From Customs Union to the Internal Market

Single Market Program Partly a reaction to the stagnation of intra- EC trade and partly a reaction to the global trends based on: 1. Technological advances 2. Rapid industrial restructuring at the global level 3. 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 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 (pro- business) 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 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 Collapse of Communist regimes in  Dublin Summit: “Unstoppable momentum” to go beyond the internal market towards a political union. EMU a necessity.

Static versus Dynamic Gains 1. Static gains from the elimination of frontier controls and NTBs estimated to be relatively small. 2. Dynamic gains resulted from economies of scale, restructuring, and greater competition.

The Single Market Program: Main Results  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  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) 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 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 Microeconomic Approach: Welfare gains as % of GDP was estimated around % 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 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.