SINGLE EUROPEAN
MARKET 2
REF: SEM 2 nov08
Introduction
• This lecture will build on the introduction to
the SEM ( or the internal market), and
consider
– The European airline industry
– Further evaluation of the SEM programme
– The growth effects of the SEM
Example: The Airline industry and
the single market
• Europe’s airline industry liberalised
• Aims included:
– increase competition
– benefit consumers
– make EU airlines more cost competitive in
global terms
• See article and questions
Pre-liberalisation
• High fares
• High barriers to entry
• Limited number of
airlines on a route
•
•
•
•
•
Post-liberalisation
Lower fares available
Greater consumer choice
Easier for new airlines to
compete on a route
Airlines (Ryanair, Ireland)
can now fly from one
foreign country (UK) to
another foreign country
(France)
Development of low cost
carriers
European LCC routes 2000
European LCC routes 2006
Source: CAA Airport Statistics
Further evaluation of the SEM
programme
• Employment & inflexible EU labour
markets
• Market concentration & price convergence
• Is the EU more innovative?
• Is the EU more efficient?
– See data for EU Commission 1996, which
supports Cecchini Report estimates in medium
term
Mergers & takeovers (or acquisitions)
Part of the restructuring process following integration
• M&A activity is high in EU.
• Most M&A is mergers within member state.
– about 55% ‘domestic.’
– Remaining 45% split between:
• one is non-EU firm (24%),
• one firm was located in another EU nation (15%),
• counterparty’s nationality was not identified (6%).
• Distribution of M&A quite
varied:
M&A activity by nation, 1991-2002
B, 2.8%
UK, 31.4%
DK, 2.6%
EL, 1.1%
S, 5.3%
IRL, 1.7%
NL, 6.5%
L, 0.5%
I, 6.2%
A, 2.1%
P, 1.2%
F, 13.5%
D, 16.3%
E, 5.0%
Source Baldwin & Wyplosz
FIN, 3.9%
– Large States: share M&As
much lower than share of the
EU GDP.
– Italy,rance,Germany 36% of
the M&As, 59% GDP.
• Except UK.
– Small Staes have
disproportionate high share
of M&A
• Integration (relatively)
largest changes in smallest
states
• UK’s share relatively large
– Non harmonised takeovers rules.
• some members have very restrictive takeover
practices, makes M&As very difficult.
• others, UK, very liberal rules.
– Lack of harmonisation means restructuring
effects vary between member states.
• 1987-1992: M&A activity in maufacturing
• More recently most activity in service
sector
• See Allen (1998) & European Economy 2001
– On SEM reading list
More specific areas
• Look at the service sector
• Example, see Pelkmans, ch7, Services market integration. &
other text books
• Also, Pelkmans for
– ch5, Product market integration (section5.4)
– ch6, Product market integration (sec.6.6 &6.7)
– ch8, Network industries
Growth (dynamic) effects of the
SEM
• We’ve seen common market theory can
show us the possible effects of moving from
a customs union to a common market
– The SEM programme aimed to make a
common market a reality
• We’ve seen the SEM increases competition
in Europe
• We now consider the growth effects of the
SEM
Growth effects of the SEM
• So far static allocation effects have been
considered
• Baldwin (1989) argued dynamic gains may be 5
times greater than those in the Cecchini Report
– Change rate at which new F of P (mainly K)
accumulated, leading to growth of output/worker
– Cecchini: liberalisation can’t permanently raise growth
rates
– Baldwin: permanently raise growth rates
Basic diagram
Medium term
• Medium term growth bonus results in
gains of up to 9% of GDP, compared to
Cecchini’s 6.5%
– Eg.Spain………………………………………
………………………………….......................
• European integration
Notes:
allocation effect
raised efficiency
improved investment
climate
raised investment in K
raised output per person
Long term
• Long term growth bonus can be added to
this, leading to the growth rate being 0.250.75 percentage points higher.
– Due to Technological progress (following
investment in the medium term)
Long term growth
• More difficult to determine empirically in EU
• We can concentrate on medium term investment
booms associated with European integration, like
after Spain joined the EU
• Some States, such as Greece, have not benefited
(compared to Spain, Portugal, and Ireland) due to
poor macroeconomic management, a poor
investment climate, and lack of supply side
reform.
Question
What opportunities and threats does the
internal market pose for
(a) British firms
(b) Non-European firms?
Also, see video & questions
Conclusions
• Cecchini underestimated SEM benefits
according to Baldwin
• Overall, the SEM is one of the EU’s most
far reaching policies that has influenced
many sectors of the economy
• The SEM had wide ranging political
implications
Appendix: Theory
Medium & long term effects
• Capital (K) comprised of
– Physical K
– Human K
– Knowledge K (technology)
• Medium term
– Increased output / person stops at a new higher
level (as K / worker diminishes)
• Long term
– Rate of growth (accumulation) permanently
higher
– Mainly accumulation of knowledge K
(technological progress) as physical K suffers
from diminishing returns
Medium term growth
• Analysis based on Solow’s growth model
• Assume
– People save & invest a fixed % of income (s in diag.)
– Constant % depreciation of K stock (d in diag.)
– EU is a single, closed economy, with integrated K & L
markets
• Equilibrium K/L* where
inflow of K = depreciation of K
• This allows us to find output/worker (Y/L*) at
point B
Euro/L
Depreciation / worker
d (K/L)
A
K/L*
Inflow of K (investment)
s(GDP/L)
K/L
Euro/L
Y/L*
B
Output/worker
GDP/L
Depreciation / worker
d (K/L)
A
K/L*
Inflow of K (investment)
s(GDP/L)
K/L
• Integration has 2 stages
• Stage 1:Integration raises efficiency, thus
raises output/worker
– GDP/L shifts up to GDP/L1
– Y/L rises to Y/Lc at constant K/L*
Euro/L
Y/L*
B
Output/worker
GDP/L
Depreciation / worker
d (K/L)
A
K/L*
Inflow of K (investment)
s(GDP/L)
K/L
Euro/L
GDP/L 1
Y/Lc
C
Y/L*
B
Output/worker
GDP/L
Depreciation / worker
d (K/L)
A
K/L*
Inflow of K (investment)
s(GDP/L)
K/L
• Stage 2:
– As GDP/L shifts up to GDP/L1, this leads to the inflow
of K (investment) curve shifting up, s(GDP/L) to
s(GDP/L)1
– New equilibrium at point D, giving K/L1
– Output/ worker rises ( Y/Lc to Y/L1) as we move from
point C to E (could take 10 years)
• C to E shows up as faster than normal growth, before growth
returns to normal
• Medium term growth bonus –reflects improved efficiency
stimulates I
Euro/L
Y/L1
Y/Lc
Y/L*
E
GDP/L 1
C
Output/worker
GDP/L
B
D
A
K/L* K/L1
Depreciation / worker
d (K/L)
s(GDP/L)1
Inflow of K (investment)
s(GDP/L)
K/L
Euro/L
Induced K formation, resulting from integration
E
Y/L1
Medium term growth bonus
Y/Lc
C
GDP/L 1
Allocation effect
Y/L*
B
D
Depreciation / worker
d (K/L)
s(GDP/L)1
A
K/L* K/L1
K/L
Long term growth
• More difficult to determine empirically in EU
• We concentrate on medium term investment
booms associated with European integration, like
after Spain joined the EU