The Concept of a Fully Integrated Market - Essay Example

EUROPEAN BUSINESS: Wherever you located in the EU, it is a truly integrated market 0 Introduction 1 Definition of a Single Market The Single European Act of 1986, and introduced in 1987, codified the attributes of a single integrated market, targeted for completion on 31 December 1992. The legislated measures included the following: Elimination of frontier controls (full measures of which have been repeatedly delayed) Acceptance throughout the market of professional qualifications Acceptance of national standards for product harmonization Open tendering for public supply contracts Free movement of capital between states Reduction of state aid for certain industries Harmonization of VAT and excise duties throughout the market The Single Market came into force and effect commencing 1 January 1993, although many of the legislated measures took longer to implement. At the time of its commencement, between 90% and 95% of the requisite legislation had already been enacted by all the member countries (A Dictionary of Business and Management, 2006). 1.2 Stages of Economic Integration The concept of a fully integrated market involving complete unification is not attainable in a single step. There are several levels of integration, tabulated below: Table 1: Stages of integration (sourced from Rodriguez-Pose, 2001) The free trade area is the simplest level of integration, where goods and services are allowed to move freely among its members. This necessarily implies the abolition of tariffs and quotas for imports among the member-nations, without abolishing the same tariffs and quotas in their trade with third countries. Essentially, the free trade area agreement is a preferential trade agreement, and the products covered by the removal of tariffs and trades may be limited, or may encompass the entire manufacturing sector. The next stage of economic integration is the customs union, where internal tariffs and quotas are accompanied by certain external trade restrictions, or where external tariffs and quotas are harmonized. This level of integration sought to address the weakness of the free trade area, which was vulnerable because of the member countries’ unequal policies with external trade. This invited third countries to target the member country with the most favourable tariff policies. Under the customs union, there is resort to the creation of common regulatory bodies and institutions endowed with police powers to control and regulate trade within the union. The third level, the common market, is also known as a single market. In this stage of integration, there is free factor mobility of goods among the member countries, in the form of goods, capital, labour, and services. A more intense level of regulation is implicit, and institutions are established to monitor and oversee that decisions adopted by each state does not alter the free factor mobility in the territory. The economic union is the fourth level of integration, at which the member states harmonize their economic policies, mainly in the areas of economic and fiscal policy. A series of central institutions aids in the coordination of particular areas of economic policy to the point that sovereign states relinquish control to the supranational body. Finally, complete economic integration results with the subsequent and total disappearance of the capacity of individual states to implement their own respective economic policies. This involves a common currency, a common fiscal and financial system, and central institutions that wield control of national economic institutions that merely become its branches. Presently the EU is at the stage of the economic union and is working towards economic integration, a stage which it admittedly has not yet fully attained. 1.3 Historical Background of the European Union (The CIA World Factbook, 2009) It is difficult to describe the European Union (EU) on terms of conventional political units. It is not a country, but an organization of countries – 27 to date –although it has the attributes of a sovereign and independent nation, with its own flag, anthem, founding date, the beginnings of a common foreign security policy, its set of laws and law-enforcement institutions, and its own currency. Neither is it a federation, because it is more than a free-trade association such as NAFTA or ASEAN. The EU evolved from a regional economic agreement that was originally participated in by 6 neighbouring European countries in 1951. It is the result of directions European leaders sought to pursue after two World Wars involved two main belligerent states: France and Germany. The region’s leaders believed that by economically and politically uniting these two countries, lasting peace would be established and a possible recurrence of these animosities. It was in 1950 when the French foreign minister conceived of the union of the whole of Europe, commencing with the integration of the coal and steel industries. In 1951 the Treaty of Paris was signed by the original six countries – Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands – together with the establishment of the European Coal and Steel Community (ESCS). The success of this union led to the integration of the rest of the member countries’ economies in 1957, due to which the European Economic Community (EEC) was born, simultaneous with the European Atomic Energy Community (Euratom). These developments were accompanied by the multilateral agreement of the six member states to eliminate trade barriers among them and create a common market. Ten years later (in 1967) the three institutions were merged into one, formally called the European Community (EC), with only one Commission, one Council of Ministers, and one European Parliament. In 1995, the European Union was created, and in 1999 the euro was launched. Membership in the EC also steadily grew, with the addition of Denmark, Ireland the United Kingdom in 1973, Greece in 1981, Spain and Portugal in 1986, and in 1995, Austria, Finland and Sweden joined what was already then the Economic Union. 