s?
• Increasing globalisation of the world economy
  (increased competition, especially from the US,
  Japan, and the NICs Newly Industrialised
  Countries)
• More sophisticated systems to dodge trade
  barriers (multinational corporations)
• Belief that market fragmentation (nationally
  divided markets) was reducing economies of scale

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The limits of European competitiveness

• The costs of the non-Europe (Cecchini, 1991)
• Physical barriers Intra-European stoppages,
  controls at border checkpoints, bureaucracy,
  different currencies
• Technical barriers Different national product
  standards and technical regulations across Member
  States
• Fiscal barriers Lack of fiscal harmonisation

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The expected benefits of economic integration

• Cecchini report (1988). Cost saving effects
• Static trade effect benefits from allowing
  public authorities to buy from the cheapest
  suppliers
• Competition effect Downward pressure on prices
  as a result of greater competition
• Restructuring effect Reorganisation of
  industrial sectors and individual companies as a
  result of greater competition
• Other possible benefits
• Benefits on investment, innovation
  (rationalisation of RD expenditure) and growth
• Savings for the public sector (lower government
  subsidies for inefficient firms

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The expected benefits of economic integration (II)

• Combination of cost saving effects results in two
  kinds of benefits
• Direct benefits from the eradication of economic
  borders
• Indirect benefits from economic restructuring,
  increases in trade and competition and greater
  economies of scale
• Result
• The emergence of virtuous cycles of innovation
  and competition
• Lowering of prices for consumers
• Greater job creation

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Estimation of benefits

• Cecchini (1988) 4 to 7 of Europes GDP

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Economic impact of the SMP
http//europa.eu.int/comm/internal_market/10years/
background_en.htm
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Problems

• Price variation remains high
• Delay in market rule transposition and
  implementation
• Mutual recognition of standards still problematic
• Cultural differences have an impact (preference
  of domestic market, understandings of health and
  safety)
• Financial services insufficiently liberalized
  (hah!)
• Labour mobility low

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De-Regulation and Re-Regulation

• Single Market removed many rules negative
  integration
• Market Failures
• Technical standards/consumer protection
  (information)
• Health, safety, environmental standards (negative
  externalities)
• Competition policies (monopolistic markets etc.)
• Industry regulators (natural monopolies)

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Competition policy
H. Walkenhorst, University of Essex

• European Commission (positive regulation)
• merger control
• prohibition of unfair market protection and
  restrictive practices
• Abuse of dominant position, monopoly
• state aid
• Liberalization of utilities

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State Aids
H. Walkenhorst, University of Essex

• State aids forbidden except
• 1. Special help at times of natural disaster
• 2. Aid to depressed regions
• 3. Aid to promote new economic activities

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Environmental and Social Policies

• De-Regulation, harmonized regulation, and
  competition policies efficiency
• Environmental and Social Policies allocation of
  values
• EU promotes high level of environmental standards
  (SEA)
• Social policies rather underdeveloped (but
  Anti-discrimination)

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Conclusions

• Europe as an uncompleted market
• Twin approach of regulation and liberalisation
• Spill-over effects to domestic, neighbouring
  and global markets political implications for
  national economic strategies and philosophies

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Class questions

• To what extent have the obstacles to an internal
  European market been removed by the 1992
  programme?
• How has the market developed in the last 17 years
  and why is it still not completed?
• Should it be completed?