Analysis of the Effects of the Single European Act and Maastricht Treaty in Germany

7/24/2019 Analysis of the Effects of the Single European Act and Maastricht Treaty in Germany

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Analysis of the effects of the Single European Act and MaastrichtTreaty in Germanys auto trade with the EU

First Draft

Alvaro de la Gar a

Dr! Simran Sahi

"D #$%#&'(


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Auto trade )etween Germany and EU increased )y #*+ after the signing of the Single

European Act and the Maastricht Treaty in the years '(&, and '(($ respectively! -'. The

formation of the EU not only affected automotive e/ports from Germany to the EU0 )ut also

)enefited German wor1ers )y a com)ined '%+ wage increase! The signing of these two

agreements )rought in large amounts of domestic and foreign capital investment0 concluding in

an increase in capital towards manufactured goods of '#+ over the period of , years after

'(($! 2n the other hand0 unemployment in the auto industry increased )y (+ after the first five

years of the European Union formatted! -$. This is seen as a direct conse3uence of the huge

influ/ of new capital to the country and the free mo)ility of people through the EU! Germany0

one of the strongest economies in the Union is )ound to attract population who suffer )oth

structural and frictional unemployment in other EU countries!

This paper analy es Germanys auto trade with the EU )efore and after the signing of the

European Single Act and the Maastricht Treaty0 to confirm a ''*+ in e/ports and a (*+ in

imports! The paper also goes into the conse3uences created )y an increase in trade0 an

unemployment increased '$+ and ''+ after the signing of )oth treaties0 capital influ/ to the

country went from $(4 to $&40 which translates to a 5+ decrease! The paper goes into an

inflation analysis to disprove the e/istence of the Dutch disease in Germanys economy! Finally0

this paper confirms Germanys economy )ehaves according to the 6ec1scher72lin model!

'! "ntroduction

8ast year mar1ed the '$% th anniversary of the )irth of the automo)ile in Germany! 9arl 4en

registered his invention a :vehicle powered )y a gas engine!; This patent is considered to )e the

)irth of the automo)ile as we 1now it! Germany to date continues to occupy a uni3ue position in

the international automotive industry! German original e3uipment manufacturers account for ',

percent of glo)al passenger car production!


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"n the domestic mar1et0 the automotive industry remains the countrys most important economic

sector and Europes single largest auto mar1et! The country is also host to the largest

concentration of 2EM plants in Europe! Today there is an annual '(!% million euros committed

to automotive research and development ma1ing Germany the most innovative automo)ile

country in the world!

Even though the 9arl 4en patented the first automo)ile in the late '&,*s it wasnt until the

'($*s that Germanys automotive industry started forming! Although this mar1et sector wasnt

healthy it still held important trade with )oth France and Swit erland as well as with the rest of

Europe! The central position of this country as well as the 3uic1 innovation led to e/port high

e/port margins even )efore of e/tensive car use!

The Great Depression in the early '(hile eighty7si/ auto companies had

e/isted in Germany during the '($*s0 )arely twelve survived the depression0 including Daimler7

4en 0 2pel and Ford=s factory in ?ologne! "n addition0 four of the country=s ma@or car

manufacturers 6orch0 Dampf 9raft >agen -D9>.0 >anderer and Audi formed a @oint

venture 1nown as the Auto Union in '( had made one million ol1swagen 4eetles0 and )y '(%5 had )uilt ten million!

A)out 5%+ of this car manufacturing was directed towards France0 Spain0 Swit erland0 and U9


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sales! -


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"t is clear from Figure ' than )etween these two free trade agreements -FTAs. there was a

huge raise in auto e/ports to the European Union0 in '(&, @ust when the Single European Act

came into play0 German auto e/ports to the EU went up to (!&+! "n '((


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First off0 the GDC per capita in Germany is analy ed over the years! This is a good indicator of

the countrys wealth! From Figure HH a really healthy and fast paced growth is o)served in

Germany0 again there is a change in the slope of the graph during the signing of )oth the Single

European Act and the Maastricht Treaty! Through those few years GDC per capital started

increasing faster in conse3uence to the increasing openness in Europe trade0 not only in the

automotive industry )ut in all the economic sectors! The Single European Act created a

?ommon Mar1et which eliminates all the tariffs from imports and e/ports0 ma1ing Germany

more willing to e/change goods and services to the rest of Europe0 which contains the strongest

economies in the >orld! >ith the disappearance of tariffs0 import prices fell which increased

e/ports out of the country and with a decrease in import prices GDC increased rapidly!

Furthermore0 after the Maastricht Treaty the EU was created which created a single currency

and increased free movement of tourists and wor1ers across the Union! This way frictional

unemployment was decreased0 and productivity increased -as it will )e shown )elow.! >ith

these two com)ined effects GDC increased in a pace almost dou)le the speed than it usually

grows for a period of 5 years!

' * * * *

' 5 * * *

$ * * * *

$ 5 * * *

< * * * *

< 5 * * *

G D C

p e r c a p i t a

' ( &* ' ( (* $* * * $ * ' * $* $*F e a r

Ge rman y=s GDC pe r cap it a ove r tim e


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A statistical regression analysis was done over the GDC graphJ with an I $ of *!&5 the model is

relia)le and useful! The model presents a coefficient of %$* US Dollars ear and has relatively

low noise! A second regression analysis was done over '(($7'((#0 which is a perfect

representation of the effect of the formation of the EU! The slope of this section is $05**

US ear which is more than # times the average value0 this is a surprisingly large increase

nevertheless0 the formation of the European Union did eliminate several )arriers in Europes

economy!

