1. Specialization and Clusters
Integrations and
Specialization and Clusters
Integration: the elimination of tariffs and non-tariff barriers
And specifically 4 freedoms:
Goods
Capital
Services
People
Milestones of European Integration
The Treaty of Rome ( )
Defined the four freedoms
But unanimity of decision led to blocades
Removed by the Single European Act SEA 1986/87
Qualified majority voting for vast range of fields
Treaty of Maastricht 1992
European Union and economic union
Treaty of Amsterdam 1997
Schengen (border control)
Treaty of Nice 2001
Enlargement and Institutional Reforms

2. of the integration process
Basic elements
of the integration process
Abolishment of tariffs
Common tariffs versus non-members
Common rules:
Product market regulations
Labor market regulation
Common currency
Environmental laws
Social charter
Transport infrastructure
Competition policy, corporate governance
Tax system
A set of European institutions
Milestones of European Integration
Not necessarily common wages
And the same extent of social expenditures

3. The economic effects of integration
In the short run:
Specialization and regional relocation according to basic economic forces
In the long run:
Diffusion of technology
Equalization of input prices (wages, capital, materials)
Migration
Catching up of laggards
Higher efficiency (on average)
More competition
Higher growth
However:
The short run can be very long, and the costs of structural change can be very high.

4. Theoretical hypothesis
Old Trade Theory:
Perfect competition and no scale economies
Countries specialize in products intensively using relative abundant factor
Countries specialize according to endowment distribution and production technology
Integration enforces this product specialization
Coal and steel in Ruhrgebiet, cars in Detroit
New Trade Theory:
Similar endowments
Increasing returns to scale, heterogeneous products
First mover advantages
Large home markets plus economies of scale leads to net exports
New Economic Geography:
Endogenous regional structure of inputs
Linkages, economies of scale and spillovers favor concentration
Congestion, costs of commuting, rising prices of immobile factors favor dispersion

5. Stylized facts about European integration effects
Europe vs. US
Stronger growth of productivity over decades
Indicates catching up (I.e. via intra-European integration)
But not in 90’s
Catching up within Europe
Ireland: +8% per year
Spain, Portugal, and Greece +2.7, 2.5, 2.45%
Slightly catching up: EU +2%
Specialization of countries
Degree of specialization increased
Specifically Germany in mainstream industries
Sweden, Finland in Telecom
Ireland in chemicals, computer, pharmaceuticals
Economic concentration of industries
Degree of concentration stagnates or is decreasing
Regional distribution of resources
Very low migration
Persistent differences in wages and productivity
Larger than in the US due to lower migration of firms and persons
Clustering
Similar firms and related industries in regions
Can lead to agglomeration advantages
Creation or enforcement of clusters a “modern” industrial policy
Health cluster in Denmark/Sweden
Fashion cluster in Northern Italy
Biotech cluster in Munich
Telecom clusters in Finland, Sweden