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15. The analysis suggested that the impact would be felt over the medium-term, with a cumulative impact of around +4.25% on GDP and -6% on the price level expected to be achieved in five to six years. The Single Market was also estimated to deliver a positive impact on employment of around two million jobs, even after taking account of the significant productivity and restructuring effects that would come from greater market integration. It was thought these could be further improved upon if macroeconomic policy The European Currency Unit (ECU) was introduced on 13th March 1979 as the unit of account of the European 8 Community (a basket of Member State currencies). It was replaced by the euro on 1st January 1999, at parity.
64 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market measures designed to harness the development potential of the Single Market were employed. In this instance, the impact on GDP would increase to approximately 6.5%, with the positive impact on employment arising around five million jobs.
16. The study did not systematically estimate how these gains would be distributed across Member States. However, the analysis suggested that while all stood to gain from the removal of these barriers, new Member States could potentially realise above average gains given that many of the potential benefits arose from achieving lower costs and more efficient production methods.
Baldwin, R. (1989), On the Growth Effects of 1992, NBER Working Paper No. 3119, published in Economic Policy, 9, p248-81
17. Building on the Cecchini analysis, this ex-ante study sought to include the impact of several types of dynamic trade effects in the analysis of the impact of the 1992 Single Market Programme. Instead of viewing the Programme as a simple exercise of trade liberalisation, it saw it as one of significant market liberalisation and deregulation, with wide ranging (static and dynamic) impacts across the economy.
Overview of Methodology:
18. This was a first exploratory attempt to quantify some of the dynamic effects of the Single Market, and the quantitative challenges were particularly difficult given the lack of robust data available for key aspects of the analysis. The author applied models from New Growth Theory to provide an indication of the potential dynamic impact.
19. The key premise was better incorporation of the impact of increasing returns to scale on an economy-wide basis. It emphasised that economies of scale delivered by accessing a larger market could have a dynamic impact, i.e. on the growth rate of GDP over the medium term (and possibly permanently), as well as a static impact on the level of GDP.
20. Using Romer’s growth model, Baldwin showed, like Cecchini, that on this basis there would be an initial static impact on output per worker and on the capital-labour ratio, corresponding by assumption to Cecchini’s 4.25-6.5% of GDP. But there would also be an additional shift leading to a higher, dynamic, impact on both measures. Baldwin concluded that market liberalisation had an indirect impact on the investment climate in Europe, inducing higher saving and investment, and hence a larger impact on growth than the static analysis suggested. The size and longevity of this growth bonus depended on how important were economy-wide increasing returns to scale.
21. The analysis also considered the impact of innovation on the long-run growth rate of GDP, highlighting the potential impacts of reduction in trade costs, pro-competitive affects and regulation standardisation. Baldwin highlighted that the difficulties associated with modelling impact of this kind, including lack of robust data (for example, on profit margins, R&D costs, the rate of technological dissemination and spillovers and so on), had an impact on the precision of results, and required calibration of data to deliver an assessment of the long-term impact.
22. These data constraints limited the report to tentative results. As with the Cecchini report, this study did not take account of the enlargement effect, shown to have had a significant impact on increased specialisation of economic activity across European Member States.
Appendix 1: Comparative analysis of economic studies on the impact of the Single Market 65
23. The study suggested that the Cecchini numbers significantly underestimate the potential economic benefits from establishing the Single Market, by at least 40%, and possibly as high as 250%, though this upper estimate was considered implausible.
24. The paper further argued that the long-term growth effects on EC GDP of the 1992 Internal Market Programme (due to technical change) could be very significant, potentially adding between close to 0.3 and approximately 0.9 percentage points to the EC’s longterm GDP growth rate.
25. However, there were difficulties in cumulating these results, given the different approaches used. Baldwin therefore used the results to highlight the argument that the original estimates did not fully take account of the potential impact of the 1992 programme, rather than focusing on the numbers themselves.
Monti, M. & D. Buchan (1996), The Single Market and Tomorrow’s Europe – A Progress Report from the European Commission, European Commission9
26. This study was the first ex-post analysis by the European Commission to assess the Single Market’s achievements. The analysis focussed on the original measures as outlined in the Commission’s 1985 White Paper (282 measures tackling various barriers to the Four Freedoms), pre-existing legislation required to deliver the Single Market, additional measures not originally considered in 1985, such as the liberalisation of some network industries, and additional “flanking” policies such as competition and regional cohesion.
Overview of Methodology:
27. In a similar approach to the original Cecchini report, the analysis was based on a series of 38 in-depth (cross-) sectoral analyses and an extensive survey of business opinions.
However, the assessment was clearly badged as an attempt to assess the impact of the proposals undertaken thus far, and not a “Cecchini Mark 2” which would have the objective of validating the earlier analysis.
