DG ECFIN 1 What have we learned from European Economic Integration? University of Sussex, July 2007 Where next on the Single Market? Adriaan Dierx Fabienne Ilzkovitz European Commission European Commission and Université Libre de Bruxelles

DG ECFIN 2 Where next on the Single Market? 1.The latest empirical evidence on the economic impact of the Single Market 2.The Single Market Review 3.Market monitoring as a tool to improve the governance of the Single Market

DG ECFIN 3 Where next on the Single Market? 1.The latest empirical evidence on the economic impact of the Single Market (DG ECFIN Economic Paper nr /economicpapers271_en.htm ) /economicpapers271_en.htm 2.The Single Market Review 3.Market monitoring as a tool to improve the governance of the Single Market

DG ECFIN 4 Why an Internal Market? The Cecchini Report

DG ECFIN 5 The IM, EMU and enlargement have contributed to boost trade and FDI and to increase price convergence…. Ratio of Intra EU Manufacturing trade to GDPPrice convergence between EU member states Coefficient of variation of comparative price levels of final consumption by private households including indirect taxes

DG ECFIN 6 But the EU remains a less integrated market than the US Lower degree of price dispersion for tradeables between main US cities than that between EU capitals Lower degree of trade integration in the EU than in the US Intra-trade in manufactured products 2002 (intra exports as a percentage of GDP) CPI-weighted Price dispersion in tradeables

DG ECFIN 7 The Internal Market has contributed to improve the business environment More competition –  mark-ups in sectors more affected by NTB –Turbulence in market leadership Increased size and multinationality of firms Multinationality and firm size

DG ECFIN 8 But there is still not enough business dynamism in the EU … Average entry /exit rate over the period twice as large in the US than in most euro-area countries Firms in the US tend to grow faster than firms in EU economies EU 25: Simple average, excl. CY,LU,MT Source: World Bank, Doing Business in 2005/2006 Ease of doing business

DG ECFIN 9 Main Productivity Developments in the EU and the US

DG ECFIN 10 While EU enterprises do innovate … Only 1/4 of the innovative EU companies sell new goods or services in other European countries Source: Innobarometer 2004

DG ECFIN 11 World export market shares by skill intensity of sectors (%) High Technology ICT Medium Technology Low Technology EU15 (Extra) EU US Japan China The Internal Market has not sufficiently promoted a shift towards the faster growing high tech sectors

DG ECFIN 12 Potential of the Internal Market not yet fully exploited 1.Problems with implementation of IM rules 2.Some of the instruments are not fully adequate 3.Remaining barriers  Services  Fiscal barriers 4.Barriers to the diffusion of knowledge (IPRs)  Macro-economic gains of the Internal Market could be doubled

DG ECFIN 13 Estimated gains from the Single Market (as a percentage of GDP) Already achieved: +2.2% in 2006 Potential for further benefits 1.Services Directive (0.5-1%) 2.Financial integration (1.1%) 3.Liberalisation of energy sector (0.8%) 4.Corporate tax harmonisation (0.2%)

DG ECFIN 14 Where next on the Single Market? 1.The latest empirical evidence on the economic impact of the Single Market 2.The Single Market Review 3.Market monitoring as a tool to improve the governance of the Single Market

DG ECFIN 15 Single Market Review Process –March 2007: Interim report (vision paper) –Autumn 2007: Final report by Commission –Spring 2008: Decision by European Council Main elements –Concrete policy actions –Improved governance

DG ECFIN 16 Concrete policy actions aimed at creating a Single Market : Citizens and consumers  Increase the benefits for consumers An integrated economy  Develop synergies between the SM and EMU Knowledge society  Encourage use and diffusion of new technologies A well regulated SM  Make the environment more business-friendly A sustainable Europe  Accompany the SM with social and environmental policies Open to the world  Make Europe attractive to foreign investors and export our rules and standard at world level

DG ECFIN 17 Improved governance aimed at: More decentralised and network-based More responsive to the global context Improving the communication More impact-driven and result oriented policies based on a better understanding of markets

