1. 1 Integrations and Specialization and Clusters Integrations and Specialization and Clusters Integration: the elimination of tariffs and non-tariff barriers And specifically 4 freedoms: Milestones of European Integration Goods Services Capital People The Treaty of Rome (25.3.1957) Defined the four freedoms Defined the four freedoms But unanimity of decision led to blocades But unanimity of decision led to blocades Removed by the Single European Act SEA 1986/87 Removed by the Single European Act SEA 1986/87 Qualified majority voting for vast range of fields Qualified majority voting for vast range of fields Treaty of Maastricht 1992 European Union and economic union European Union and economic union Treaty of Amsterdam 1997 Schengen (border control) Schengen (border control) Treaty of Nice 2001 Enlargement and Institutional Reforms Enlargement and Institutional Reforms

2. 2 Basic elements of the integration process Basic elements of the integration process Milestones of European Integration Not necessarily common wages And the same extent of social expenditures Abolishment of tariffs Common tariffs versus non-members Common rules: Product market regulations Product market regulations Labor market regulation Labor market regulation Common currency Common currency Environmental laws Environmental laws Social charter Social charter Transport infrastructure Transport infrastructure Competition policy, corporate governance Competition policy, corporate governance Tax system Tax system Common currency A set of European institutions

3. 3 The economic effects of integration The economic effects of integration In the short run: Specialization and regional relocation according to basic economic forces In the long run: Diffusion of technology Diffusion of technology Equalization of input prices (wages, capital, materials) Equalization of input prices (wages, capital, materials) Migration Migration Catching up of laggards Catching up of laggards Higher efficiency (on average) Higher efficiency (on average) More competition More competition Higher growth Higher growth However: The short run can be very long, and the costs of structural change can be very high.

4. 4 Theoretical hypothesis Old Trade Theory: Perfect competition and no scale economies Perfect competition and no scale economies Countries specialize in products intensively using relative abundant factor Countries specialize in products intensively using relative abundant factor Countries specialize according to endowment distribution and production technology Countries specialize according to endowment distribution and production technology Integration enforces this product specialization Integration enforces this product specialization Coal and steel in Ruhrgebiet, cars in Detroit New Trade Theory: Similar endowments Similar endowments Increasing returns to scale, heterogeneous products Increasing returns to scale, heterogeneous products First mover advantages First mover advantages Large home markets plus economies of scale leads to net exports Large home markets plus economies of scale leads to net exports New Economic Geography: Endogenous regional structure of inputs Endogenous regional structure of inputs Linkages, economies of scale and spillovers favor concentration Linkages, economies of scale and spillovers favor concentration Congestion, costs of commuting, rising prices of immobile factors favor dispersion Congestion, costs of commuting, rising prices of immobile factors favor dispersion

5. 5 Stylized facts about European integration effects Europe vs. US Stronger growth of productivity over decades Stronger growth of productivity over decades Indicates catching up (I.e. via intra-European integration)Indicates catching up (I.e. via intra-European integration) But not in 90’sBut not in 90’s Specialization of countries Degree of specialization increased Degree of specialization increased Specifically Germany in mainstream industries Specifically Germany in mainstream industries Sweden, Finland in Telecom Sweden, Finland in Telecom Ireland in chemicals, computer, pharmaceuticals Ireland in chemicals, computer, pharmaceuticals Economic concentration of industries Degree of concentration stagnates or is decreasing Degree of concentration stagnates or is decreasing Regional distribution of resources Regional distribution of resources Very low migration Very low migration Persistent differences in wages and productivity Persistent differences in wages and productivity Larger than in the US due to lower migration of firms and persons Larger than in the US due to lower migration of firms and persons Catching up within Europe Ireland: +8% per year Ireland: +8% per year Spain, Portugal, and Greece +2.7, 2.5, 2.45% Spain, Portugal, and Greece +2.7, 2.5, 2.45% Slightly catching up: EU +2%Slightly catching up: EU +2% Clustering Similar firms and related industries in regions Can lead to agglomeration advantages Creation or enforcement of clusters a “modern” industrial policy Health cluster in Denmark/SwedenHealth cluster in Denmark/Sweden Fashion cluster in Northern Italy Fashion cluster in Northern Italy Biotech cluster in Munich Biotech cluster in Munich Telecom clusters in Finland, Sweden Telecom clusters in Finland, Sweden