2.0 Assessment of the attainment of the goals of the SEM European integration has two goals: externally, it is to advance Europe’s trade primacy and its political & economic power. Internally, it seeks to progress towards a convergence of living standards, lower trade barriers and adopt a common currency (The CIA World Factbook, 2009). These are not as easy as they sound. As economic borders come down there is necessarily the question as to whether businesses set up anywhere in the union will meet the same economic challenges or be benefited by the same economic advantages. The question is whether or not the EU is truly a single, integrated, business milieu. For this purpose, case incidents will be examined in order to determine the practical implications on the EU’s business environment. For the purposes of discussion, this paper shall seek to assess whether or not the twin SEM programme objectives have been attained, which are: A) that the SEM programme should be properly in place. B) that the SEM programme should bring economic and business benefit to the EU. 2.1 Evaluation against objective A 2.1.1 Assessment of the policy stages of the integration process To evaluate this programme objective it is necessary to examine the various policy stages of the EU integration process. These stages are the treaty stage, the legislation stage, the transposition stage, and the observance and enforcement stage. It goes without further discussion that the treaty stage has long been surpassed, and that as determine by the CIA World Factbook 2009, nearly all necessary legislation (about 95%) has been completed and put into place at the time of the implementation of the Single European Market in 1 January 1993. Most important among these are the establishment of the regulatory institutions that shall oversee the economic policies of the member nations. The enactment of EU legislation is now the function of the European Parliament, the members of which are selected by popular vote, beginning 1979 and every five years thereafter. Another instance is that in 1992, the Treaty of Maasctricht led to member-states’ cooperation in foreign and defense policy, in judicial and internal affairs, and in the creation of an economic and monetary union using one common currency. Presently, efforts are underway to establish a political agreement known as the Reform Treaty, or alternately the Treaty of Lisbon, which would serve as a Constitution for the EU. An important institution that had been established long before is the Court of Justice of the European Union, though previously existing in different forms since 1952. It came to its present being with the entry into force of the Reform Treaty, also known as the Treaty of Lisbon. It has two subordinate chambers: The General Court, which used to be known as the Court of First Instance, and the Civil Service Tribunal. The Court of Justice is tasked with the mandate to ascertain that the Treaties are observed with the force of law among the member states of the Union. With these various evidences it would be safe to say that the EU had long surpassed the legislation stage. The next stage, which is the transposition stage, requires the subjugation of national law under the law of the European Union. In this respect, the “Cassis de Dijon” case, which surfaced in 1979 during the period leading to the 1992 deadline, is instructive: The “Cassis de Dijon” case In 1979, controversy surrounded a German regulation prohibiting importation of alcoholic beverages from other EU countries if such beverage did not meet Germany’s minimum alcohol content requirements. Rowe-Zentral AG, a German import/export firm, brought suit against enforcement of the regulation, claiming that the German regulation on minimum alcohol contents constitute an illegal non-tarriff barrier. The subject of contention involved Cassis de Dijon, a French liqueur made from black currants. Apparently, Casses contained 15%-20% alcohol, while German standards required a minimum of 25%. In its response, the German government argued that its regulation remain valid on the ground of health issues. It rationalized that the law intended to avoid the proliferation of alcoholic beverages within the German market, and that beverages with low alcoholic content tend to alcohol tolerance more than for higher concentrated alcoholic drinks. The German government further argued consumer protection, and finally, that the elimination of the import ban signifies that one country could set the standards for all member states. In it decision released in February 1979, the European Court of Justice struck down the German import prohibition Currently, the EU is in the Observance and Enforcement stage. There are still irritants, such as the 2006 ruling of the EC where it threatened to sue France for refusing to demand that France Telecom return to the French government an amount between $1 billion to $1.44 billion in what the EC considers as illegal subsidies (TelecomWeb News Break, 2006). However, it is understood that in the matter of the unification of legal matters and regulations, there will be always pockets of controversy in what a country may or may not do. Given the overall picture, however, it appears that substantial compliance has been observed by the EU Member States in the major policies. 