DG ECFIN 18 Improved governance aimed at more impact-driven and result oriented policies Act where it will have a maximum impact Act when market do not deliver Assess consequences of policy interventions Identify synergies between policy instruments Proposal for market monitoring

DG ECFIN 19 Where next on the Single Market? 1.The latest empirical evidence on the economic impact of the Single Market 2.The Single Market Review 3.Market monitoring as a tool to improve the governance of the Single Market

DG ECFIN 20 Proposed two-stage approach A. Sectoral screening on basis of readily available indicators B. In-depth investigation of market(s) in selected sectors Why? Market monitoring is very time and resource intensive

DG ECFIN 21 Criteria for sectoral screening 1.Economic importance of the sector 2.Importance of the sector for the adjustment capacity of the EU economy 3.Signs of market malfunctioning from the perspective of businesses and consumers

DG ECFIN Economic importance of the sector  Static perspective  Sector share in total EU25 value added in 2004  Sector share in total EU25 employment in 2004  Dynamic perspective  Sector average annual world export growth in

DG ECFIN 23 Manufacturing and tradable services % total World value addedemploymentexport growth Food and beverages151,862,257,3 Chemicals241,941,6712,2 Rubber and plastics250,990,618,2 Basic metals270,730,8312 Fabricated metal281,821,588 Machinery292,080,978 Electrical machinery and apparatus, nec310,90,67,5 Radio, television and comm. equip.320,520,318,5 Medical, precision and optical instruments330,570,1810,6 Motor vehicles341,421,137,5 Electricity, gas and water supplyE2,170,5920,8 Other business activities746,9713,097,2 Other service activities930,721,2870,7

DG ECFIN 24 Non tradeable services % total value added % total employment ConstructionF6,175,66 Sale, maint. and repair of motor vehicles501,711,83 Wholesale trade513,615,15 Retail trade524,317,21 Hotels and restaurantsH2,213,46 Other inland transport602,643,09 Other supp. and aux. transport activities…631,761,81 Post and telecommunications642,371,93 Financial intermediation654,111,91 Insurance and pension funding6610,6 TOTAL SELECTED SECTORS 52,5857,74

DG ECFIN Importance of the sector for adjustment Strong interlinkages with rest of the economy Adoption and diffusion of new technologies Transmission of price shocks (especially relevant for adjustment within the euro area)

DG ECFIN Importance of the sector for adjustment  Interlinkages with the rest of the economy  Symmetric input-output table for the EU27 for the year 2000  Backward multipliers and forward multipliers (suppliers of essential inputs)  Identification of KEY SECTORS

DG ECFIN 27 FORWARD ORIENTED NO RELEVANT FORWARD EFFECTS BACKWARD ORIENTED Key sectors with widely spread effects Key sectors but with forward effects concentrated Backward oriented sectors with widely spread effects Key sectors but with backward effects concentrated Key sectors without widely spread effects Backward oriented sectors without widely spread effects NO RELEVANT BACKWARD EFFECTS Forward oriented sectors with widely spread effects Forward oriented sectors without widely spread effects Sectors with weak interlinkages with rest of economy

DG ECFIN 28 FORWARD ORIENTEDNO RELEVANT FORWARD EFFECTS BACKWARD ORIENTED 24, F, 5115, 29, 34, 50, H, 66 52, 92 NO RELEVANT BACKWARD EFFECTS 20, 21, 22, 25, 27, 28, 37, E, 60, 63, 64, 65, 67, 71, 72 26, 74 16, 17, 18, 19, 23, 30, 31, 32, 33, 35, 36, 41, 61, 62, 73, 90, 91, 93

DG ECFIN 29 Key sectors (forward and backward oriented) 24 - Chemicals and chemical products 51 - Wholesale trade 52 - Retail trade F - Construction 92 - Recreational, cultural and sporting activities

DG ECFIN 30 Forward oriented sectors 20 - Wood and cork 21 - Pulp and paper 22 - Printing, 25 - Rubber and plastics 26 - Other non-metallic mineral 27 - Basic metals 28 - Fabricated metal 37 - Recycling E - Electricity, gas and water supply 60 - Other Inland transport 63 - Other supporting and auxiliary transport activities 64 - Post and telecommunications 65 - Financial intermediation, 67 - Activities related to financial intermediation 71 - Renting of machinery and equipment 72 - Computer and related activities 74 - Other business activities

