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«July 2013 Review of the Balance of Competences between the United Kingdom and the European Union The Single Market © Crown copyright 2013 You may ...»

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Quoted in Minford et al (2005) – Bradford S. C. (2003), Paying the Price: Final Goods Protection in OECD 11 Countries, Review of Economics and Statistics, 85(1) The model divides the world economy into 4 blocs – the UK, NAFTA, rest of the EU, rest of the world. (see p.26) 12 68 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market 40. The analysis also provided a high-level sectoral break-down of the results – agriculture, basic manufacturing, hi-tech manufacturing and traded services – and the impacts on for example, terms of trade, consumer surplus etc were discussed in each before the overall estimate of the impact is given.

41. Finally, the assessment did not take account of the 2004 enlargement. Data for the model base run was taken from 1998 as the most comprehensive dataset available at the time.

Headline results:

42. The headline results suggested that, far from an economic gain, there was an economic cost to membership of around 3% of GDP for the UK and around 2% for the rest of the EU. Specifically, the analysis suggested that a move by the EU and UK to unilateral free trade in goods and services would deliver a gain for the REU of 2% of REU GDP, and for the UK 3.8% of UK GDP, and that even if the EU did not make the move, the UK would still gain around 2.5% of its GDP, with a small loss to the REU of 0.2% of its GDP. These results postulated considerable structural changes resulting from this liberalisation, with competition under free trade largely eliminating manufacturing in favour of traded services for the UK.

Ilzkovitz, F., A. Dierx, V. Kavocs & N. Sousa (2007) Steps towards a deeper economic integration: the Internal Market in the 21st Century – a contribution to the Single Market Review (European Commission – DG ECFIN; European Economy No. 271)


43. In 2007, the European Commission undertook another review of the Single Market, which aimed at providing evidence of the benefits achieved since inception in 1992. The review sought to analyse the effects of implementation of the Single Market Programme and to suggest areas where further improvements could be made. In particular the study sought

to address the following three questions:

a. To what extent was the environment in which the Single Market operated in 2007 different from that of the late 1980s-early 1990s?

b. What was the latest empirical evidence on the economic impact of the Single Market? and c. Why had the Single Market failed to live up to early expectations?

Overview of Methodology:

44. The study highlighted various challenges reflecting the changing nature of the Single Market, including the growing importance of services the rapid technological development since its inception, greater integration through Economic and Monetary Union (EMU), and enlargement.

45. The analysis identified micro-economic effects associated with increased competition pressure, less price-setting behaviour in firms, and changes to industrial structure, including the specialisation of activities across European borders, through assessing trends in trade flows/integration, FDI activity, price convergence and the impact on competition across Member States.

Appendix 1: Comparative analysis of economic studies on the impact of the Single Market 69 46. The study also made an assessment of the macro-economic impact of the creation of the Single Market. Given that the creation and evolution of the Single Market was based on a series of microeconomic reforms, for which there is a potential “whole economy” impact,

the analysis was divided into three strands:

a. Estimation of the macroeconomic impact of EU15 market integration in manufacturing through simulating competition and innovation effects. The parameters were based on a range of earlier studies on the impact of the creation of the Single Market on price-cost mark-ups and total factor productivity (TFP).

(EU15 only).

b. More targeted simulation of the impact of opening up electricity and telecommunications markets to competition. Estimates for the decline of aggregate price-cost mark-ups for network industries were based on earlier studies and anticipated impact due to the observed pace of liberalisation.

c. Simulation of the impact on competition and innovation from increased trade following enlargement to EU25. The enlargement effect was simulated through isolating the trade effect of enlargement, calculating the impact on mark-ups and TFP, and introducing these into QUEST.

47. The analysis was carried out by DG – Economic and Financial Affairs using their QUEST model (a Computerised General Equilibrium, CGE, model)13 over the period 1992-2006, with the impacts of the creation of the Single Market simulated through the introduction of “shocks” to calculate the extent of deviation from the baseline. The focus on the period 1992-2006 meant that the study did not include the progressive benefit in the period leading up to 1992: for example the benefits of eliminating tariffs with the EU were excluded.

48. The final part of the study focused on simulations of the impact of the removal of additional barriers in future, suggesting substantially larger gains could yet be achieved, particularly with reference to the opening up of services markets and reduction of fiscal barriers.

Headline results:

49. The paper found that the creation of the Single Market had acted as a powerful instrument of delivering economic integration and increasing competition within the EU. However, the micro-economic analysis suggested that integration had lost momentum over the most recent years covered by the study, but that this should perhaps be expected in the process of European product market integration as remaining barriers become more difficult to remove. This part of the analysis also suggested that integration had not led to a shift towards a higher-technology-intensive sector, suggesting that the EU had not yet established itself as an innovation-driven technology leader.

50. It concluded that the Single Market had been the source of large macro-economic benefits, raising the level EU GDP by around 2.18% (€223 billion) by 2006 and creating

2.75 million additional jobs across the EU25. It had resulted in a 0.9 percentage point decline in the aggregate price-cost mark-up and boosted total factor productivity by 0.5% over the period 1992-2006. A breakdown of the headline GDP respects for the EU15/EU10 and the cumulative impact on the EU25 is given in the tables below.

