Economic Integration in the EUA2 Economics revision presentation on deeper economic integration within the EU and the economic and social impact of the single European market

What is the European Union?

• The European Union (EU) is a group of fifteen nations engaged in a long run process of economic and political integration

• The Euro Zone comprises twelve nations who have formed a currency union

• The Euro came into circulation as a medium of exchange on the 1st of January 2002

• Of the fifteen members of the EU, only the United Kingdom, Sweden and Denmark are currently outside of the Euro Zone

• European economic and monetary union brings both economic costs and benefits for member nations

• There is no guarantee that the economic benefits of membership of the EU will be evenly spread between countries and between regions – indeed the issue of inequality (equity) is one which concerns all EU nations

European Union in the Global EconomyShare in Nominal World GDP (2000)

Eastern Europe

2%

Asia-Pacific

12%

All Others

8%

Latin America

6%

J apan

17%Eurozone

23%

US

28%

UK

4%

Country Total GDP in 2000 (billions

of €)

% of the EU economy

Austria 205.5 2.42 Belgium 244.0 2.87 Denmark 174.2 2.05 Finland 131.2 1.54 France 1399.2 16.47 Germany 2036.0 23.97 Greece 120.7 1.42 Ireland 101.1 1.19 Italy 1152.3 13.57 Luxembourg 19.9 0.23 Netherlands 399.1 4.70 Portugal 112.3 1.32 Spain 605.7 7.13 Sweden 248.8 2.93 United kingdom 1543.0 18.17 European Union 8493.0 100.00 United States 10738.7 126.44 Japan 5163.2 60.79

The Essence of a Single Market

Importance of the EU for British Exports

Aus/ NZ

1.6%

European Union

57.3%

Other W Europe

2.8%

Other

13.6%

J apan

2.0%

F.East ex J apan*

5.2%

North America

17.6%

* Comprises China, Hong Kong, Malaysia, Singapore, South Korea, Taiwan and Thailand

British Imports of Goods in 2000 (By Destination)

Other

12.3%

Aus/ NZ

1.0%

F.East ex J apan*

11.1%

J apan

4.7%

North America

15.1%

Other W Europe

5.3%

European Union

50.5%

* Comprises China, Hong Kong, Malaysia, Singapore, South Korea, Taiwan and Thailand

Different Types of Economic Integration

No Internal Trade Barriers

Common External Tariff

Factor and Asset Mobility

Common Currency

Common Economic Policy

Free Trade Area

Customs Union

Single Market

Monetary Union

Economic Union

Different Types of Economic Integration

No Internal Trade Barriers

Common External Tariff

Factor and Asset Mobility

Common Currency

Common Economic Policy

Free Trade Area

X

Customs Union

X X

Single Market

X X X

Monetary Union

X X X X

Economic Union

X X X X X

Regional Trading Blocs - America

Regional Trading Blocs - Europe

What is a Customs Union?

• The European Union is a customs union

• A Customs Union comprises two (or more) countries which agree to:

– (1) Abolish tariffs and quotas on trade between themselves

– (2) Adopt a uniform system of tariffs on imports from non-members countries – e.g. the Common External Tariff (CET)

• Thus, in the case of the EU, the tariff imposed on, say, imports of Japanese TV sets will be the same in the UK as in any other member country

• A Customs Union shares the revenue from the CET in a pre-determined way – in this case the revenue goes into the main EU budget fund

Trade Creation and Trade Diversion

Trade Creation (TC)

• TC - a shift in domestic consumer spending from a high cost domestic source to a lower cost partner source within the EU, as a result of the abolition tariffs on intra-union trade

Trade Diversion (TD)

• TD - a shift in domestic consumer spending from a low cost world source to a higher cost partner source, as a result of the elimination of tariffs on imports from the partner

Overall Economic Welfare Effects?

Much depends on whether the customs union creates effects that are mainly trade creating or trade diverting…………

Britain in Europe: The Benefits of UK Membership

• 57% of Britain's exports go to other EU countries – this proportion is expected to grow further as the single market develops and trade diversion and trade creation affects our pattern of trade

• UK Membership of the EU gives British business tariff-free access to a market of 370 million consumers, boosting trade and prosperity – this will increase with enlargement

• Over 3 million jobs directly or indirectly linked to exports to the EU – but the precise number of linked jobs is open to question

• Britain's membership of the EU stimulates inward investment

• The EU is the world's largest consumer market - giving UK consumers access to lower prices (static gains from trade)

• Britain is a major recipient of EU structural funds

Four Economic Freedoms Inside the Single Market

• Goods:

– Companies can sell their products anywhere in the member states and consumers can buy where they want with no penalty

– Less red tape and customs formalities / delays

• People:

– Citizens can live and work in any other country and their professional qualifications are subject to mutual recognition

– Implications for leisure, business location, travel

• Capital:

