Economics 1490 GROWTH AND CRISIS IN THE WORLD ECONOMY with Professor Dale W. Jorgenson Lecture 13: October 15, 2015 Europe 2020 and the Single Market Harvard University Department of Economics - Fall 2015

Lecture 13 : October 15, 2015 Europe 2020 and the Single Market Course Outline A. Introduction B. U.S. Financial and Economic Crisis. C. Europe and the U.S.: Convergence and Divergence. D. Asian Economic Miracles. E. Sustainability of Economic Growth. F. Outlook for the World Economy.

Europe and the United States: Convergence and Divergence 11. U.S. Growth Resurgence and European Slowdown. 12. European Competitiveness. 13. Europe 2020 and the Single Market. 14. European Policy Response: The Euro. 15. European Policy Response: The Pound. Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

Lecture 12: October 13, 2015 European Competitiveness PATTERNS OF WORLD TRADE The Value Added Approach to Trade Shifting Patterns of World Trade Inward and Outward Foreign Direct Investment

Lecture 12: October 13, 2015 European Competitiveness

Lecture 12: October 13, 2015 European Competitiveness

Lecture 12: October 13, 2015 European Competitiveness

Lecture 12: October 13, 2015 European Competitiveness

Lecture 12: October 13, 2015 European Competitiveness EUROPEAN COMPETITIVENESS International Fragmentation of Production Regional Shares of Global Manufacturing Revealed Comparative Advantage of the EU27

Lecture 12: October 13, 2015 European Competitiveness Value added and workers involved in production of German transport equipment

International fragmentation of production Lecture 12: October 13, 2015 European Competitiveness

Lecture 12: October 13, 2015 European Competitiveness Regional shares in world GVC income for all manufactures (%)

Lecture 12: October 13, 2015 European Competitiveness Revealed comparative advantage of EU27, by group of final manufactures (%)

Lecture 12: October 13, 2015 European Competitiveness Change in employment versus change in real wage in manufacturing GVCs, (1995=1).

Lecture 12: October 13, 2015 European Competitiveness

Lecture 12: October 13, 2015 European Competitiveness COMPARATIVE ADVANTAGE AND COMPETITIVENESS Global Value Chains and Patterns of World Trade Revealed Comparative Advantage European Competitiveness and the Knowledge Economy

Lecture 13 : October 15, 2015 Europe 2020 and the Single Market “Tous ceux qui ont essayé de régler les problèmes économiques que posait le traité de Rome en oubliant le coté politique de la chose sont allés à un échec et aussi longtemps qu'on examinera [ces] problèmes uniquement sur le plan économique et sans penser à la politique, je le crains, nous irons à des échecs répétés.” “All those who, in trying to meet the economic challenges set out by the treaty of Rome, neglected the political dimension have failed. As long as [those] challenges will be addressed exclusively in an economic perspective, disregarding their political angle, we will run – I am afraid – into repeated failures.” Paul-Henri Spaak Discours à la Chambre des Représentants 14 June 1961

Lecture 13 : October 15, 2015 Europe 2020 and the Single Market COMPLETING THE INTERNAL MARKET "Europe stands at the crossroads. We either go ahead – with resolution and determination – or we drop back into mediocrity. We can now either resolve to complete the integration of the economies of Europe; or, through a lack of political will to face the immense problems involved, we can simply allow Europe to develop into no more than a free trade area.“ European Commission "Completing the internal market” White Paper for the European Council (Milan, June 1985)

Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

Lecture 13 : October 15, 2015 Europe 2020 and the Single Market A NEW STRATEGY FOR THE SINGLE MARKET “The services sectors are crucially important for our economies. They account for 70% of GDP, they are the most important source of foreign direct investment, and they are the only sector of net job creation in the EU. Nevertheless, services markets remain strongly fragmented with only 20% of the services provided in the EU having a cross-border dimension. As a result, the productivity gap between the US and the Euro area remains much wider than acceptable (about 30%).” Mario Monti, 2010

