From Customs Union to the
Internal Market
Single Market Program
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1.
2.
3.
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Partly a reaction to the stagnation of intraEC 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.
Single Market Program
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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 R&D.
Increasing appeal of supply-side programs (probusiness) 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.
Single Market Program
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Rapid increase in FDI especially to weaker
regions, Spain, Portugal, Ireland.
A wave of mergers and acquisitions
Sharp increase in intra-EC trade (>60% of EC
trade is intra-EC trade).
German Unification in October 1990.
Collapse of Communist regimes in 19891990
Dublin
Summit:
“Unstoppable
momentum” to go beyond the internal market
towards a political union. EMU a necessity.
Static versus Dynamic Gains
1.
2.
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.
The Single Market Program:
Main Results
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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).
The Single Market Program:
Main Results
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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.
The Single Market Program:
Main Results

Currently, EU is the world’s largest
trading area and second only to the
US in terms of foreign direct
investment flows.
Costs of Non-Europe” or Cecchini
Report (1988)
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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).
Benefits
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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.
Micro and Macro Consequences
of the Completion of the Internal
Market
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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.
Ex post Gains from the
Internal Market
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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.