Single European Market 2

Question 1

We will consider the airline industry and the single market.

When was EU’s airline industry liberalised?

Answer 1

1987-97 : over 10 years split into 3 stages.

whereas US airline liberated all at once

Question 2

Aims of liberalisation

Answer 2

increase competition
benefit consumers
make Eu airlines more cost competitive globally

Question 3

Pre-liberalisation state of airline industry

Answer 3

High fares
High barriers to entry
Limited number of airlines on a route (state duopoly - BA or AirFrance to get to France & split revenue)

Question 4

Post-liberalisation state of airline industry (5)

Answer 4

Lower fares

More choice

Lower barriers to entry - compete on routes

Airlines could now fly from one foreign country to another foreign country. e.g Irish airline Ryanair can offer UK to France)

Development of low cost carriers (Ryanair - cuts AC by minimising engine time, and at airports where runways are easy to function in)

Question 5

pg 10 is good for essay too

Question 6

Ways Ryanair cut AC

Answer 6

No free food
Quick turnaround times for aircraft (25 mins) thus more time in air earning money
No reclining seats (saves £1m p.a)
Book online and print own tickets

Question 7

How does Ryanair increase its TR, since standard tickets are so cheap

Answer 7

Sells food
Fee to put baggage in hold
Higher chargers if passengers check in bags/have no boarding card

All additional stuff contributes around 20% of their revenue

Question 8

Why did EU liberalise the European airline market

Answer 8

Make EU airlines more globally efficient (previously US airlines were most efficient)

More competition to benefit consumers

Question 9

Back to M&A - part of industrial restructuring following integration

Which nation performed the most M&A 1991-2002

Answer 9

UK - 31.4%

Question 10

What does this imply about UK’s takeover rules

Answer 10

Very liberal, easy for foreigners to take over etc.

Whereas some members have very restructure takeover practices making M&A difficult

Question 11

If UK are lenient while other members are not, what does this mean for restructuring effects

Answer 11

Lack of harmonisation amongst takeover rules means restructuring effects are varied across states.

Question 12

Now we consider macro effects of the SEM. So far we only considered static benefits.

What did Baldwin argue

Answer 12

Dynamic gains may be 5 times greater than those in the Cecchini Report

Question 13

Why were dynamic gains higher?

Answer 13

New capital formation - K accumulation increased growth of output per worker (since each worker has more capital to work with)

Question 14

Why was Cecchini and Baldwin’s gains different

Answer 14

Cecchini thought liberalisation could not permanently raise growth rates

Baldwin thought it could

Question 15

So Baldwin said dynamic gains 5x more than Cecchini (liberalisation can increase growth rates permanently)

What about their approximations for the medium term (10 years)

Answer 15

Baldwin 9% GDP compared to Cecchini 6.5%

Question 16

Medium term - Stages of European integration

Answer 16

1. Allocation effect
2. Raised efficiency (micro - BE-comp diagram, restructuring (mergers) improves efficiency)
3. Improved investment climate since more efficient, it attracts more investment from outside
4. Rasied investment in capital (K formation) and output per person

Question 17

In the long term growth rate can increase 0.25-0.75% higher.

Why?

Answer 17

Technological progress following the improved investment climate in the medium term!

Question 18

Caveats to long term growth (2)

Answer 18

Harder to determine, thus focus on medium term investment booms such as after Spain joint.

Some states e.g Greece have not benefitted due to poor macro management, poor investment climate and correspondly a lack of supply side reform

Question 19

Macro theory of the single market (USE FOR ESSAY MAYBE SINCE 40% THEORY)

Question 20

What is capital (K) comprised of (3)

Answer 20

Physical K - the one considered here (medium term)
Human k
Knowledge k (technology) -

Question 21

What happens to physical capital in the medium term

Answer 21

Increased output per person stops at a point. (Since we get diminishing return as we employ more physical capital)

Question 22

Long term what happens

Answer 22

Rate of growth is permanently higher, due to knowledge K (technological progress) ,

since physical K suffers DMR as mentioned in last FC

SO BASICALLY MEDIUM TERM HAS DMR, LONG RUN GROWTH RATES ARE PERMANENTLY HIGHER

Question 23

Assumptions in this Solow model (3)

Answer 23

People save and invest a fixed s% of their income

Constant d% of depreciation on K

EU is a closed single economy with integrated K&L markets

Question 24

Where is the equilibrium in this model

Answer 24

Inflow of k = depreciation of k

I.e capital accumulation comes in to suffice the depreciation we get on capital

Question 25

Solow model diagram

Answer 25

Just go up from K/L* which gives you point B which is the output per worker (Y/L*)

Question 26

How do we demonstrate stage 1 of integration

Answer 26

Integration improving efficiency, since more competition means they cut costs and become more efficienct.

This is shown by an shift upwards in the output/worker curve (pg 29)

Question 27

Recall the next stage of EU integration

Answer 27

Improved investment climate, and increased investment

Question 28

So how can we visualise this in the diagram

Answer 28

Since output/worker (GDP/L) curve increases, investments more attractive since more efficient.

So we get a shift upwards in inflow of K (investment) (pg32)

Shift upwards in inflow of K. Gets even higher output/worker (Y/L) and capital labour ratio.
So effectively moved from C to E (takes about 10 years according to Baldwin) i.e the additional increase

Question 29

Criticism of this model

Answer 29

Doesn’t capture technological change which accounts for 30-50% of growth

Effects of integration may be overestimated.

Question 30

Why effects of integration overestimated?

Answer 30

Some markets already integrated before SEM

Many EU markets highly specialised, so modest gains. Already international