Single European Market 2 Flashcards
We will consider the airline industry and the single market.
When was EU’s airline industry liberalised?
1987-97 : over 10 years split into 3 stages.
whereas US airline liberated all at once
Aims of liberalisation
increase competition
benefit consumers
make Eu airlines more cost competitive globally
Pre-liberalisation state of airline industry
High fares
High barriers to entry
Limited number of airlines on a route (state duopoly - BA or AirFrance to get to France & split revenue)
Post-liberalisation state of airline industry (5)
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)
pg 10 is good for essay too
Ways Ryanair cut AC
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
How does Ryanair increase its TR, since standard tickets are so cheap
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
Why did EU liberalise the European airline market
Make EU airlines more globally efficient (previously US airlines were most efficient)
More competition to benefit consumers
Back to M&A - part of industrial restructuring following integration
Which nation performed the most M&A 1991-2002
UK - 31.4%
What does this imply about UK’s takeover rules
Very liberal, easy for foreigners to take over etc.
Whereas some members have very restructure takeover practices making M&A difficult
If UK are lenient while other members are not, what does this mean for restructuring effects
Lack of harmonisation amongst takeover rules means restructuring effects are varied across states.
Now we consider macro effects of the SEM. So far we only considered static benefits.
What did Baldwin argue
Dynamic gains may be 5 times greater than those in the Cecchini Report
Why were dynamic gains higher?
New capital formation - K accumulation increased growth of output per worker (since each worker has more capital to work with)
Why was Cecchini and Baldwin’s gains different
Cecchini thought liberalisation could not permanently raise growth rates
Baldwin thought it could
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)
Baldwin 9% GDP compared to Cecchini 6.5%
Medium term - Stages of European integration
- Allocation effect
- Raised efficiency (micro - BE-comp diagram, restructuring (mergers) improves efficiency)
- Improved investment climate since more efficient, it attracts more investment from outside
- Rasied investment in capital (K formation) and output per person
In the long term growth rate can increase 0.25-0.75% higher.
Why?
Technological progress following the improved investment climate in the medium term!
Caveats to long term growth (2)
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
Macro theory of the single market (USE FOR ESSAY MAYBE SINCE 40% THEORY)
What is capital (K) comprised of (3)
Physical K - the one considered here (medium term)
Human k
Knowledge k (technology) -
What happens to physical capital in the medium term
Increased output per person stops at a point. (Since we get diminishing return as we employ more physical capital)
Long term what happens
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
Assumptions in this Solow model (3)
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
Where is the equilibrium in this model
Inflow of k = depreciation of k
I.e capital accumulation comes in to suffice the depreciation we get on capital
Solow model diagram
Just go up from K/L* which gives you point B which is the output per worker (Y/L*)
How do we demonstrate stage 1 of integration
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)
Recall the next stage of EU integration
Improved investment climate, and increased investment
So how can we visualise this in the diagram
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
Criticism of this model
Doesn’t capture technological change which accounts for 30-50% of growth
Effects of integration may be overestimated.
Why effects of integration overestimated?
Some markets already integrated before SEM
Many EU markets highly specialised, so modest gains. Already international
