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What have we learned from European Economic Integration? University of Sussex , 16-17 July 2007

What have we learned from European Economic Integration? University of Sussex , 16-17 July 2007. Where next on the Single Market? Adriaan Dierx Fabienne Ilzkovitz European Commission European Commission and Université Libre de Bruxelles. Where next on the Single Market?.

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What have we learned from European Economic Integration? University of Sussex , 16-17 July 2007

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  1. What have we learned from European Economic Integration? University of Sussex, 16-17 July 2007 Where next on the Single Market? Adriaan Dierx Fabienne Ilzkovitz European Commission European Commission and Université Libre de Bruxelles

  2. Where next on the Single Market? • The latest empirical evidence on the economic impact of the Single Market • The Single Market Review • Market monitoring as a tool to improve the governance of the Single Market

  3. Where next on the Single Market? • The latest empirical evidence on the economic impact of the Single Market (DG ECFIN Economic Paper nr. 271 http://ec.europa.eu/economy_finance/publications/economic_papers/2007/economicpapers271_en.htm) • The Single Market Review • Market monitoring as a tool to improve the governance of the Single Market

  4. Why an Internal Market?The Cecchini Report

  5. The IM, EMU and enlargement have contributed to boost trade and FDI and to increase price convergence…. Ratio of Intra EU Manufacturing trade to GDP Price convergence between EU member states Coefficient of variation of comparative price levels of final consumption by private households including indirect taxes

  6. Lower degree of trade integration in the EU than in the US But the EU remains a less integrated market than the US Lower degree of price dispersion for tradeables between main US cities than that between EU capitals Intra-trade in manufactured products 2002 (intra exports as a percentage of GDP) Price dispersion in tradeables CPI-weighted

  7. The Internal Market has contributed to improve the business environment • More competition •  mark-ups in sectors more affected by NTB • Turbulence in market leadership • Increased size and multinationality of firms Multinationality and firm size

  8. But there is still not enough businessdynamism in the EU… • Average entry /exit rate over the period 1997-2003 twice as large in the US than in most euro-area countries • Firms in the US tend to grow faster than firms in EU economies Ease of doing business 2005-2006 EU 25: Simple average, excl. CY,LU,MT Source: World Bank, Doing Business in 2005/2006

  9. Main Productivity Developments in the EU and the US

  10. While EU enterprises do innovate … Only 1/4 of the innovative EU companies sell new goods or services in other European countries • Source: Innobarometer 2004

  11. World export market shares by skill intensity of sectors(%) The Internal Market has not sufficiently promoted a shift towards the faster growing high tech sectors

  12. Potential of the Internal Market not yet fully exploited • Problems with implementation of IM rules • Some of the instruments are not fully adequate • Remaining barriers • Services • Fiscal barriers • Barriers to the diffusion of knowledge (IPRs)  Macro-economic gains of the Internal Market could be doubled

  13. Estimated gains from the Single Market (as a percentage of GDP) Already achieved: +2.2% in 2006 Potential for further benefits • Services Directive (0.5-1%) • Financial integration (1.1%) • Liberalisation of energy sector (0.8%) • Corporate tax harmonisation (0.2%)

  14. Where next on the Single Market? • The latest empirical evidence on the economic impact of the Single Market • The Single Market Review • Market monitoring as a tool to improve the governance of the Single Market

  15. Single Market Review • Process • March 2007: Interim report (vision paper) • Autumn 2007: Final report by Commission • Spring 2008: Decision by European Council • Main elements • Concrete policy actions • Improved governance

  16. Concrete policy actions aimed at creating a Single Market : • Citizens and consumers Increase the benefits for consumers • An integrated economy Develop synergies between the SM and EMU • Knowledge society Encourage use and diffusion of new technologies • A well regulated SM Make the environment more business-friendly • A sustainable EuropeAccompany the SM with social and environmental policies • Open to the worldMake Europe attractive to foreign investors and export our rules and standard at world level

  17. Improved governance aimed at: • More decentralised and network-based • More responsive to the global context • Improving the communication • More impact-driven and result oriented policies based on a better understanding of markets

  18. Improved governance aimed at more impact-driven and result oriented policies • Act where it will have a maximum impact • Act when market do not deliver • Assess consequences of policy interventions • Identify synergies between policy instruments Proposal for market monitoring

  19. Where next on the Single Market? • The latest empirical evidence on the economic impact of the Single Market • The Single Market Review • Market monitoring as a tool to improve the governance of the Single Market

  20. Proposed two-stage approach • Sectoral screening on basis of readily available indicators • In-depth investigation of market(s) in selected sectors Why? Market monitoring is very time and resource intensive

  21. Criteria for sectoral screening • Economic importance of the sector • Importance of the sector for the adjustment capacity of the EU economy • Signs of market malfunctioning from the perspective of businesses and consumers

  22. 1. Economic importance of the sector • Static perspective  Sector share in total EU25 value added in 2004  Sector share in total EU25 employment in 2004 • Dynamic perspective  Sector average annual world export growth in 1999-2005

