DG ECFIN
What have we learned from
European Economic Integration?
University of Sussex, 16-17 July 2007
Where next on the Single Market?
Adriaan Dierx
European Commission
Fabienne Ilzkovitz
European Commission and
Université Libre de Bruxelles
1
DG ECFIN
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
2
DG ECFIN
Where next on the Single Market?
1. The latest empirical evidence on the
economic impact of the Single Market
(DG ECFIN Economic Paper nr. 271
http://ec.europa.eu/economy_finance/publications/economic_papers/
2007/economicpapers271_en.htm)
2. The Single Market Review
3. Market monitoring as a tool to improve
the governance of the Single Market
3
DG ECFIN
Why an Internal Market?
The Cecchini Report
European Union
United States
22%
25%
27%
30%
Sectors with high growth
potential
Sectors with high growth
potential
Sectors with moderate growth
potential
Sectors with moderate growth
potential
Sectors with weak growth
potential
Sectors with weak growth
potential
48%
48%
Productivity (US = 100)
Market share losses in high-technology products
(1980-1984)
electronical
equipment
telecommunication
equipment
Sectors with weak growth
potential
pharmaceutical
products
Sectors with moderate
growth potential
precision
instruments
Sectors with high growth
potential
electrical
machines
0
Industrial
machines
50
2
0
-2
-4
-6
-8
-10
-12
-14
Chemical products
Change of EU share
in world exports
100
Source: European Commission - Cecchini Report (1988)
If not indicated data refer to the year 1985
4
DG ECFIN
The IM, EMU and enlargement have
contributed to boost trade and FDI and to
increase price convergence….
Ratio (Exports+Imports) / GDP current prices
Ratio of Intra EU Manufacturing trade to GDP
Price convergence between EU member states
45%
45
43%
40
EU 25
41%
35
39%
30
Intra EU 25
37%
25
35%
20
EU 15
Intra EU15
33%
15
31%
10
29%
5
27%
25%
1995
0
1997
1999
2001
2003
2005
1991
1993
1995
1997
1999
2001
2003
Coefficient of variation of comparative price levels of final
consumption by private households including indirect taxes
5
DG ECFIN
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
35
30
25
Intra-trade in manufactured
products 2002
(intra exports as a percentage
of GDP)
33.0
0.25
All Europe
Price dispersion in
tradeables
0.20
U.S.
CPI-weighted
20
20.2
0.15
19.0
15
0.10
10
0.05
5
0
0.00
EU25
euro area
United States
1990
1992
1994
1996
1998
2000
6
DG ECFIN
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
Number of EU
countries
1987
1993
1997
2000
Firm Size (€ bn)
0
1
2
3
4
5
6
7
7
DG ECFIN
But there is still not enough business
dynamism in the EU…

Average entry /exit rate over the period 1997-2003 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
120
110
Ease of doing business 2005-2006
100
90
2006
80
2005
70
60
50
36
40
30
20
10
0
GR
IT
PL
HU
SI
CZ
PT
ES
EU25*
SK
FR
AT
LV
NL
DE
BE
EE
LT
FI
SE
JP
IE
DK
UK
US
EU 25: Simple average, excl. CY,LU,MT
Source: World Bank, Doing Business in 2005/2006
8
DG ECFIN
Main Productivity Developments in the EU and the US
6
Annual % Change
5
4
EU
3
US
2
1
0
1967
1970
Average % change
previous year
1973
1976
1979
1982
Labour productivity per
hour
1985
1988
1991
1994
1997
2000
Total hours worked
2003
2006
GDP
1974-1984
EU15
3.1
US
1.3
EU15
-0.9
US
1.5
EU15
2.1
US
2.7
1985-1995
2.2
1.4
0.3
1.7
2.4
2.9
1996-2006
1.6
2.1
1.1
1.4
2.5
3.3
9
DG ECFIN
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
10
DG ECFIN
The Internal Market has not sufficiently promoted
a shift towards the faster growing high tech sectors
World export market shares by skill intensity of sectors (%)
EU15
(Extra)
EU10
US
Japan
China
High
Technology
ICT
Medium
Low
Technology Technology
1998-2003
19982003
1998-2003
1998-2003
13.1
10.4
37.2
14.0
0.8
19.9
11.8
2.8
1.0
16.6
12.8
3.0
4.3
23.8
18.2
4.5
2.6
8.4
1.6
7.4
11
DG ECFIN
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
12
DG ECFIN
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%)
13
DG ECFIN
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
14
DG ECFIN
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
15
Concrete policy actions aimed at
creating a Single Market :

