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SINGLE EUROPEAN MARKET 2 REF: SEM 2 nov08

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.

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SINGLE EUROPEAN MARKET 2 REF: SEM 2 nov08

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  1. SINGLE EUROPEAN MARKET 2REF: SEM 2 nov08

  2. 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

  3. 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

  4. 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

  5. European LCC routes 2000

  6. European LCC routes 2006

  7. Source: CAA Airport Statistics

  8. 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

  9. 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%).

  10. Distribution of M&A quite varied: • 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 Source Baldwin & Wyplosz

  11. 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

  12. 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

  13. 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

  14. 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

  15. Basic diagram

  16. Medium term • Medium term growth bonus results in gains of up to 9% of GDP, compared to Cecchini’s 6.5% • Eg.Spain………………………………………………………………………….......................

  17. European integration allocation effect Notes: raised efficiency improved investment climate raised investment in K raised output per person

  18. Long term • Long term growth bonus can be added to this, leading to the growth rate being 0.25-0.75 percentage points higher. • Due to Technological progress (following investment in the medium term)

  19. 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.

  20. Question What opportunities and threats does the internal market pose for (a) British firms (b) Non-European firms? Also, see video & questions

  21. 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

  22. Appendix: Theory

  23. Medium & long term effects • Capital (K) comprised of • Physical K • Human K • Knowledge K (technology)

  24. 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

  25. 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

  26. Euro/L Depreciation / worker d (K/L) Inflow of K (investment) s(GDP/L) A K/L K/L*

  27. Euro/L Output/worker GDP/L B Y/L* Depreciation / worker d (K/L) Inflow of K (investment) s(GDP/L) A K/L K/L*

  28. 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*

  29. Euro/L Output/worker GDP/L B Y/L* Depreciation / worker d (K/L) Inflow of K (investment) s(GDP/L) A K/L K/L*

  30. Euro/L GDP/L 1 Y/Lc C Output/worker GDP/L B Y/L* Depreciation / worker d (K/L) Inflow of K (investment) s(GDP/L) A K/L K/L*

  31. 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

  32. Euro/L GDP/L 1 E Y/L1 Y/Lc C Output/worker GDP/L B Y/L* Depreciation / worker d (K/L) D s(GDP/L)1 A Inflow of K (investment) s(GDP/L) K/L K/L* K/L1

  33. Euro/L Induced K formation, resulting from integration GDP/L 1 E Y/L1 Medium term growth bonus Y/Lc C Allocation effect B Y/L* Depreciation / worker d (K/L) D s(GDP/L)1 A K/L K/L* K/L1

  34. 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

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