SINGLE EUROPEAN MARKET 1 REF: SEM Oct 09

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SINGLE EUROPEAN MARKET 1REF SEM Oct 09
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Introduction / origins

• Realisation of 4 freedoms
• Limited progress to common market - NTBs
• Eurosclerosis
• USA / Japan / NICs - threat
• Casis de Dijon (ECJ 1979)

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Aims include

• Increase efficiency
• supply side of economy
• Aid integration
• Benefit consumers

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Cockfield White Paper 1985

• COMPLETING THE INTERNAL MARKET
• Single European Act (SEA) 1986
• implemented 1987
• favourable circumstances
• 3 types of barrier to be eliminated
• physical
• technical
• fiscal

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

• Cost of not completing SEM
• Results - various scenarios exist
• Expected 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

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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

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• Specific industry data
• Aircraft 20 1/2 METS gradient
• Electric motors 15
• Drink tobacco 1-6
• See Griffiths Wall, Intermediate Microeconomics

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• 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

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• Expected macroeconomic benefits
• Assume passive govt policy
• GDP Prices Employment
• 4.5 - 6 1.8m
• various scenarios results existed
• Reasons for these gains
• Emerson (1988)

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Evaluation

• Cecchini too optimistic?
• economies of scale
• brand loyalty
• redistributive effects ignored?
• External effects
• Other estimates
• Baldwin
• Smith Venebles
• Psychological benefits important

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• 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

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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
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• Areas of concern incl. important!
• public procurement
• tax harmonisation
• company law eg takeovers
• postal services
• financial services
• Lisbon Agreement (2000) considered necessary.
  Why?

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• EU Commission Report (1996) medium term
• Economic Evaluation of the Internal Market,
  European Economy Reports and Studies,4
• bears out optimism of Cecchini Report
• employment 0.3m - 0.9m higher than if no SEM
• GDP (1994) 1 - 1.5 higher
• investment 2.7 higher
• rise in intra EU trade
• rise in FDI

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Conclusions

• SEM major economic political implications
• Possible Cecchini overestimation, but
  psychological benefits important
• Little cost to EU budget
• Work still to be done

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• Specific References
• Will be given out separately

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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/S
  econdEdition/2E_Chap6_math_appendix.pdf
• Aids understanding of integration on market size,
  competition, efficiency, economies of scale,
  prices, etc

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Other theory may incl

• See Hansen Nielsen, Ch3 New Trade Theories for
  other models
• Considers
• Imperfect markets
• Product differentiation
• Market structures, firm size,
• Full partial market integration
• Concludes convincing, but outcome uncertain if
  assumptions relaxed increased realism
• Common market theory

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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
• PgtMC in imperfect competition (see Lerner index)
• Curve indicates number of firms
  mark up

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BE-COMP diagram(Initially, assume closed economy)
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• BE Curve
• Break even curve ( zero economic (normal) profit
  curve)
• If P gtgt MC (hi mark up) more firms survive
• Firms are NOT always on the BE curve as they can
  earn gt or lt normal profits in SR
• In LR firms will lie on BE curve as there is
  entry/exit

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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

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Equilibrium closed economy
Price
Mark-up
euros
Home market
Panel a
Panel b
Panel c 1 firm
Demand curve
BE
E
E
m'
p
ac P
AC
COMP
MC
Number of firms
n
MC
(Long run)
Sales per firm
Total sales
x
C
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• Panel c
• Shows firm size (sales per firm), x
• Where AC ac (normal profits)

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Equilibrium closed economy
Price
Mark-up
euros
Home market
Panel a
Panel b
Panel c
Demand curve
BE
E
E
E
m'
ac
p
AC
COMP
MC
Number of firms
n
MC
(Long run)
Sales per firm
Total sales
x
C
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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

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• STAGE 1
• Short 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

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No trade (autarky) to free trade integration
euros
price
Home market only (foreign market similar)
Mark-up
BE
D
E
E
E
m'
ac
p
AC
COMP
MC
Number of firms
n
Sales per firm
Total sales
C
x
29
No trade (autarky) to free trade integration
euros
price
Home market only
Mark-up
BE
D
BEFT
E
E
E
m'
ac
p
A
A
pA
mA
AC
COMP
MC
Number of firms
2n
n
Sales per firm
Total sales
C
x
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• Move from E to A Firms losing money (below BE)
• Competitive effect markup falls
• Mark-up UA lt required for 2n firms to break even
• Short run price impact p to pA

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• 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

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No trade (autarky) to free trade integration
euros
price
Home market only
Mark-up
BE
D
BEFT
E
E
E
m'
p
ac
A
A
pA
mA
AC
COMP
MC
Number of firms
2n
n
Sales per firm
Total sales
C
x
33
No trade (autarky) to free trade integration
euros
price
Home market only
Mark-up
BE
D
BEFT
E
E
E
m'
p
ac
E
E
u
p
A
A
pA
mA
AC
COMP
MC
Number of firms
2n
n
n
Sales per firm
Total sales
C
C
x
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• More efficient firms, AC falls from ac to ac

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No trade (autarky) to free trade integration
euros
price
Home market only
Mark-up
BE
D
BEFT
E
E
E
ac
m'
p
E
E
p
A
A
pA
mA
AC
COMP
MC
Number of firms
2n
n
n
Sales per firm
Total sales
C
C
x
36
No trade (autarky) to free trade integration
euros
price
Home market only
Mark-up
BE
D
BEFT
E
E
E
ac
m'
p
E
E
E
ac
p
A
A
pA
mA
AC
COMP
MC
Number of firms
2n
n
n
Sales per firm
x
Total sales
C
C
x
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• 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 costs
• Speed of adjustment
• Slow (E A E) eg. European airlines
• Fast (E E) eg. Eur banking sector

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No trade (autarky) to free trade integration
euros
price
Home market only
Mark-up
BE
D
BEFT
E
1
E
E
m'
p
ac
E
W
E
E
p
ac
A
A
pA
mA
AC
COMP
MC
Number of firms
2n
n
n
Sales per firm
x
Total sales
C
C
x