EUROPEAN GROWTH STRATEGY The starting point for our discussion of European growth strategies is the Lisbon Agenda, adopted by Lisbon European Council in March This was a ten- year program to become the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion. The goal of this growth strategy was to be achieved by a three-pronged program: preparing the transition to a knowledge-based economy and society by better policies for the information society and R&D, as well as by stepping up the process of structural reform for competitiveness and innovation and by completing the internal market; modernising the European social model, investing in people and combating social exclusion; sustaining the healthy economic outlook and favourable growth prospects by applying an appropriate macro-economic policy mix. Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

INNOVATION POLICY AND THE SINGLE MARKET The Lisbon Agenda calls for creation of a European Area of Research and Innovation. This calls for coordination of research across Europe, provision of tax incentives for private investment in research and development, benchmarking European research activities, increasing mobility of research workers, and providing a European patent system. In addition, the Lisbon Agenda calls for reduced regulatory barriers to entrepreneurship and starting new businesses. The Lisbon Agenda calls for a complete and fully operational internal market. In particular, the Agenda proposes a strategy for creating a single market for services by 2000, in other words, within a few months for adoption of the Lisbon Agenda itself. Finally, the Lisbon Agenda calls for efficient and integrated financial markets and fiscal consolidation, quality, and sustainability of public finances. Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

EUROPEAN GROWTH STRATEGY: THE REMIX By 2004 it had become apparent that the Lisbon Agenda was not working. This led to two initiatives at the European level: The Kok Report, a report of a High Level Group chaired by Wim Kok, Prime Minister of The Netherlands from 1994 to 2002 and leader of the Labour Party in The Netherlands from The Bolkestein Directive on Services in the Internal Market. This was proposed by Frits Bolkestein, a liberal-conservative politician who led the People’s Party in The Netherlands and served as Secretary of Defense under Kok in a coalition government that included three parties. In 1999 Bolkestein joined the European Commission and served as European Commissioner for the Internal Market and Services until Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

Lecture 13 : October 15, 2015 Europe 2020 and the Single Market THE LISBON AGENDA AND THE SERVICES DIRECTIVE Supplementary Readings: Report for the High Level Group Chaired by Wim Kok (2004), Facing the Challenge, Luxembourg, Official Publications of the European Communities, November. Commission of the European Communities (2004), “Proposal for a Directive of the European Parliament and of the Council on Services in the Internal Market,” Brussels, European Commission, pp Commission of the European Communities (2006), “Directive of the European Parliament and of the Council on Services in the Internal Market,” Brussels, European Commission, December. dir/proposal_en.htm# _3

EUROPEAN GROWTH STRATEGY: THE KOK REPORT External events since 2000 have not helped achieving the objectives but the European Union and its Members States have clearly themselves contributed to slow progress by failing to act on much of the Lisbon strategy with sufficient urgency. This disappointing delivery is due to an overloaded agenda, poor coordination and conflicting priorities. Still, a key issue has been the lack of determined political action. The Lisbon strategy is even more urgent today as the growth gap with North America and Asia has widened, while Europe must meet the combined challenges of low population growth and ageing. Time is running out and there can be no room for complacency. Better implementation is needed now to make up for lost time. In this context, if we are to deliver the Lisbon goals of growth and employment then we must all take action. To achieve them will require everyone to engage. This means more delivery from the European institutions and Member States through greater political commitment, broader and deeper engagement of Europe’s citizens, and a recognition that by working together Europe’s nations benefit all their citizens. Each element of the Lisbon strategy is still needed for the success of the whole. Improved economic growth and increased employment provide the means to sustain social cohesion and environmental sustainability. In their turn, social cohesion and environmental sustainability can contribute to a higher growth and employment. Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

THE KOK REPORT: CONCLUSIONS This requires urgent action across five areas of policy: the knowledge society: increasing Europe’s attractiveness for researchers and scientists, making R & D a top priority and promoting the use of information and communication technologies (ICTs); the internal market: completion of the internal market for the free movement of goods and capital, and urgent action to create a single market for services; the business climate: reducing the total administrative burden; improving the quality of legislation; facilitating the rapid start-up of new enterprises; and creating an environment more supportive to businesses; the labour market: rapid delivery on the recommendations of the European Employment Taskforce; developing strategies for lifelong leaning and active ageing; and underpinning partnerships for growth and employment; environmental sustainability: spreading eco-innovations and building leadership in eco-industry; pursuing policies which lead to long-term and sustained improvements in productivity through eco-efficiency. Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