– Currencies and capital can flow freely and European citizens can use financial services in any member state

• Businesses can invest in any EU country they prefer

• Individuals can open savings accounts in any country and move their finances to and from different countries

• Services:

– Professional services such as banking, insurance, architecture and advertising can be offered in any member state

The Main Building Blocks of a Single Market

• (1) Relaxation of EU border formalities

• (2) Development of a European-wide competition policy

– EU Commission now exerts control over mergers and acquisitions

– Implementation of EU policy on anti-competitive practices

• (3) Development of “mutual recognition” – where each country recognises each others national standards (e.g. beer production, additives in foods etc)

• (4) Competitive tendering for government procurement – e.g. bidding for the construction of new roads, schools, hospitals and other contracts to run public sector services

• (5) Movement towards harmonisation of indirect taxes and company taxes (there is strong resistance to this from the UK)

• (6) Moves towards protecting intellectual property rights within EU

Potential Advantages from a Successful SEM

• Focus on macroeconomic benefits + opportunities for UK businesses• Single Market seen as a “positive sum game” – if it enhances

productivity, there is benefit for most people• More intensive competition within member nations

– Consumers' living standards benefit from lower prices – a rise in real incomes

– Reduction of "X-inefficiencies" for producers– Lower profit margins and lower inflation– Less power to price discriminate because of greater price

transparency• European businesses better able to exploit economies of scale by

selling with a much larger single market • Trade stimulates capital investment and technological development• Potential welfare gains from freer movement of labour • Development of a pan-European capital market – important for

companies wanting to raise extra finance to fund investment• The Main Aim of the Single European Market – is to increase trend

European economic growth and increase employment

Evaluation: The Impact of the EU Single Market (1)

• Rising intra EU trade – trade creating effects of reduction in trade barriers and increased factor and financial mobility

• Expansion of cross-border shopping – particularly where there are clear price differentials and where indirect taxes vary

• Wave of cross frontier (EU) mergers & acquisitions

• Increased number of “joint ventures” and technological alliances between European companies (possible gains in dynamic efficiency for EU consumers in the long run)

• Increased Japanese & US foreign direct investment inside the European Union (partly a desire to avoid import controls) – this subsided in 2001-2002 following the global economic slowdown

• The economic benefits of the SEM are not evenly spread – the main micro and macroeconomic gains are likely to be stronger within the core EU "growth-axis“ and with those countries that have a comparative advantage in high growth sectors / industries

Evaluating the Impact of the SEM (2)

• Some evidence of a fall in price-cost mark-ups in European manufacturing industries (0.2% pa) suggesting a cut in domestic monopoly power

• But still wide price differentials in many markets – including for example the prices of new cars

• The impact of SEM has been greatest in certain industries:

– Pharmaceuticals

– Steel

– Aerospace

– Financial services (including insurance)

– Utilities

– Food processing and retailing

Single Market: Threats for UK Consumers and Businesses

• Threats to UK businesses– Increased competitive pressure for UK firms from within the SEM –

particularly if the EU is enlarged (comparative advantage can change)

– Damaging effect of the strong exchange rate and continued non-participation in the Euro may limit the benefits of the SEM

– Government procurement policies continue to favour national companies

– Increased threat of takeover from the development of a pan European capital market – as industries restructure and consolidate

• UK consumers– Higher prices for some goods and services because of the common

external tariff for EU15 countries (loss of consumer welfare)– Emergence of European monopolies might lead to restricted

competition in some areas and higher prices for consumers– European competition policy needs to be alert to this– Greater labour mobility within EU15 – a threat to some jobs in

industries where workers are most mobile (financial services, retailing, ICT etc.) – the result of “economic migration”

The EU on the Single Market (Ten Years On)

• EU GDP in 2002 is 1.8 percentage points or € 164.5 billion higher thanks to the Internal Market

• € 877 billion in increased prosperity (€5700 per household)• The creation of 2.5 million extra jobs • EU exports to third countries have increased from € 415 billion in 1992 to € 985

billion in 2001 and over the same period EU investment in those countries increased exponentially, from € 18 billion to € 206 billion.

• New inflows of foreign direct investment (FDI) into the European Union were four times higher in 2001 than they were in 1992, despite the fact that 2001 was a weak year for FDI

• In many cases, cheaper prices for goods and groceries thanks to the opening up of national markets and the resultant increase in competition – – Lower telecommunications tariffs: for example, prices charged by the old

national monopolies for national calls have been reduced by around 50% on average and those for international calls by around 40%

– Lower airfares: a recent study estimates that the price of promotional fares fell by 41 % between 1992 and 2001

• More than 15 million EU citizens have moved across borders to work or to enjoy their retirement

• A single market of over 370 million people soon to increase to 452 million after enlargement, has allowed larger businesses to benefit from enormous economies of scale