1. SINGLE EUROPEAN MARKET 1 REF: SEM Oct 09

2. Introduction / origins zRealisation of 4 freedoms zLimited progress to common market - NTBs zEurosclerosis zUSA / Japan / NICs - threat zCasis de Dijon (ECJ 1979)

3. Aims include zIncrease efficiency ysupply side of economy zAid integration zBenefit consumers

4. Cockfield White Paper 1985 zCOMPLETING THE INTERNAL MARKET zSingle European Act (SEA) 1986 yimplemented 1987 yfavourable circumstances z3 types of barrier to be eliminated yphysical ytechnical yfiscal

5. Cecchini Report 1988 The European Challenge: 1992 The Benefits of a Single Market zCost of not completing SEM zResults - various scenarios exist zExpected microeconomic benefits yupto 6.4% of GDP (welfare gains approach) ymajor gains xremoval of technical barriers2.4% xeconomies of scale2.1% xreduced monopoly power1.6% xothers0.3% zReasons for these gains

6. Minimum Efficient Technical Scale (METS) zWhat is it? ytechnical economies available ycost gradient at half METS zBenefits of expanding output differs between industries zWhen a sector would benefit from EoS zSEM - opportunity to expand output

7. Specific industry data zAircraft 20% 1/2 METS gradient zElectric motors15% zDrink & tobacco 1-6% ySee Griffiths & Wall, Intermediate Microeconomics

8. yMcDonald & 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 yStudy considers single product firms; not generally so in practice

9. zExpected macroeconomic benefits Assume passive govt policy GDP Prices Employment +4.5%- 6%+1.8m various scenarios & results existed zReasons for these gains zEmerson (1988)

10. Evaluation zCecchini too optimistic? yeconomies of scale ybrand loyalty yredistributive effects ignored? yExternal effects zOther estimates yBaldwin ySmith & Venebles zPsychological benefits important

11. zImplementation yInternal Market Scoreboard shows worsening national delays in implementing EU laws. (EU Commission, May 2003) yThe 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. yOnly 5 states achieved the target figure of 1.5% or less yYou find recent data

12. 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

13. zAreas of concern incl. important! ypublic procurement ytax harmonisation ycompany law eg takeovers ypostal services yfinancial services zLisbon Agreement (2000) considered necessary. Why?

14. zEU Commission Report (1996) medium term Economic Evaluation of the Internal Market, European Economy Reports and Studies,4 ybears out optimism of Cecchini Report xemployment 0.3m - 0.9m higher than if no SEM xGDP (1994) 1 - 1.5% higher xinvestment 2.7% higher xrise in intra EU trade xrise in FDI

15. Conclusions zSEM major economic & political implications zPossible Cecchini overestimation, but psychological benefits important zLittle cost to EU budget zWork still to be done

16. zSpecific References yWill be given out separately

17. Appendix: Theory notes zWe will use the BE-COMP diagram (see Baldwin & Wyplosz, Ch6) zThis is a simplification of the Cournot oligopoly problem with free entry & segmented markets yOk if firm sizes are symmetric yIf asymmetric can use a mathematical approach, see: http://hei.unige.ch/~baldwin/PapersBooks/BW/Secon dEdition/2E_Chap6_math_appendix.pdf http://hei.unige.ch/~baldwin/PapersBooks/BW/Secon dEdition/2E_Chap6_math_appendix.pdf zAids understanding of integration on market size, competition, efficiency, economies of scale, prices, etc

18. Other theory may incl: zSee Hansen & Nielsen, Ch3: New Trade Theories for other models yConsiders xImperfect markets xProduct differentiation xMarket structures, firm size, xFull & partial market integration yConcludes: convincing, but outcome uncertain if assumptions relaxed & increased realism zCommon market theory