  23. 2. Importance of the sector for adjustment • Strong interlinkages with rest of the economy • Adoption and diffusion of new technologies • Transmission of price shocks (especially relevant for adjustment within the euro area)

  24. 2. Importance of the sector for adjustment • Interlinkages with the rest of the economy • Symmetric input-output table for the EU27 for the year 2000 • Backward multipliers and forward multipliers (suppliers of essential inputs)  Identification of KEY SECTORS

  25. Key sectors (forward and backward oriented) • 24 - Chemicals and chemical products • 51 - Wholesale trade • 52 - Retail trade • F - Construction • 92 - Recreational, cultural and sporting activities

  26. Forward oriented sectors • 20 - Wood and cork • 21 - Pulp and paper • 22 - Printing, • 25 - Rubber and plastics • 26 - Other non-metallic mineral • 27 - Basic metals • 28 - Fabricated metal • 37 - Recycling • E - Electricity, gas and water supply • 60 - Other Inland transport • 63 - Other supporting and auxiliary transport activities • 64 - Post and telecommunications • 65 - Financial intermediation, • 67 - Activities related to financial intermediation • 71 - Renting of machinery and equipment • 72 - Computer and related activities • 74 - Other business activities

  27. Backward oriented sectors • 15 - Food and beverages • 29 - Machinery • 34 - Motor vehicles • 50 - Sale, maint. and repair of motor vehicles • H - Hotels and restaurants • 66 - Insurance and pension funding

  28. 2. Importance of the sector for adjustment • Adoption and diffusion of new technologies • Focus on ICT- related sectors, given that ICT has become a “general purpose technology”, i.e. a technology that is increasingly used in all activities and all sectors of the economy. • ICT diffusion also leads to important positive spillover on market functioning and performance in other sectors, namely by allowing firms to improve their productive efficiency and their ability to respond to changing market conditions.

  29. ICT- related sectors Industry categorisation provided by the Groningen's Growth and Development Centre ICT - producing • 30 - Office, accounting and computing machinery • 31 - Electrical machinery and apparatus, nec • 32 - Radio, television and communication equipment • 33 - Medical, precision and optical instruments • 64 - Post and telecommunications

  30. ICT- users • 18 - Wearing apparel • 22 - Printing and publishing • 29 - Machinery • 35 - Other transport equipment • 36t37 - Manufacturing nec • 51 - Wholesale trade • 52 - Retail trade • 65 - Financial intermediation • 66 - Insurance and pension funding • 67 - Activities related to financial intermediation • 71 - Renting of machinery and equipment • 72 - Computer and related activities • 73 - Research and development • 74 - Other business activities

  31. 2. Importance of the sector for price adjustment DATA Evidence on price stickiness  OBJECTIVE Identification of bottlenecks for transmission of price adjustment  WHY? Necessary for the reallocation of factors and in particular for the functioning of the competitiveness channel within the euro area (given the absence of independent monetary and exchange rate policies)

  32. Sectors with some evidence of sticky prices • 17 - Textiles • 18 - Wearing apparel • 28 - Fabricated metals • 50 - Sale, maintenance and repair of motor vehicles • 52 - Retail trade • 92 - Recreational, cultural and sporting activities • H - Hotels and restaurants • 93 Other service activities Sectors with more flexible prices • 15 - Food and beverages • 23 - Coke, refined petroleum • 24 - Chemicals • 30 - Office, accounting and computing machinery • 32 - Radio, television and communication equipment

  33. 3. Signs of market malfunctioning • Economic efficiency • Labour productivity growth • Consumer and business satisfaction • Scope for policy intervention based on first analysis of causes of market malfunctioning: • Integration/openness • Competition • Innovation • Regulation

  34. 3. Signs of market malfunctioning • From the point of view of economic efficiency  Labour productivity growth (gross value added per hour worked) - period 1995-2004 - benchmark: US

  35. US outperforms the EU in most sectors in terms of labour productivity

  36. Performance gap in terms of L- productivity vis-à-vis the US

  37. From the point of view of consumers and businesses satisfaction • 2006 Consumer Satisfaction Survey • DG MARKT 2006 Public Consultation on future Single Market policy

  38. Selected sectors on the basis of economic importance, contribution to adjustment and productivity performance • 29 - Machinery  51 - Wholesale trade • 52 - Retail trade • 65 - Financial intermediation • 66 - Insurance and pension funding • 74 - Other business activities

  39. (1) - “B” for backward linkages and “F” for forward linkages (2) - “U” for ICT-user and “P” for ICT-producer

  40. Alternative selection strategies Signs of market malfunctioning + Economic importance OR important for adjustment

  41. First analysis of causes of market malfunctioning in selected sectors • INTEGRATION - Market thickness - Import penetration - Contribution of FDI inflows to total investment - Coefficient of variation of prices across countries • COMPETITION - Mark-ups - Concentration ratios • INNOVATION - R&D/value added - R&D intensity - Patent applications - Skill structure of employment • REGULATION - OECD regulation indicators

  42. Example: The retail sector (52) • Lower productivity growth than US • Important share of total EU25 value added and employment • Important forward and backward interlinkages • Intensive ICT- using sector • Higher price stickiness than in US

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