2.1.2 Assessment of barriers There are three sets of barriers to full integration, namely the physical, technical, and fiscal barriers. The physical barriers are associated with the presence of intra-EC border stoppages, control at border checkpoints, superfluous bureaucratic procedures and red tape, and the existence of different currencies. The empirical study conducted by Ikzkovitz, Dierx, Kovacs and Sousa of the EC (2007) have attested that the SEM (the Internal Market) is a power instrument for promoting economic integration and increasing competition within the EU. It has brought about substantial economic benefits, though admittedly the gains realized by virtue of the SEM could have been larger. For instance, there are still, according to the report, remaining cross-border barriers to the free flow of trade and investment which have not been removed, thereby slowing the process of innovation and what would have been a more dynamic and competitive economy. Two areas as particularly vulnerable: the free exchange of services, and the development of an Internal Market for knowledge (Ilzkovitz, et al., 2008). 2.1.3 Assessment of convergence Price convergence In the EC Single Market Review, Ilzkovitz et al report the development of price convergences across the EU 25 member states, as shown in the following table. Table 2: Price convergence between EU25 Member States: breakdown by product categories (Source: Ilzkovitz, et al., 2007) Academics, however, give less weight to price convergences, although they are an important indicator of the strengthening price competition across the EU. Mainly, discrepancies in prices are subject to economic realities that influence prices, such as local tastes and preferences, and different tax rates. On the other hand, one big barrier seen is the absence of large pan-European wholesalers and retailers in the likes of America’s Wal-Mart, bringing price dispersion in the euro area to within twice as much as the levels in America as of 2003 (Economics, 2003). In a series of academic papers, other convergences have been examined, such as that of business cycle synchronization, as more indicative of the progress of economic integration in the territory. Business cycle synchronization and convergence Loose synchronization tends to heighten tensions. The use of a single currency is assumed to increase economic integration of the Member-States that could be detected by a higher synchronization of their business cycles. Studies have pointed to the following tendencies that influence business cycle convergence, giving testament to the delicacy of assessing convergence information and their implication on EU integration. Similar institutional conditions of the wage bargaining process and homogeneous reforms in terms of wage bargaining and employment tax rates foster business cycle synchronization. Structural reforms possibly require a considerable time span until their effects fully materialize. Making institutional arrangements more similar as well as coordinating reforms over countries in the same institutional area could adversely affect business synchronization. It might be assumed that countries with similar labour market characteristics absorb shocks differently caused by large differences concerning market regulation, resulting in diverging business cycles. Thus, similar reforms may have different impacts due to differences in product market regulations. Institutional reforms derive their context from the country’s economic environment.(ZEW, 2008). Table 3: Correlation studies of business cycle of countries vis-à-vis the euro area, estimates for different sample periods. (Source: ZEW, 2008) The ZEW report found that generally, coherence and dynamic correlation among the considered countries are fairly high, falling below 0.5 only in few cases. This does not assure that convergence has already been attained, but as a continuing process it shows significant positive direction in this respect, considering the varied status of these economies in 1992, and the relatively recent entrants to the EU from the Eastern European states. 2.2 Evaluation against objective B: Objective A having been determined as to substantially, though not completely, accomplished, it is necessary to determine whether the institutional frameworks set in place have redounded to real and tangible benefits to the EU citizenry. According to the report by Heringhaus (2008), citing the EC report for 2007, there are ten benefits brought to citizens by the SEM. These are : Increased prosperity: The EC report states that in the last 15 years prior to report date (15 Nov 2007), the SEM was responsible for increasing EU’s prosperity by 2.15% of GDP. For 2006 alone, the figure came to an increase of €240 billion – a per capita increase of €518 for every EU citizen, compared to the period before the Single Market. Additional jobs: An additional 2.75 million extra jobs were created within the period 1992-2006 due to the Single Market. Wider choice of products and services: In a representative poll, 73% of EU citizen expressly attributed to the Single Market the availability of a wider range of products and services, while the establishment of common standards has brought about safer and more environmentally friendly products (e.g., food, cars, medicines). Lower prices: The opening up of national markets brought about stronger price competitions, thus driving prices down, a typical example of which is the cost of telephone calls which has been reduced on the average by 40% from 2000 to 2006. Costs went down due to less red tape, as SEM rules currently being implemented has replaced with a single framework a great many complex and various national laws. Huge potential markets: The EC report substantiates that any business in the EU automatically has access to close to 500 million potential customers. increased ease of doing business, allowing large businesses to take advantage of economies of scale. Furthermore, new markets have become accessible to small- and medium-scale businesses that would have formerly been discouraged from exporting due to the cost and intricacies of legal requirements under their national laws. Less red tape: There is reduced bureaucratic red tape both for citizens and businesses, lowering the latter’s compliance costs from an average of €813 in 2002, to €554 in 2007. Time needed for administrative