TIME LINE FOR THE SINGLE MARKET IN SERVICES IN THE U.S. 1787: the United States Constitution (Article I, Section 8, Clause 3). The clause states that the United States Congress shall have power "To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes". 1824: The premise of the doctrine is that the U.S. Constitution reserves for the United States Congress at least some degree of exclusive power "to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes" (Article I, § 8). Therefore, individual states are limited in their ability to legislate on such matters. The Dormant Commerce Clause does not expressly exist in the text of the United States Constitution. It is, rather, a doctrine deduced by the U.S. Supreme Court and lower courts from the actual Commerce Clause of the Constitution. Justices Antonin Scalia (1987) and Clarence Thomas (2007) have rejected the notion of a dormant commerce clause. Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

TIME LINE FOR THE SINGLE MARKET IN SERVICES IN EUROPE 1951: Treaty of Paris establishes the European Coal and Steel Community. 1957: Treaty of Rome establishes the European Economic Community. 1968: Tariffs abolished within the EEC. 1986: Single European Act to establish a Single European Market by : Services Directive to establish a single market in services by Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

THE BOLKESTEIN DIRECTIVE ON SERVICES IN THE SINGLE MARKET This proposal for a directive is part of the process of economic reform launched by the Lisbon European Council with a view to making the EU the most competitive and dynamic knowledge-based economy in the world by Achieving this goal means that the establishment of a genuine internal market in services is indispensable. It has not hitherto been possible to exploit the considerable potential for economic growth and job creation afforded by the services sector because of the many obstacles hampering the development of service activities in the internal market. This proposal forms part of the strategy adopted by the Commission to eliminate these obstacles and follows on from the Report on the State of the Internal Market for Services, which revealed their extent and significance. With a view to taking full effect by 2010, the proposal is based on a dynamic approach involving phased implementation of some of its provisions, a commitment to additional harmonisation on certain specific matters (cash-in- transit services, gambling and judicial recovery of debts), the guarantee that it will evolve and that any need for new initiatives can be identified. Moreover, this proposal is without prejudice to any legislative or other Community initiatives in the field of consumer protection. Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

FREE ENTRY INTO SERVICES In order to eliminate the obstacles to the freedom of establishment, the proposal provides for: administrative simplification measures, particularly involving the establishment of "single points of contact", at which service providers can complete the administrative procedures relevant to their activities, and the obligation to make it possible to complete these procedures by electronic means; certain principles which authorisation schemes applicable to service activities must respect, in particular relating to the conditions and procedures for the granting of an authorisation; the prohibition of certain particularly restrictive legal requirements that may still be in force in certain Member States; the obligation to assess the compatibility of certain other legal requirements with the conditions laid down in the Directive. Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

COUNTRY OF ORIGIN PRINCIPLE In order to eliminate the obstacles to the free movement of services, the proposal provides for: the application of the country of origin principle, according to which a service provider is subject only to the law of the country in which he is established and Member States may not restrict services from a provider established in another Member State. This principle is accompanied by derogations which are either general, or temporary or which may be applied on a case-by-case basis; the right of recipients to use services from other Member States without being hindered by restrictive measures imposed by their country or by discriminatory behavior on the part of public authorities or private operators. In the case of patients, the proposal clarifies the circumstances in which a Member State may make reimbursement of the cost of health care provided in another Member State subject to authorization; a mechanism to provide assistance to recipients who use a service provided by an operator established in another Member State; in the case of posting of workers in the context of the provision of services, the allocation of tasks between the Member State of origin and the Member State of destination and the supervision procedures applicable. Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

HARMONIZATION With a view to establishing the mutual trust between Member States necessary for eliminating these obstacles, the proposal provides for: harmonization of legislation in order to guarantee equivalent protection of the general interest on vital questions, such as consumer protection, particularly as regards the service provider's obligations concerning information, professional insurance, multidisciplinary activities, settlement of disputes, and exchange of information on the quality of the service provider; stronger mutual assistance between national authorities with a view to effective supervision of service activities on the basis of a clear distribution of roles between the Member States and obligations to cooperate; measures for promoting the quality of services, such as voluntary certification of activities, quality charters or cooperation between the chambers of commerce and of crafts; encouraging codes of conduct drawn up by interested parties at Community level on certain questions, including in particular commercial communications by the regulated professions. Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