DG ECFIN
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
16
DG ECFIN
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
17
DG ECFIN
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
18
DG ECFIN
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
19
DG ECFIN
Proposed two-stage approach
A.
B.
Sectoral screening on basis of
readily available indicators
In-depth investigation of market(s)
in selected sectors
Why?
Market monitoring is very time and
resource intensive
20
DG ECFIN
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
21
DG ECFIN
1. 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 1999-2005
22
DG ECFIN
Manufacturing and
tradable services
% total
% total
World
value added
employment
export growth
Food and beverages
15
1,86
2,25
7,3
Chemicals
24
1,94
1,67
12,2
Rubber and plastics
25
0,99
0,61
8,2
Basic metals
27
0,73
0,83
12
Fabricated metal
28
1,82
1,58
8
Machinery
29
2,08
0,97
8
Electrical machinery and apparatus, nec
31
0,9
0,6
7,5
Radio, television and comm. equip.
32
0,52
0,31
8,5
Medical, precision and optical instruments
33
0,57
0,18
10,6
Motor vehicles
34
1,42
1,13
7,5
Electricity, gas and water supply
E
2,17
0,59
20,8
Other business activities
74
6,97
13,09
7,2
Other service activities
93
0,72
1,28
70,7
23
DG ECFIN
Non tradeable services
% total
value added
% total
employment
Construction
F
6,17
5,66
Sale, maint. and repair of motor vehicles
50
1,71
1,83
Wholesale trade
51
3,61
5,15
Retail trade
52
4,31
7,21
Hotels and restaurants
H
2,21
3,46
Other inland transport
60
2,64
3,09
Other supp. and aux. transport activities…
63
1,76
1,81
Post and telecommunications
64
2,37
1,93
Financial intermediation
65
4,11
1,91
Insurance and pension funding
66
1
0,6
52,58
57,74
TOTAL SELECTED SECTORS
24
DG ECFIN
2. 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)
25
DG ECFIN
2. 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
26
DG ECFIN
FORWARD ORIENTED
BACKWARD
ORIENTED
Key sectors with
widely spread
effects
Key sectors but
with backward
effects
concentrated
NO RELEVANT
BACKWARD
EFFECTS
Forward oriented
sectors with
widely spread
effects
Key sectors but
with forward
effects
concentrated
Key sectors
without
widely spread
effects
Forward oriented
sectors
without
widely spread
effects
NO RELEVANT FORWARD
EFFECTS
Backward oriented sectors with
widely spread effects
Backward oriented sectors
without widely spread
effects
Sectors with weak interlinkages
with rest of economy
27
DG ECFIN
FORWARD ORIENTED
24, F, 51
NO RELEVANT FORWARD
EFFECTS
15, 29, 34, 50, H, 66
BACKWARD
ORIENTED
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
28
DG ECFIN
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
29
DG ECFIN
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
30
DG ECFIN
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
31
DG ECFIN
2. Importance of the sector
for adjustment
 Adoption
and
technologies
diffusion
of
new
• 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.
32
DG ECFIN
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
33
DG ECFIN
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
34
DG ECFIN
2. Importance of the sector
for price adjustment
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)
35
DG ECFIN
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
36
DG ECFIN
3. 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
37
DG ECFIN
3. Signs of market malfunctioning