28. The 38 reports assessed the degree of implementation of the Single Market in various
European industries, and across them:
a. 19 studies of manufacturing and services sectors – each of these studies assessed the extent of reduction in barriers in cross-border transactions, and identified residual issues;
b. 6 “barrier studies” – technical barriers, public procurement, customs and fiscal formalities, industrial property protection, currency management and capital market liberalisation;
c. 13 ‘further impact’ studies – analysing the economic impact of removing barriers (trade and investment flows, price convergence, competition and competitiveness, employment and labour markets, and economic cohesion);
Drawn from European Commission (1996), The Impact and Effectiveness of the Single Market – Communication from the Commission to the European Parliament and Council, 30 October 1996 66 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market d. Plus a survey of business opinion to rate the impact of the success of the Internal Market programme and the impact that it had had on their strategies and operations – responses from 13,000 enterprises across 12 Member States;
29. The more “vertical” sector reports provided a “bottom-up” approach to assessing the impact, and the “horizontal” studies on cross-sectoral barriers helped to give a more macroeconomic perspective by considering the impact on trade and investment, and competition, at the aggregate and regional level.
30. The assessment highlighted key assumptions, including on what the economy would look like in the absence of a single market (the counterfactual) and how the actions taken under the Internal Market Programme may have interacted with other factors and trends over the same period to affect the economy. A counterfactual and a number of scenarios were constructed and modelled using the GEM-E3 model, an applied multicountry, multi-sectoral dynamic Computable General Equilibrium (CGE) model of the 12 EU Member States.10 31. The key limitation to this study was that it was undertaken very soon after the implementation of the Single Market in 1992. As such, limited data availability, particularly regarding the longer-term and more dynamic impacts, constrained the analysis. The headline figures could therefore also not consider the implications of enlargement.
32. The analysis found that the Single Market had increased output by 1.1-1.5% by 1994 and
created 300,000-900,000 new jobs. It further suggested that:
a. Inflation rates were 1-1.5% lower than they would have otherwise been;
b. The programme had stimulated investment in the EU by an additional 2.7% and attracted additional foreign direct investment to the EU, an increase in world FDI inflows from 28.2% between 1982 and 1987, to 44% in the early 1990s; and c. There had been falling costs in a number of industries, for example, a 7% reduction in the price of telecommunications equipment, saving buyers between ECU 1.5 2 billion a year.
33. The results also suggested an increase in economic integration and convergence between Member States, such as intensified intra-EU trade (with the share of intra-EU exports of manufacturing and services increasing by 14% and 7.6% respectively over the previous decade – although not at the expense of trade with the rest of the world), an increase in the share of public sector purchases from other Member States (from 6% to 10%) and higher growth rates in poorer Member States than richer ones.
34. The analysis suggested that around half of the effects seen came from improvements in competition and efficiency (in both manufacturing and services sectors), and half from technical progress associated with the Single Market. In particular, there was a wider range of products and services available at lower prices (particularly in newly liberalised services sectors), industrial restructuring had improved the competitiveness of companies, and there was greater mobility of labour across Member State borders and greater economic convergence and cohesion between different EU regions.
Further details of the modelling can be found in: National Technical University of Athens (1998), Aggregate 10
35. However, the report highlighted that the effects measured were lower than might have been expected. This was attributed to the impact of the recession in the early 1990s and to the slower than expected implementation of the Single Market proposals. As such, the analysis suggested that there was potentially significant further benefit to be gleaned from continued progress.
Minford, P., V. Mahambare & E. Nowell (2005), Should Britain Leave the EU – An Economic Analysis of a Troubled Relationship, Edward Elgar/Institute of Economic Affairs
36. This study took a different perspective from others covered in this appendix, although there were some common elements in approach. In particular, it made a broader assessment of the costs and benefits of the UK’s membership of the EU rather than trying to isolate the impact of the Single Market. As such, it considered additional areas of policy, such as the impact of the CAP, the euro, and broader aspects of proposed harmonisation such as those around social welfare. In particular, the study contended that, rather than reducing barriers between markets, the EU had led to increasing levels of protection in trade, in labour markets, and against take-overs of domestic firms by foreign companies by protecting its firms from world competition.
Overview of Methodology:
37. The study considered the “tariff-equivalent” impacts of non-tariff measures, such as quotas, anti-dumping, and informal agreements, focussing on the impacts for goods and services sectors. Estimates of tariff-equivalents across sectors were drawn from an earlier paper by Bradford (2003).11 The author then estimated the welfare impacts on the UK and the rest of the EU (REU) by using these figures in a CGE world model built by Minford et al, 200512, which looked at the changes in trade resulting from removing protection in these areas – the comparison was between being inside the EU customs union and being outside under free trade. The analysis was more forward-looking, with the status quo as
the benchmark, and the scenarios being tested representing potential futures:
a. If the UK withdrew from the EU trade arrangements in favour of unilateral free trade;
b. If the EU also moved to unilateral free trade.
38. Welfare effects considered by the authors included terms of trade gains/losses of real income, the customs union transfers effected through trade-diversion of RoW sourcing to customs union partners, and the consumer surplus lost through higher internal prices.
39. The model used did not impute scale economies from greater integration, but did include gains from greater competition, where it was assumed in the benchmark that the maximum gains from competition had already been achieved under the status quo. As such the Cecchini-style competitive processes from the creation of the Single Market were considered to have already been incorporated into the benchmark, and were therefore not reflected in the estimates. However, the longer-term dynamic impacts associated with innovation do not seem to have been fully incorporated.