THE SERVICES DIRECTIVE OF 2006 In the Commission's initial 2004 draft, service providers would, temporarily, have been subject to the laws of their country of origin rather than those of the country where the service is provided. They could thus test a new market without having to register with the authorities. This principle was the most controversial part of the proposal as many of Europe's older member states worried that cheaper workers from the eastern EU countries would flock massively to the West, pulling down social standards. Instead, the article was renamed 'freedom to provide services' and holds that member states must "ensure free access to and free exercise of a service activity within [their] territory," while allowing them to continue applying their own rules on conditions of employment, including those laid down through collective bargaining agreements. Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

A NEW GROWTH STRATEGY: EUROPE 2020 Europe 2020 puts forward three mutually reinforcing priorities: Smart growth: developing an economy based on knowledge and innovation. Sustainable growth: promoting a more resource efficient, greener and more competitive economy. Inclusive growth: fostering a high-employment economy delivering social and territorial cohesion. Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

SEVEN INITIATIVES The Commission is putting forward seven flagship initiatives to catalyze progress under each priority theme: "Innovation Union" to improve framework conditions and access to finance for research and innovation so as to ensure that innovative ideas can be turned into products and services that create growth and jobs. "Youth on the move" to enhance the performance of education systems and to facilitate the entry of young people to the labor market. "A digital agenda for Europe" to speed up the roll-out of high-speed internet and reap the benefits of a digital single market for households and firms. Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

SEVEN INITIATIVES (continued) "Resource efficient Europe" to help decouple economic growth from the use of resources, support the shift towards a low carbon economy, increase the use of renewable energy sources, modernize our transport sector and promote energy efficiency. "An industrial policy for the globalization era" to improve the business environment, notably for SMEs, and to support the development of a strong and sustainable industrial base able to compete globally. "An agenda for new skills and jobs" to modernize labor markets and empower people by developing their of skills throughout the lifecycle with a view to increase labor participation and better match labor supply and demand, including through labor mobility. "European platform against poverty" to ensure social and territorial cohesion such that the benefits of growth and jobs are widely shared and people experiencing poverty and social exclusion are enabled to live in dignity and take an active part in society. Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

THE LISBON AGENDA AND THE SERVICES DIRECTIVE: SUMMARY The Lisbon agenda failed. As the Kok Report of 2004 points out, all five of the objectives had to be achieved simultaneously – the knowledge-based economy, reduced regulatory barriers to entry, a single market in services, including financial services, and fiscal consolidation. In 2004 Single Market Commissioner Bolkestein proposed creation of a single market in services through free entry into service markets, the country of origin principle, and harmonization of the legal framework for service businesses. Free entry and harmonization were made voluntary and the country of origin principle was rejected. Europe 2020 has replaced the Lisbon Agenda. This focuses on public financing of research, enhanced educational performance, support for broadband, reduction of natural resource use, modernization of labor markets, and elimination of poverty. The single market in services has disappeared as an objective and fiscal consolidation is not mentioned. Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

Lecture 13 : October 15, 2015 Europe 2020 and the Single Market COMMON, INTEGRATED APPROACH Investment Plan for Europe A Renewed Commitment to Structural Reforms Pursuing Fiscal Responsibility

Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

Lecture 13 : October 15, 2015 Europe 2020 and the Single Market INVESTMENT PLAN FOR EUROPE Mobilization of Additional Investment in Partnership with EIB Transparent Pipeline of Projects at the EU Level Capital Markets Union

Lecture 13 : October 15, 2015 Europe 2020 and the Single Market PURSUING FISCAL RESPONSIBILITY Responsible, Growth-Friendly Fiscal Consolidation Efficient and Growth-Friendly Tax System Stability and Growth Pact

Lecture 13 : October 15, 2015 Europe 2020 and the Single Market SUMMARY: EUROPE 2020 AND THE SINGLE MARKET Service Sector Directive of 2006 Europe 2020 Annual Growth Survey of 2015

Lecture 13 : October 15, 2015 Europe 2020 and the Single Market

Lecture 13 : October 15, 2015 Europe 2020 and the Single Market