Single European Market

Question 1

Common/Single European market

Answer 1

Adds free factors of production

(CU = movement of G&S)
(CM/SEM = movement of G&S + factors of production)

Question 2

Why was there limited progress to common market?

Answer 2

Due to many NTBs (non-tariff barriers)

E.g Italy & Spain banned British chocolate and not even called chocolate (doesn’t meet a min amount of cocoa butter)

Question 3

Which act updated the treaty of Rome, removing NTBs

Answer 3

Single European Act 1986 (SEA)

Basically industries have to harmonise and agree their standards

Question 4

Trade was still hindered due to NTBS.
What was needed in European institutions

C) who were the main threat?

Answer 4

Qualified majority voting (since 1 state could veto)

C) USA/Japan a threat as EU uncompetitive

Question 5

Casis de Dijon (1979) : what key principle was founded in this case

B) what did this lead to?

Answer 5

Mutual recognition - If a product (Casis - blackcurrent drink) was suitable for sale in one state, then it was suitable to sell in all states.

B) Led to the development of the single market (removal of technical barrier)

Question 6

Cecchini report aims

Answer 6

Increased supply side efficiency (increased competition)
Aid/promote integration
Benefit consumers (more choice and lower prices)

Question 7

Cockfield white paper 1985 - removed 3 types of barriers

Answer 7

Physical (obstructed movement of g&s and FOP e.g passport control limited the free movement of FOP)

Technical (principle of mutual recognition)

Fiscal (tax harmonisation.. but hasn’t worked too well, differences in VAT etc)

Question 8

Back to Cecchini report - we just considered the predictions of the SEM (2 cards earlier)

Expected microbenefits of SEM (we consider medium term 10 years)

Answer 8

Up to 6.4% GDP attributed to:

Removal of technical barriers 2.4%
E.o.S 2.1%
Reduced monopoly power since more comp 1.6%
Others 0.3%

Question 9

Note: preparation of SEM between 1986-92, and SEM began 1993

Question 10

That was microbenefits - 6.4% GDP increase (following removal of technical barriers (mutual recognition) , EOS, reduction of monopoly power and others.

Assuming passive government policy
Expected Macro benefits IN THE MEDIUM TERM to:
(GDP, Price level, Employment)

Answer 10

GDP +4.5%
Prices -6% (competition)
Employment increase by +1.8M

Question 11

So that was Cecchini’s predictions for micro/macrobenefits.

Criticisms of the report (4)

Answer 11

E.os - some sectors (drinks) already pan European

Brand loyalty still exists - may not use new foreign competition out of habit

Redistributive effects ignored - losers from greater competitive effects of integration not accounted for (inefficient firms e.g esp in Greece die out)

Psychological benefits important - people realise more competition

Question 12

Where was there limited progress in (6)

Answer 12

Public procurement

Tax harmonisation (links back to fiscal barrier)

Company law e.g it was hard for foreign firms take over German firms (protectionist) dont want foreign interest own key strategic assets (whereas UK lets this e.g Royal Mail bought by Czech billionaire)

Postal services

Financial services

Service sector (not as successful as goods sector - part of first essay.. explain why)

Question 13

How has the Single market performed? From the EU commission report

Answer 13

Well
GDP, investment, employment, trade & FDI higher

Use pg 16 report, good for first essay, lots of data about the different markets doing well/not. (Can help support why single market good or bad)

Question 14

Single Market theory

What market structure is it

Answer 14

Simplified cournot oligopoly

Question 15

Assumption for Single Market theory

Answer 15

Firms are symmetric in size

Question 16

Break even competition (BE-COMP) diagram

A) what does the competition (COMP) curve show?
B) under imperfect competition what is the condition
C) as a result, would COMP curve be upward/down
D) diagram with monopoly and duopoly structure
E) SR and LR possibilities
F) 3 part diagram (one to show LRAC& SALES per firm, one shows home MARKET total sales, panel A is same as previous diagram)

Answer 16

A) COMP curve - how much P exceeds MC as number of firms changes

B) P>MC in imperfect competitive, and more firms survive

C) Downward sloping, more firms = lower the markup (more comp)

D) diagram simple, number of firms on X axis, mark-up on Y axis so downward sloping COMP curve.

E) SR - not always on BE curve since can earn > or < than normal profits
LR - lie on BE curve due to entry and exit

Question 17

Theory applied - what did the European integration result in

Answer 17

This theory shows the effect of the removal of NTBs, since tariffs were already removed.

Industrial restructuring - bigger, few, n more efficient (due to EOS) firms facing more effective competition and lower prices

Question 18

2 stages - short run and long run

Answer 18

Short run - make a loss (more firms n’>2n)

Long run - industrial restructuring - firms merge, so fewer firms to restore normal profit (less firms (2n>n’‘) average costs also falls (ac’ to ac”) following E.OS from industrial restructuring

Question 19

Diagram

Answer 19

BE curve shifts downwards following removal of NTBs, and number of firms increases n’ to 2n’. New mark-up is μA. (SO OPERATING BELOW BE CURVE, A LOSS!!! HENCE THE RESTRUCTURING PART, FIRMS MERGE TO REDUCE COSTS)

Middle diagram new price is pA. (Free trade benefit for consumers, but bad for producers as making a loss)

No change to costs yet in left diagram

Question 20

Long run diagram

Answer 20

u’’ where we break even (where BE curve intersects the COMP curve

Fall in AC due to economies of scale

Welfare gain in area W from lower prices

Question 21

Welfare gain? 2 evals

Answer 21

Yes, lower price and rise in consumption, more choice, buy foreign products too)

Eval: ignore adjustment costs e.g unemployment

Speed of adjustment varies between industries and sectors

Doesnt work as well for service sector e.g energy

Question 22

This what Britain has lost since Brexit.

Question 23

Example of this

Answer 23

KLM and Air France - merge to get lower costs, and welfare gain as consumers get lower prices

Question 24

Coffee money

Answer 24

Bribes

lines at borders, traffic waiting to get approved at customs to ensure whether they met the home country’s standards. with SEM customs posts are removed.

Question 25

QMV introduced alonng with SEM, vote majority to carry a measure through, improves efficiency of decison making in the EU (no 1 vetoer)