From the point of view of economic
efficiency
 Labour productivity growth (gross value
added per hour worked)
- period 1995-2004
- benchmark: US
38
DG ECFIN
US outperforms the EU in most sectors in terms of
labour productivity
350
32
300
30t33
250
31
200
US
150
17
100
19
18
51
34
21
275266
25
H
63
74 29
24
63E
28
24
90
26
E
92
22 36t37
74
60
-11,14
60
20
66
72
15
73
91
50
0
F
64
16
61
-50
-100
-100
23
-50
0
50
100
150
200
250
300
350
EU 25
39
DG ECFIN
Labour productivity performance (growth during period 1995-2004 in %)
EU25
US
17 - Textiles
22,9
94,9
18 - Wearing apparel
13,9
82,2
19 - Leather and footwear
6,1
81,3
21 - Pulp and paper
32,4
75,8
22 - Printing and publishing
14,3
29,7
25 - Rubber and plastics
32,3
58,4
26 - Other non-metallic mineral
33,5
38,8
27 - Basic metals
28,9
55,6
28 - Fabricated metal
19,3
41,3
29 - Machinery
25,1
48,9
30t33 - Electrical and optical equipment
64,2
268,9
31 - Electrical machinery and apparatus, nec
24,7
219,7
32 - Radio, television and communication equipment
154,2
312,8
34 - Motor vehicles
26,7
88,4
35 - Other transport equipment
35,8
36,9
36t37 - Manufacturing, nec ; Recycling
10,1
51,4
40
DG ECFIN
Labour productivity performance (growth during period 1995-2004 in %)
EU25
US
50 - Sale, maint. and repair of motor vehicles
7,2
75,5
51 - Wholesale trade
27,2
52,8
52 - Retail trade
14,6
58,1
H – Hotels and restaurants
-1,3
11,8
62 - Other air transport
6,6
57,9
63 - Other supporting and auxiliary transport activities
-2
42,2
65 - Financial intermediation
46,7
69,4
66 - Insurance and pension funding
-13,4
10,3
73 - Research and development
-1,6
46,4
74 - Other business activities
-7,7
17,1
90 - Sewage and refuse disposal
-5,1
37,6
92 - Recreational, cultural and sporting activities
4,3
21,7
-11,1
11,8
93 - Other service activities
41
DG ECFIN
Performance gap in terms of L- productivity vis-à-vis the US
350,00
300,00
250,00
200,00
EU25
150,00
US
100,00
50,00
0,00
93
92
90
O
74
73
66
65
63
62
H
52
51
50
36t37
35
34
32
31
30t33
29
28
27
26
25
22
21
19
18
17
-50,00
42
DG ECFIN

From the point of view of consumers and
businesses satisfaction

2006 Consumer Satisfaction Survey

DG MARKT 2006 Public Consultation on future
Single Market policy
43
DG ECFIN
AVERAGE SATISFACTION SCORE BY SERVICE
SECTORS
AVERAGE SCORES
Air Transport
7.69
Mobile Telephony
7.91
Insurance Services
7.92
Retail Banking
7.82
Water Distribution
7.73
Gas Supply
7.64
Electricity Supply
7.61
Postal Services
7.42
Fixed Telephony
7.3
Extra-urban Transport
7.05
Urban Transport
7.04
44
DG ECFIN
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
45
DG ECFIN
Contribution to
EU25
employment
Contribution to
EU25 value added
EU25
Productivity
growth
1995-2004
Interlinkages (1)
ICT (2)
1%
2.1%
25,1%
B
U
51 - Wholesale trade
5.2%
3.6%
27,2%
B/F
U
52 - Retail trade
7.2%
4.3%
14,6%
B/F
U
65 - Financial
intermediation
1.9%
4.1%
46,7%
F
U
66 - Insurance
0.6%
1%
-13,4%
B
U
13.1%
7%
-7,7%
F
U
29%
22.1%
SECTORS
29 - Machinery
74 - Other business
activities
ACCUMULATED
TOTAL
(1) - “B” for backward linkages and “F” for forward linkages
(2) - “U” for ICT-user and “P” for ICT-producer
46
DG ECFIN
Alternative selection strategies
Signs of market malfunctioning
+
Economic importance OR important for adjustment
47
DG ECFIN
Criteria for selection
SELECTED SECTORS
Economic
importance
22 - Printing and publishing
Contribution to
adjustment
X
25 - Rubber and plastics
X
27 - Basic metals
X
28 - Fabricated metal
X
29 - Machinery
X
31 - Electrical machinery and apparatus, nec
X
32 - Radio, television and communication equipment
X
34 - Motor vehicles
X
50 - Sales, maintenance and repair
X
51 - Wholesale trade
X
X
52 - Retail trade
X
X
H - Hotels and restaurants
X
63 - Other supporting and auxiliary transport activities
X
65 - Financial intermediation
X
X
66 - Insurance
X
X
74 - Other business activities
X
X
93 - Other service activities
X
X
48
First analysis of causes of market
malfunctioning in selected sectors