compliance by business companies was reduced from 24 days in 2002 to only 12 days in 2007. However, greater improvement is still desired in this area to bring the duration to below 12 days. Better value for taxpayers: Due to more liberal, transparent, and competitive public procurement rules, governments have realized savings that they could devote to priorities such as health and education. For instance, the drop in the price of railway rolling stock has created saving within the range of 10% to 30%, studies show. Ease of doing business: Trade within the EU has risen by 30% since 1992, which the study attributes to the absence of border bureaucracy and reduction in delivery times and costs. Prior to the removal of the borders, the tax regime alone necessitated the processing of 60 million customs clearance documents annually, which today are no longer required. More opportunities to work, live and study abroad: Since 1992, more than 15 million EU citizens have moved to other EU countries for work or retirement, due to the transferability of social benefits. An estimated 1.5 million youths have completed their academic programmes in another Member State, due to the Erasmus programme; and finally, Easier travelling and shopping: EU citizens enjoy mobility across most of the EU without carrying a passport and without stopping for border checks. Shoppers are protected by full consumer rights when shopping outside their country but within EU territory, and there are no maximum limits as to what they could purchase and take for personal use. Breuss (2002), on the other hand, categorizes the effects of integration as falling within four classes: 1. Trade effects, due mainly to the reduced costs of trade 2. Single Market effects, moving towards greater efficiency gains and increased price competition 3. Factor movements in the form of increased foreign direct investments (FDI) activities and migration; and 4. The costs of enlargement There is much speculation as to whether the performance so far of the Single Market has met the projections of the Cecchini/Emerson report of 1988, which was a “quite optimistic ex ante study” issued in 1988 (Herringhaus, 2008). Admittedly, present conditions are nowhere approximate to the Cecchini predictions; for instance, the EC estimates two million additional jobs created due to the SEM whereas Cecchini estimated 5 million. The use of Cecchini has caused some controversy, in that some academics point to the fact that the Cecchini report was not intended as a forecast, having been done in 1988, but rather a paper on the possibilities that a Single European Market may offer. Furthermore, Cecchini could not have in any way foreseen the international economic shocks from 1988, such as the dot.com bubble burst that affected international markets, and of course the 2007-2009 financial crisis. There exists a great difference in per capita income within the members states, ranging from $7,000 to $69,000, as well as historic national animosities. Thus, the EU has problems coming up with a common solution by way of devising and enforcing common policies. Among the 27 members, 12 are generally acknowledged to be less economically and technologically developed than the other 15. The launching of the euro in 1999 eventually led in 2002 to its use as the exclusive unit of exchange for 12 of the EU states, with the exclusion of the UK, Sweden and Denmark. As to the flow of FDIs, studies corroborate that the region has been benefiting from a strong flow of investment funds. If any, the recent financial crisis appears to have spurred interest in the relatively stronger stability of the EU zone, and funds from the US have moved into promising projects in the area. The table below is one such study released by the EC in its 2007 review of the SEM. Figure 1: FDI Outward and Inward Stocks in the EU15 and EU25 (Source: Ilzkovitz, et al 2007) 3.0 Conclusion This brief assessment, no way exhaustive, has brought to light the fact that while the SEM is in no way a complete success, it has within the short amount of time of a couple of decades achieved what no other group of nations has achieved. It is a continuing process, and despite the slower pace than that predicted, it has withstood several international economic shocks and guided its Member-Nations to emerge as much better than they otherwise would have been. As testament, more nations have joined or are considering joining the EU, and as the EU territory broadens, its level of integration also deepens. Someday, it is safe to say that the EU may provide the model for other regional economies to seek the benefits of integration. References Central Intelligence Agency 2009 The European Union. The World Factbook. Accessed 28 December 2009 from https://www.cia.gov/library/publications/the-world-factbook/geos/ee.html Centre for European Economic Research GmbH (ZEW) Institute for Advanced Studies 2008 Study on economic integration and business cycle synchronisation: Final Report. Project of the EU Commission, Bureau of European Policy Advisers. Accessed 27 December 2009 from http://ec.europa.eu/dgs/policy_advisers/publications/docs/final_report_study_zew.pdf Economist 2003 The Flaw of One Price. 18 Oct vol. 369 issue 8346. Source: Academic Source Complete European Commission (EC) 2007 Ten Ways in which Europeans have benefited from the Single Market. 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Raleigh, 23-26 March 2000. Rodriguez-Pose, A 2002 The Economic Geography of the European Union, Part II Paper 1. Lecture presentation. Accessed 6 January 2009 from http://personal.lse.ac.uk/rodrigu1/Cambridge%201.pdf "Single Market." A Dictionary of Business and Management. 2006. Retrieved January 07, 2010 from Encyclopedia.com: http://www.encyclopedia.com/doc/1O18-SingleMarket.html TelecomWeb 2006 EC Gets Tough: France Told to Pay what France Telecom Won’t. 20 July. Source: Business Source Complete Read More