19. BE-COMP diagram zAssume closed economy (initially) zCOMP curve yCOMP curve: competition yCOMP curve shows how much P excceds MC (or mark up) as number of firms changes yP>MC in imperfect competition (see Lerner index) yCurve indicates number of firms mark up

20. BE-COMP diagram (Initially, assume closed economy) Mark-up ( ) COMP curve BE (break-even) curve n mono duo n=1 n=2 Number of firms

21. zBE Curve yBreak even curve ( zero economic (normal) profit curve) yIf P >> MC (hi mark up) more firms survive yFirms are NOT always on the BE curve as they can earn > or < normal profits in SR xIn LR firms will lie on BE curve as there is entry/exit

22. Equilibrium : closed economy zWe can find equilibrium mark-up, price, size and number of firms zPanel a yCOMP curve; mark-up = u when n firms yBE curve; n firms can break even when mark-up = u zPanel b yEquilibrium price (p) = mark-up + MC yC = equilm level of consumption

23. Equilibrium : closed economy Sales per firm AC Price Total sales Demand curve Number of firms Mark-upeuros x COMP BE n C E ac = P E ' p MC Home market (Long run) MC Panel a Panel b Panel c 1 firm

24. zPanel c yShows firm size (sales per firm), x xWhere AC =ac (normal profits)

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

26. Impact of European integration zEuropean integration resulted in yIndustrial restructuring yBigger, fewer, more efficient (eg economies of scale) firms facing more effective competition and lower prices z2 stages yShort run yLong run

27. STAGE 1 Short run: Competitive effect (E to A) zPRE integration: typical firm has 100% sales at home, 0% abroad; POST integration: 50-50 zIntegration: no trade to free trade: BE curve shifts right to BE FT yNew market share for each firm yAt any given mark-up, more firms can break even

28. No trade (autarky) to free trade integration Sales per firm AC price Total sales Number of firms Mark-up euros x COMP BE n E C E MC p ' ac Home market only (foreign market similar) E D

29. No trade (autarky) to free trade integration Sales per firm AC price Total sales D Number of firms Mark-up euros x COMP BE FT BE 2nn E C E A A MC p pApA ' A ac Home market only E

30. zMove from E to A: Firms losing money (below BE) yCompetitive effect = markup falls yMark-up U A < required for 2n firms to break even zShort run price impact p to p A

31. STAGE 2 Long run: Industrial restructuring (A to E) zNumber of firms falls 2n to n yVia mergers, takeovers, bankruptcy yRestores normal profits zFirms increase yMarket shares yOutput yMark-up

32. No trade (autarky) to free trade integration Sales per firm AC price Total sales D Number of firms Mark-up euros x COMP BE FT BE 2nn E C E A A MC p pApA ' A ac Home market only E

33. No trade (autarky) to free trade integration Sales per firm AC price Total sales D Number of firms Mark-up euros x COMP BE FT BE 2nnn E CC E A E A MC p p pApA ' A ac Home market only E E u

34. zMore efficient firms, AC falls from ac to ac

35. No trade (autarky) to free trade integration Sales per firm AC price Total sales D Number of firms Mark-up euros x COMP BE FT BE 2nnn E CC E A E A MC p p pApA ' A ac Home market only E E

36. No trade (autarky) to free trade integration Sales per firm AC price Total sales D Number of firms Mark-up euros x COMP BE FT BE 2n x nn E E CC E A E A MC p p pApA ' A ac Home market only E E

37. zResult: yBigger, fewer, more efficient firms facing more effective competition yWelfare: gain = area W xLower price (p to p) & rise in consumption (C to C) xNo production loss or tariff rev loss zIgnores MT adjustment costs zSpeed of adjustment ySlow (E – A – E) eg. European airlines yFast (E – E) eg. Eur banking sector

38. No trade (autarky) to free trade integration Sales per firm AC price Total sales D Number of firms Mark-up euros x COMP BE FT BE 2n x nn E E CC E A 1 E A MC p p pApA ' A ac Home market only E E W