$ 5

< *

< 5

# *

# 5

5 *

? a r C r o d u c t i o n

S h a r e o f G D C

' ( , * ' ( & * ' ( ( * $ * * * $ * ' *F e a r

? a r C r o d u c ti o n S h a r e o f G D C o v e r t im e

To place the automotive industry into perspective with Germanys economy0 Figure HH a graph

of car production share of GDC over Time is presented a)ove! "nterestingly enough0 the share

of GDC has )een going down through the years! From a STATA analysis0 a decrease in the

negative slope is seen in )oth periods after the treaties0 which translates to increased

production with respect to all the other economic sectors! This constant decrease of car

production is e/plained )y Germanys efforts to differentiate its economy0 with a growing

chemical sector which to date accounts for a)out (+ of the economy and a machinery sector

that has a '#+ share of the GDC it is not uncommon that the auto production share of the GDC


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has gone down! -%. Furthermore0 this Germany differentiation is in the production of capital

intensive goods0 this is in agreement to the 672 model!

Another important thing to chec1 when analy ing growth and more to it in the automotive sector

is capital investment! 4elow a regression of capital investment over the years is shown! "t is

seen than )efore the creation of the EU it is in a high constant increase0 nevertheless0 right in

'(($ the graph levels off and has very small increase! Even though this might seem counter

intuitive0 it is e/plained through the Germany Trade and "nvest Statistics! -,. According to them0

most of the )ig car industries were )uilt )efore the signing of these two treaties and only small

technologic advances were added to each of these factories!

1975 1980 1985 1990 1995 2000 2005 2010 2015

0

2

4

6

8

10

12

Germany Auto Capita" nvestment vs. $ime

!i""ions o# Euros

Germanys ?apital investment plateaued around '(($0 )ut it still ma1es up around $5+ of their

GDC! -5. >hich compared to other countries is a very large percentageJ this provides more

evidence to the 672 model )eing followed )y Germany! 4ecause of the capital a)undance

nature of the country0 a high capital investment is o)served!


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An additional element that was investigated was the unemployment rate in Germany through

the yearsJ this is an economic indicator which helps trac1 the direction of the economy of

Germany! Again0 important spi1es are o)served in '(&& and '((, with unemployment rates of

'$!%+ and ''!#+ respectively! A regression analysis was done to this graph also0 )ut as the

)ehavior is very stochastic through the years and a value of *!#' for the coefficient of correlation

was found0 not proving the model suggested!

Even though a model was not produced0 the high levels of unemployment suggest a capital

oriented economy0 which is in accordance with the analysis done through other economic

indicators! The high unemployment in Germany during the years after )oth treaties can )e

accounted through two thingsK a su)stitution of la)or to introduce machinery0 or an increase in

foreign wor1ers due to the free mo)ility started )y the formation of the European Union!

#

%

&

' *

' $

U n e m p l o y e m e n

t I a t e

' ( &* ' ( (* $* * * $ * ' * $* $*F e a r

Une mp loyme n t ra t e ove r t im e

Finally0 inflation is analy ed to test the e/istence of the Dutch disease in Germanys economy at

some point in history! The Dutch disease is caused when a country is strongly )ased of off one

good and this way the countrys ?onsumer Crice "nde/ is overvalued with respect to the other

products! "n the case of Germany0 a strong focus in cars would create high inflation in its ?C"!


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Figure HH )elow does show an increase in inflation during the period )etween the two treaties0

although the increase reaches a high of 5+0 it is not significant enough to prove the e/istence of

the Dutch disease at any point in Germany0 therefore we wit out this theory!

*

$

#

%

&

" n f l a t i o n

' ( , * ' ( & * ' ( (* $ ** * $* ' *F e a r

"nf la t ion ov er t ime

Germany has always )een the largest automotive manufacturer in the >orld0 and after the

creation of a common mar1et and later the European Union0 tariffs got eliminated which

increased )oth its e/ports to the strongest mar1etK EuropeJ as well as its auto part imports! This

increase in trade )rought with it good conse3uences in general! GDC per capita rose 3uic1er for

these periods of time than its averageJ it was o)served also that auto trade was a )ig

component of this fast paced growth! A spi1e in capital investment was not o)served during this

period0 which is due to the earlier construction of most of the car factories0 and @ust small

innovation additions to the current technology! Finally )oth a rise in unemployment and inflation

was o)served0 the latter was not significant enough to catalogue Germanys economy to

present a case of Dutch disease! 2n the other hand0 unemployment spi1es were e/plained )y

the capital intensity of most of Germanys )usiness sectors0 specially the automotive one! An


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increase in the production of cars with the singing of the two treaties couldve led to

unemployment due to two reasonsK free mo)ility of foreign wor1ers0 or the replacement of la)or

with machinery and capital!

The reasons e/plained in this paper support that Germanys economy does follow the

6ec1scher72lin Trade model! Germany0 a capital a)undant country0 e/ports capital intensive

goodsJ and this leads to incomplete speciali ation towards those goods! Even as Germany

continues to differentiate its economy away from cars0 all of its activities are still capital oriented!

IEFEIEB?ESK

-'. httpK www!vda!de en ahlen @ahres ahlen e/port inde/!html-$. 2E?D Statistical Ieport 7 httpK stats!oecd!org-

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Analysis of the Effects of the Single European Act and Maastricht Treaty in Germany