The current version of QUEST (III) is a global macroeconomic New-Keynesian Dynamic Stochastic General 13 Equilibrium (DSGE) model. This class of model is highly utilised by international institutions and central banks for macro-economic modelling. The models have detailed microeconomic foundations and cater for frictions in goods, labour and financial markets. A number of different versions of QUEST III have been constructed to cater for a wide range of policy issues – each has a specific focus, with a regional and sectoral disaggregation 70 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market

–  –  –

2002 164.5 1.79 15.9 0.17 180.4 1.96 8.8 1.96 2003 168.4 1.81 18.9 0.20 187.9 2.01 11.4 2.45 2004 172.2 1.81 21.2 0.22 193.4 2.03 12.8 2.62 2005 176.1 1.83 24.5 0.25 200.6 2.08 14.8 2.90 2006 179.9 1.83 27.1 0.27 207.0 2.10 15.6 2.91

–  –  –

2002 189.2 1.96 2637.4 1.35 2003 198.7 2.05 2644.1 1.34 2004 206.2 2.08 2660.8 1.34 2005 215.4 2.15 2711.2 1.35 222.6 2.18 2750.5 1.36 51. The 2007 study also suggested that the potential of the Single Market had not yet been fully exploited and that there was still some way to go in removing barriers between Member States. The study concluded by suggesting that if further progress was made (both in terms of full and proper implementation of existing directives and, where possible, tackling remaining non-tariff barriers) the benefits achieved could be doubled.14 52. In 2012, the Commission released an update to this estimate which extended the assessment period to 2008. This update suggested that the Single Market had raised EU GDP by a fractionally lower figure, 2.13%, and created 2.77 million additional jobs across Europe over that period.

Boltho, A. & B. Eichengreen (2008) – The Economic Impact of European Integration (CEPR Discussion Paper No. 6820)


53. This paper took a different approach to its predecessors, through focussing more deliberately on what the counterfactual might have been without the Single Market programme. The study was an ex-post assessment and considered many different stages of European integration from the creation of the European Payments Union in 1950 to the European Monetary Union.

The analysis estimates that progress on: services could deliver a 0.5-1% increase in EU GDP; financial markets

–  –  –

Overview of Methodology:

54. The paper discussed the various stages of European economic integration15 and looked at possible alternative scenarios for the counterfactual. In particular the paper considered to what extent European living standards, growth rates, and economic structure would have developed as they have even in the absence of the EU’s institutions and processes.

55. From a review of the literature, the authors concluded that European economic integration had had a positive effect compared to the counterfactual. They then undertook a two-step

qualitative evaluation to attempt to quantify these effects by:

• Selection and evaluation of potential channels of transmission between a particular episode and economic growth, often relying on estimates available in the literature;

and • An assessment of what part of the evaluations reflected genuine unification effects.

The authors deliberately sought to minimise the positives.

56. The assessment considered the specialisation of countries, the diversification of products, and the impacts of innovation.

Headline results:

57. The analysis suggested that there has been a much clearer boost to EU output than might have been expected to be delivered purely by global movement on trade liberalisation over the same period. The authors suggested that EU GDP could be around 5% higher in 2008 than it would otherwise have been. This was considered to be a lower-bound estimate.

Conclusions 58. A wide range of assessments have been undertaken to consider the impact of the creation of the Single Market. The selection of papers covered above represents only the most significant of these, but even so demonstrates the variability in approach, geographical coverage, and time period. Comparability between studies is therefore not easy or often appropriate. The table below attempts to summarise the key elements of the different studies.

59. With the exception of Minford et al (2005), which separates out the potential impact for the UK, none of the studies provide estimates of the benefits for individual Member States.

There are various reasons why individual states may gain differently to their proportionate share in GDP (e.g. extent of liberalisation already undertaken, industrial make-up etc).

European Payments Union; European Coal and Steel Community; Common Market; European Monetary System; 1992 Single Market Programme; European Monetary Union 72 Review of the Balance of Competences between the United Kingdom and the European Union: The Single Market

–  –  –

Annex A:

Certain third-country relationships with the Single Market Note: the following factual discussion focuses on aspects of the arrangements which are relevant to the Single Market. It should not be taken as a comprehensive analysis of the pros and cons of these arrangements more broadly.

The European Economic Area (EEA) is a Treaty-based arrangement between the EU and Norway, Iceland and Liechtenstein, three of the four members of the European Free Trade Association (EFTA). It is based on an Agreement of Association which came into force in 1994. It extends to these three non-EU EEA Members the Four Freedoms and the EU’s state aid and competition rules, and provides for broader cooperation in the areas of social policy, the environment, education, and half a dozen other areas. It excludes the Common Agricultural Policy and Common Fisheries Policy and external trade policy, plus some other areas like foreign policy, defence, and Justice and Home Affairs not relevant to the Single Market, though Norway has since chosen to cooperate voluntarily with the EU in some.

Disputes are ultimately settled in (the EFTA) court. The relevant provisions in the Agreement very largely mirror those in the EU Treaty.

These arrangements mean that EEA members:

• Have no say on the Single Market legislation by which they are bound – domestically as well for exports to the Single Market proper;

• Are not part of the EU customs union. As a result, they are not part of the EU’s common trade policy and they may negotiate trade agreements with third countries;

• Have their exports to the EU bound by rules of origin. These are detailed rules which lay down how much non-EEA content a product may have before it can no longer be considered an EEA product and hence exempt from duty when entering the Single Market. (They stop, for example, China exporting a good to Norway and then Norway selling it on within the EU as a “Norwegian” product.) Demonstrating compliance with these rules can be administratively burdensome.

The Swiss arrangement is different. Switzerland is a member of EFTA but not of the EEA.

The Swiss relationship involves a series of bilateral Treaties between Switzerland and the EU, beginning with a Free Trade Agreement from 1972, and supplemented by sets of bilateral packages mostly agreed in 1999 and 2004. These deals give Switzerland free trade in most goods with the EU, including some agricultural ones; provide for free movement of persons;

give access to public procurement markets; and access to EU research programmes. There is only limited access for trade in services.

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