lecture 1, december 1st macroeconomics, foreign trade and the european union. basics and examples

Lecture 1, December 1st

Macroeconomics, foreign trade and the European Union. Basics

and Examples.

Macroeconomics, foreign trade and European Union. Basics.

• What is the European Single Market• four columns of the single market• Evaluation of the single market• Convergence or divergence?• What to do to be successful…• Putin’s proposal of Nov. 25th . Discussions, outlook.

Lecture 3Dipl.- Kfm. Thomas Stiegler, University of Göttingen.2

Today‘s topics


• Common market in Europe is not just a usual free trade zone of national states• We saw in lecture 1, that there is quite a deep integration in European Union, besides trade, even besides economy• So besides possible positive effects in foreign trade, there are several positive effects for the private and firms


European Single Market


There are four columns of the EU common market (only one of them the free trade of goods):I. Free traffic of goods; (no border controls, no tariffs, no technical burdens)II. Free traffic of services; (transportation, telecommunication, financial services, public assignments / tenders (!) )III. Free capital traffic; money transfers and financial transactions as well as traffic of EU currency is NOT limitedIV. Free traffic of citizens; Each citizen of European Union can settle down everywhere he wants, no border controls, working permission


The four freedoms in single market


to evaluate the outcomes of its single market policy, European Union implemented an “Single Market Review” which reported to the beginning of the 2000s.• economies of scale are visible to only a small extend• concurrence didn’t grow vastly (60-80% of the firms said there was no change)• The quota of foreign firms winning a tender was relatively low• big companies’ profit is bigger than small companies’


Single Market Review


The Review shows the changes in between the Maastricht treaty (1991) and the early 2000s. It’s coming to positive effects, which are, however much smaller than expected. When reading this Review we should keep in mind two points:• most of the countries were members of EEC and EC before and thus had already a quite strong integration behind them. The single market was more the last step in a row for them, not the huge step.• The review took place before eastern enlargement of EU (integrating totally non integrated countries)


Evaluation of the Review


It is argued, that a single market would give poorer countries the chance to develop faster and start a convergence process towards the richer states:• poorer states have less capital, through single market they can attract capital and invest in modern technology• products can be produced cheaper in poor countries, as

usually wages are lower. They can be sold in richer countries• Through a single currency this process will be even faster, as transaction costs fall apart and the price advantage can be used better. Capital transfers to poor countries become easier.


The single market as way to convergence?


A bigger market leads – as we learnt in the last lecture – to economies of scale and thus to specialization on goods a country is good in.• rich countries are usually good in high tech products. If they specialize in them, they can develop even better technology letting poor countries even farther behind.• through factor mobility highly qualified workers move to the rich countries• if wages in poorer countries move up – as workers want the same wealth as in the partner countries – but productivity doesn’t; poor countries fall farther behind


The single market as way to divergence?


The described danger of falling behind by specialization is smaller, the more the structure of the integrated economies is similar. However being “different” doesn’t necessarily mean falling behind. If convergence is an aim the country’s policy should act carefully. If there can be a convergence process can be dependent on:

• functionality of market mechanisms• conditions on labor markets• availability of human capital (level of education!)• functionality of economic institutions• socio-political structures


Who is right? – a synthesis


The following data takes the EU15 – before eastern enlargement as basis. The percentages are of the average of the EU15 states, GDP /head PPP.• Greece was in 1970 at 63%, 2002 at 69% of the EU level. It hardly moved up. Greece as very poor country, has as well very poor institutions, a lot of corruption, one of the worst educational systems in Europe. It seems to be at least no evidence for the convergence thesis.


Some data and its evidence (1)


• Ireland was 1970 at 62% (worse off than Greece!) 2002: 119%; Ireland has clearly structured institutions and paid money to technology firms to invest in Ireland. Ireland’s educational system is above European average on rankings, the people speak English, and so could attract EU basis of many US firms. Ireland not only converged but overtook many states. Even through the actual crisis in which Ireland is damaged strongly, it won’t fall behind European average again




• Germany was 1970 at 116% 2002 at 104%. Germany was and is the richest of the big EU states. Its economy is at highest standards in regard of technology. German GDP/head PPP grew from $3774 to $27584 in that time. This shows clearly: Germany grew at a high rate, however there were more states that grew faster. Meaning: there was a convergence process in between the 15 states taking place.




• European integration can help to give impulses for an economical growth• Growth through integration is not for sure. Member states have to create a surroundings, which let the market powers take into action• Although it is free trade, it is foreign trade so it can cause distortions in a countries external balance. However the access to bigger markets gives a big chance if used (Ireland, Poland, Czech Republic)


What to conclude


“… our aim should be to create a single continental market from Lisbon to Wladiwostok… however that shouldn’t be the final step, but only the first towards even deeper forms of integration between Russia and European Union… “ Wladimir Putin in Süddeutsche Zeitung (Germany) on November 25th, 2010.This position is a 180° turn around of the Russian government. So far they were, to express it in a positive way, “very skeptical” towards EU and hardly accepted EU as a partner on talks, but only national governments.


Prime minister Putin‘s proposal of Nov 25th.


Tell your opinion!Some hints what we should think about:- How similar is Russia’s and EU’s economy structure?- What could be the economies of scale for Russia?- Which goods would Russia sell to EU? What does that mean for the future?- Is Russia a state with strong and reliable institutions to take the positive effects of integration?


Let‘s apply what we learnt! A good proposal?


• Russia needs to develop industry producing products competitive on world markets, if it doesn’t want to be dependent on exporting raw materials in future.• Russia needs to improve its economic institutions and give more space to the free market (the government needs to gain more neutrality)• Russia needs to fight against corruption


So what to do for Russia, if this proposal is the aim? (1)


• Russia needs to open itself for foreign investors, if it wants to gain positive spillovers• Russia needs to get more independent from US$, as EU mostly uses EURO and currencies bound to EUROHowever, after doing so it is a great opportunity for Russian economy. Besides these only economic effects it is a great opportunity to make relations between Europe and Russia even better and closer and to bring the peoples closer together. Putin’s proposal is not less than the last step of ending Europe’s division and make it one again, as it last was before 1914. So this aim should be supported, but rationally and not only by heart and wishes. Some way to go! But the biggest journey starts with the first step!


So what to do for Russia, if this proposal is the aim? (2)

lecture 1, december 1st macroeconomics, foreign trade and the european union. basics and examples

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