DG ECFIN 31 Backward oriented sectors 15 - Food and beverages 29 - Machinery 34 - Motor vehicles 50 - Sale, maint. and repair of motor vehicles H - Hotels and restaurants 66 - Insurance and pension funding

DG ECFIN 32  Adoption and diffusion of new technologies Focus on ICT- related sectors, given that ICT has become a “general purpose technology”, i.e. a technology that is increasingly used in all activities and all sectors of the economy. ICT diffusion also leads to important positive spillover on market functioning and performance in other sectors, namely by allowing firms to improve their productive efficiency and their ability to respond to changing market conditions. 2. Importance of the sector for adjustment

DG ECFIN 33 ICT- related sectors Industry categorisation provided by the Groningen's Growth and Development Centre ICT - producing  30 - Office, accounting and computing machinery  31 - Electrical machinery and apparatus, nec  32 - Radio, television and communication equipment  33 - Medical, precision and optical instruments  64 - Post and telecommunications

DG ECFIN 34 ICT- users  18 - Wearing apparel  22 - Printing and publishing  29 - Machinery  35 - Other transport equipment  36t37 - Manufacturing nec  51 - Wholesale trade  52 - Retail trade  65 - Financial intermediation  66 - Insurance and pension funding  67 - Activities related to financial intermediation  71 - Renting of machinery and equipment  72 - Computer and related activities  73 - Research and development  74 - Other business activities

DG ECFIN 35 DATA Evidence on price stickiness  OBJECTIVE Identification of bottlenecks for transmission of price adjustment  WHY? Necessary for the reallocation of factors and in particular for the functioning of the competitiveness channel within the euro area (given the absence of independent monetary and exchange rate policies) 2. Importance of the sector for price adjustment

DG ECFIN 36 Sectors with some evidence of sticky prices 17 - Textiles 18 - Wearing apparel 28 - Fabricated metals 50 - Sale, maintenance and repair of motor vehicles 52 - Retail trade 92 - Recreational, cultural and sporting activities H - Hotels and restaurants 93 Other service activities Sectors with more flexible prices 15 - Food and beverages 23 - Coke, refined petroleum 24 - Chemicals 30 - Office, accounting and computing machinery 32 - Radio, television and communication equipment

DG ECFIN Signs of market malfunctioning Economic efficiency –Labour productivity growth Consumer and business satisfaction Scope for policy intervention based on first analysis of causes of market malfunctioning: –Integration/openness –Competition –Innovation –Regulation

DG ECFIN Signs of market malfunctioning  From the point of view of economic efficiency  Labour productivity growth (gross value added per hour worked) - period benchmark: US

DG ECFIN 39 US outperforms the EU in most sectors in terms of labour productivity

DG ECFIN 40 Labour productivity performance (growth during period in %) EU25US 17 - Textiles22,994, Wearing apparel13,982, Leather and footwear6,181, Pulp and paper32,475, Printing and publishing14,329, Rubber and plastics32,358, Other non-metallic mineral33,538, Basic metals28,955, Fabricated metal19,341, Machinery25,148,9 30t33 - Electrical and optical equipment64,2268, Electrical machinery and apparatus, nec24,7219, Radio, television and communication equipment154,2312, Motor vehicles26,788, Other transport equipment35,836,9 36t37 - Manufacturing, nec ; Recycling10,151,4

DG ECFIN 41 Labour productivity performance (growth during period in %) EU25US 50 - Sale, maint. and repair of motor vehicles7,275, Wholesale trade27,252, Retail trade14,658,1 H – Hotels and restaurants-1,311, Other air transport6,657, Other supporting and auxiliary transport activities-242, Financial intermediation46,769, Insurance and pension funding-13,410, Research and development-1,646, Other business activities-7,717, Sewage and refuse disposal-5,137, Recreational, cultural and sporting activities4,321, Other service activities-11,111,8

