From Customs Union to the Internal Market

1
From Customs Union to the Internal Market
2
Single Market Program

• Partly a reaction to the stagnation of intra-EC
  trade and partly a reaction to the global trends
  based on
• Technological advances
• Rapid industrial restructuring at the global
  level
• Deregulation and liberalization
• Old trade model reached its limits Need to
  extend integration beyond trade to PRODUCTION!
• EC was losing out in future industries, there was
  a general loss of competitiveness.

3
Single Market Program

• Need to develop high-tech sector with perceived
  benefits in terms of economies of scale.
• Programs ESPRIT, RACE, BRITE, and EUREKA to
  develop cooperation in RD.
• Increasing appeal of supply-side programs
  (pro-business) as in US (Reagan) and the UK
  (Thatcher).
• Need for budgetary reform and CAP reform VAT
  increased to 1.4
• Qualified Majority on Single Market Issues except
  for fiscal policy and free movement of persons.
• Different levels of economic development after
  the Iberian enlargement Harmonious
  development required reduction in regional
  disparities. Growing importance of distributive
  policies through Structural and Cohesion Funds.

4
Single Market Program

• Rapid increase in FDI especially to weaker
  regions, Spain, Portugal, Ireland.
• A wave of mergers and acquisitions
• Sharp increase in intra-EC trade (gt60 of EC
  trade is intra-EC trade).
• German Unification in October 1990.
• Collapse of Communist regimes in 1989-1990?
  Dublin Summit Unstoppable momentum to go
  beyond the internal market towards a political
  union. EMU a necessity.

5
Static versus Dynamic Gains

• Static gains from the elimination of frontier
  controls and NTBs estimated to be relatively
  small.
• Dynamic gains resulted from economies of scale,
  restructuring, and greater competition.

6
The Single Market Program Main Results

• It goes considerably beyond the Customs Union
  with the abolishment of non-tariff barriers and
  the mergence of free factor movement.
• Both multilateral liberalization (equal treatment
  (absence of any discrimination) of trading
  partners) and regional integration went hand in
  hand.
• Tariffs came down (except for textiles and
  agriculture).

7
The Single Market Program Main Results

• Liberalization of airlines, transportation,
  energy and telecommunications.
• Anti-dumping eliminated within EC but common
  anti-dumping against non-members still exists.
• Subsidies to industry declined but community wide
  subsidy for agricultural products persists (CAP).
• Mutual recognition of standards.
• Government procurement-still problematic and
  monitoring problems exist.

8
The Single Market Program Main Results

• Currently, EU is the worlds largest trading area
  and second only to the US in terms of foreign
  direct investment flows.

9
Costs of Non-Europe or Cecchini Report (1988)

• Gains Elimination of frontier controls and
  different technical standards were expected to
  reduce costs, widen profit margins and/or lower
  prices. The pursuit of vigorous competition
  should help turn cost reductions into lower
  prices. Strong competition also reduces the
  incidence of X-inefficiencies (associated with
  the poor allocation of resources inside a firm
  due to weak external competition). Hence,
  uncompetitive business protected by various NTBs
  would be pushed out of business while more
  efficient producers would benefit from economies
  of scale and lower costs and prices.
• Effects of integration on economies of scale
  many EU firms were smaller in size than required
  for minimum efficient scale (and lowest cost of
  production).

10
Benefits

• Integration in a single market would assist in
  the emergence of a virtuous cycle of innovation
  and competition.
• Eliminate the fragmentation of the EC market as
  evidenced by price differentials reaching 100 at
  times due to absence of intra-EC competition.
  Price convergence is a significant indicator of a
  single market. See car industry as a case study.
• Competition was taken to mean strategic rivalry
  among a limited number of firms oligopolistic
  markets.

11
Micro and Macro Consequences of the Completion of
the Internal Market

• Microeconomic Approach Welfare gains as of GDP
  was estimated around 4.25-6.5 of GDP.
• Macroeconomic Approach Additional growth of 4.5
  of GDP, reduction in prices by 6, creation of
  1.75 million new jobs, reduction of public sector
  deficits by 2.25, improvement of external
  balance of the EC by 1 of GDP.
• In view of great deal of uncertainty, actual ex
  ante and ex post gains should be treated with
  caution.

12
Ex post Gains from the Internal Market

• Macroeconomic gains from the internal market
  were estimated to be small.
• Impact on GDP has been between 1.1 and 1.5 , on
  investment being close to 3.
• Between 300,000 to 900,000 jobs have been
  directly attributed to internal market and
  approximately 1 reduction in prices.
• Micro gains, especially dynamic gains difficult
  to estimate.