Is European economic integration delivering the benefits predicted by its supporters
Economic integration was expected to yield substantial benefits for the European economy. The ex-ante studies concluded that a removal of barriers and cost reduction would increase the competitiveness of the European market. However, the immediate jump in performance failed to materialize after the implementation of the Single Market. The Commission perceived the existence of fragmented markets as a serious threat to European competitiveness in the world economy.
The excessive market fragmentation within the European Union was held responsible for reducing economies of scale and thus obstructing the structural reforms needed to adjust to global challenges (Rodriguez-Pose, 2003). Integration on the other hand was expected to trigger an increase in the size of the European market, a reduce the costs of trade, a remove structural bottlenecks, and trigger economic restructuring. Economic integration and the process of internationalization as a whole, coupled with technological change, put a premium on skills and on the flexibility and mobility of factors of production.
Capital was therefore expected to gain more than labour, and professionals more than unskilled workers (Tsoukalis, 1993). The widely circulated Cecchini Report (1992) outlined the costs of Europe’s fragmented markets and the potential economic benefits of integration. It identified three major cost saving areas resulting from market integration. These included benefits reaped from public authorities, which could now buy from the cheapest suppliers, the greater international competition, and the reorganization of industrial sectors to generate economies of scale (Cecchini, 1988:17).
Emphasis was placed on the positive impact of open competition. Consumers would gain due to a drop in prices and an increase in product choice and quality. The producers were expected to face a more mixed outlook. In the short term, their profits may be reduced, but in the longer run, business as a whole is expected to respond to the new competitive climate by making various adjustments – scaling up production, gaining experience of how to produce more efficiently, eliminating management inefficiencies, and improve the capacity to innovate (Cecchini, 1988).
Through all these factors the community’s “net economic welfare” would increase. The resulting gains from the Single Market were predicted to be in the range of 174 to 258 billion (Cecchini, 1988). The actual impact of further integration on economic growth in the European Union is a longstanding area of controversy. While some commentators associate open markets with economic growth, the extent to which growth is determined by this factor is debatable, since other factors such as technological change, investment in R&D, policy influenced factors, also play decisive roles.
With regard to the free movement of capital, goods, and services the deregulation of the Single Market Programme has fallen short of expectations generated by the ex-ante evaluations, which had predicted a step increase in GDP of 4. 5-7 per cent over the long term, creating 1. 8-5 million net additional jobs (Cecchini, 1988). Ex post macroeconomic assessment calculated the figure to be 1. 5 per cent in terms of GDP and 900,000 new jobs (Hall, 2001). In addition the Single Market does not seem to have led to an increase in the inflows of FDI to the EU (Rodriguez-Pose, 2003).
However, Intra-European trade has generally grown faster than GDP and also faster than trade with the rest of the world. Capital mobility has also grown spectacularly over the years, but it can be argued that this is much more an international than a European phenomenon. The increased capital mobility has been accompanied by more cross border mergers and acquisitions, most of which have taken place in anticipation of the single market, rather than after its implementation (Rodriguez-Pose, 2003).
Nevertheless, inflation levels have been kept in check by the SMP and price levels are 1. 5 per cent lower than they would otherwise have been (Hall, 2001). Keener competition and increased productivity are the mechanisms which underpin these improvements. The limitations in policy success include the failure to address satisfactorily the question of labour mobility, which constrained the effects of the SMP. Labour mobility across national frontiers has remained low. This can be partly attributed to factors such as cultural and linguistic barriers.
National labour markets are still characterized by wide diversity in terms of legislation and power relations between employers and trade unions (Tsoukalis, 1993). Therefore the European labour market remains highly compartmentalized. In general the SMP was limited to removing impediments to geographical mobility. The extensive national regulations in the labour market were untouched by Community legislation even though there was a substantial body of evidence that they were a major factor in persistently high European unemployment levels, which have accompanied and increased with further market liberalization (Tsoukalis, 2003).
Thus the European labour market remains one of the least integrated and rigid in comparison with other parts of the world. The shortfall of initial predictions can also be attributed to exogenous factors, such as unexpected and unforeseeable developments, which affected the dynamics of the single market, such as the aftermath of German reunification, the economic transformation in central and eastern Europe, and the revolution in information technology, which all have substantially altered the global economy.
In addition, at the point of completion of the European Single Market, most European economies were entering the trough of economic recession in the early 1990s (Rodriguez-Pose, 2003). Tsoukalis argues that market structures and behaviour have yet to adapt fully to the new regulatory framework and the more contestable configuration of Community markets. Therefore, it may still be too early to evaluate the positive economic effects of European integration.
In conclusion the Cecchini report and other studies have grossly overestimated the benefits, resulting from the cost reduction, of European economic integration. Integration has not produced the immediate and spectacular economic effects and fails to tackle to problems of labour mobility and unemployment, which impede on economic growth. The dynamics of the single market have also been affected alterations in the global economy. European economic integration may be lay down the foundations for a faster future adjustment by the EU to global challenges.