DG ECFIN 42 Performance gap in terms of L- productivity vis-à-vis the US

DG ECFIN 43  From the point of view of consumers and businesses satisfaction  2006 Consumer Satisfaction Survey  DG MARKT 2006 Public Consultation on future Single Market policy

DG ECFIN 44 AVERAGE SATISFACTION SCORE BY SERVICE SECTORSAVERAGE SCORES Air Transport7.69 Mobile Telephony7.91 Insurance Services7.92 Retail Banking7.82 Water Distribution7.73 Gas Supply7.64 Electricity Supply7.61 Postal Services7.42 Fixed Telephony7.3 Extra-urban Transport7.05 Urban Transport7.04

DG ECFIN 45 Selected sectors on the basis of economic importance, contribution to adjustment and productivity performance  29 - Machinery  51 - Wholesale trade  52 - Retail trade  65 - Financial intermediation  66 - Insurance and pension funding  74 - Other business activities

DG ECFIN 46 SECTORS Contribution to EU25 employment Contribution to EU25 value added EU25 Productivity growth Interlinkages (1)ICT (2) 29 - Machinery 1%2.1%25,1%BU 51 - Wholesale trade 5.2%3.6%27,2%B/FU 52 - Retail trade 7.2%4.3%14,6%B/FU 65 - Financial intermediation 1.9%4.1%46,7%FU 66 - Insurance 0.6%1%-13,4%BU 74 - Other business activities 13.1%7%-7,7%FU ACCUMULATED TOTAL 29%22.1% (1) - “B” for backward linkages and “F” for forward linkages (2) - “U” for ICT-user and “P” for ICT-producer

DG ECFIN 47 Alternative selection strategies Signs of market malfunctioning + Economic importance OR important for adjustment

DG ECFIN 48 SELECTED SECTORS Criteria for selection Economic importance Contribution to adjustment 22 - Printing and publishingX 25 - Rubber and plasticsX 27 - Basic metalsX 28 - Fabricated metalX 29 - MachineryXX 31 - Electrical machinery and apparatus, necX 32 - Radio, television and communication equipmentX 34 - Motor vehiclesX 50 - Sales, maintenance and repairX 51 - Wholesale tradeXX 52 - Retail tradeXX H - Hotels and restaurantsX 63 - Other supporting and auxiliary transport activitiesX 65 - Financial intermediationXX 66 - InsuranceXX 74 - Other business activitiesXX 93 - Other service activitiesX

DG ECFIN 49 First analysis of causes of market malfunctioning in selected sectors INTEGRATION - Market thickness - Import penetration - Contribution of FDI inflows to total investment - Coefficient of variation of prices across countries COMPETITION - Mark-ups - Concentration ratios INNOVATION - R&D/value added - R&D intensity - Patent applications - Skill structure of employment REGULATION - OECD regulation indicators

DG ECFIN 50 Example: The retail sector (52) Lower productivity growth than US Important share of total EU25 value added and employment Important forward and backward interlinkages Intensive ICT- using sector Higher price stickiness than in US

DG ECFIN 51 Integration in the retail sector Value-added to gross output ratio: - EU performing better than US

DG ECFIN 52 Competition in the retail sector EU has higher mark-ups than the US EU has lower entry rates than the US EU has lower exit rates than the US

DG ECFIN 53 Innovation in the retail sector: R&D intensity (R&D Investment/Net Sales), firm-based evidence

DG ECFIN 54 Innovation in the retail sector: Hours worked by skill groups of persons engaged (share of total hours)

DG ECFIN 55 Regulation in the retail sector: OECD regulation index EU - simple average, excluding: CZ(2003),LU(1998,2003),SK (1998) OECD - simple average, excluding: CZ(2003),LU(1998,2003),SK (1998), US(1998)

DG ECFIN 56 Retail sector: Concluding remarks Our analysis Little evidence of problems in terms of integration with rest of the economy But  Less competition than in US  Less innovation than in US  No major differences in regulatory barriers vis-à-vis the US but wide variation across Member States Alternative view: McKinsey Stronger emphasis put on the role of regulation in explaining productivity gap

DG ECFIN 57 Thank you