DG ECFIN
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
49
DG ECFIN
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
50
DG ECFIN
Integration in the retail sector

Value-added to gross output ratio:
- EU performing better than US
1,20
1,00
0,80
EU-25
US
0,60
0,40
0,20
0,00
93
923t7
921t2
92
91
90
O
N
M
L
LtQ
745t8
741t4
74
73
72
71
71t74
70
K
67
66
65
J
JtK
64
63
62
61
60
60t63
I
H
52
51
50
G
F
41
402
40x
51
DG ECFIN
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
Competition Indicators for the EU and the US
EU
US
Mark-up
0.26
0.17
Entry Rate*
4.77
9.30
Exit Rate*
1.82
9.72
*Entry and exit rates are only available for the entire wholesale and retail trade sector (NACE 50-52)
52
DG ECFIN
Innovation in the retail sector: R&D intensity
(R&D Investment/Net Sales), firm-based
evidence
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
EU
US
EU
2002
US
2005
Other retail sale in non-specialized stores
Dispensing chemists
Other retail sale in specialized stores
53
DG ECFIN
Innovation in the retail sector: Hours worked by skill
groups of persons engaged (share of total hours)
Hours w ork e d by high-s k ille d pe rs ons e ngage d (s hare in total hours )
3 0 .0 0
2000
2004
2 5.0 0
2 0 .0 0
15.0 0
10 .0 0
5.0 0
0 .0 0
US
IT
DK
DE
AT
UK
SE
CZ
FR
SK
BE
PL
SI
HU
ES
NL
FI
Hour s w or k e d by m e dium -s k ille d pe r s ons e ngage d (s har e in total hour s )
120.00
2000
2004
100.00
80.00
60.00
40.00
20.00
0.00
US
AT
BE
DE
DK
ES
FI
FR
IT
NL
SE
UK
CZ
HU
PL
SI
SK
Hour s w or k e d by low -s k ille d pe r s ons e ngage d (s har e in total hour s )
60.00
2000
2004
50.00
40.00
30.00
20.00
10.00
0.00
US
IT
SK
PL
CZ
SI
NL
HU
UK
FR
AT
SE
FI
DE
BE
DK
ES
54
DG ECFIN
Regulation in the retail sector:
OECD regulation index
5,0
4,5
4,0
3,5
3,0
1998
2,5
2003
2,0
1,5
1,0
0,5
0,0
OECD
EU
US
UK
SE
SP
PT
PL
NL
IT
IE
HU
GR
GE
FR
FI
DK
CZ
BE
AT
EU - simple average, excluding: CZ(2003),LU(1998,2003),SK (1998)
OECD - simple average, excluding: CZ(2003),LU(1998,2003),SK (1998), US(1998)
55
DG ECFIN
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
56
DG ECFIN
Thank you
57