Theorie und Politik der Europäischen Integration Prof. Dr. Herbert Brücker Lecture 5 Trade Policy Growth effects Integration of capital markets Theory.

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1 Theorie und Politik der Europäischen Integration Prof. Dr. Herbert Brücker Lecture 5 Trade Policy Growth effects Integration of capital markets Theory and Politics of European Integration

2 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Last Lecture Market Size and Scale Effects ·Monopoly, Duopoly and Breakeven-Comp Diagram ·Integration in the BE-COMP Diagram –Larger Market Size –Falling Average Costs –Higher Competition –Falling Prices –Higher Demand –Industrial Restructuring –Problems: »Higher market power of firms »Mergers and acquisitions »Anti-competitive behaviour »State aid policies

3 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Last Lecture... EU competition policy ·EU competency: 1 st pillar ·Forms of anti-competitive behaviour –collusion –cartels (e.g. vitamin cartel) –territorial price discrimination (e.g. Nintendo, pharmaceuticals) –abuse of dominant market position (e.g. Microsoft) ·Two policy areas: –merger control –state aid policy Leftover: Trade Policy

4 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker No-trade-to-free-trade integration Sales per firm AC price Total sales Demand curve Mark-upeuros x’ BE 2n’ x” n”n’ E’ E” C’C” E’ A 1 E” A MC p” p’ pApA '' AA p” p’ Home market E” E’ C Average cost curve After integration, each firm has (i) second market of same size and (ii) twice the number of competitors Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

5 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker No-trade-to-free-trade integration Sales per firm AC price Total sales Demand curve Mark-upeuros x’ BE 2n’ x” n”n’ E’ E” C’C” E’ A 1 E” A MC p” p’ pApA '' AA p” p’ Home market E” E’ C Average cost curve Competition effect: number of firms is 2n’, such that mark- up declines to A at given firm number. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

6 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker No-trade-to-free-trade integration Sales per firm AC price Total sales Demand curve Mark-upeuros x’ BE 2n’ x” n”n’ E’ E” C’C” E’ A 1 E” A MC p” p’ pApA '' AA p” p’ Home market E” E’ C Average cost curve Market size effect: BE curve shifts outward to the right. At given number of firms (point 1) we have no equilibrium). Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

7 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker No-trade-to-free-trade integration Sales per firm AC price Total sales Demand curve Mark-upeuros x’ BE 2n’ x” n”n’ E’ E” C’C” E’ A 1 E” A MC p” p’ pApA '' AA p” p’ Home market E” E’ C Average cost curve Smaller mark-up and higher competition reduces prices to p A. Below breakeven point for given number of firms. Industrial restructuring results in E’’ equilibrium number of firms. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

8 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker No-trade-to-free-trade integration Sales per firm AC price Total sales Demand curve Mark-upeuros x’ BE 2n’ x” n”n’ E’ E” C’C” E’ A 1 E” A MC p” p’ pApA '' AA p” p’ Home market E” E’ C Average cost curve Since each firm has a larger market in new equilibrium, average costs decline. Efficiency gain. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

9 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker No-trade-to-free-trade integration Sales per firm AC price Total sales Demand curve Mark-upeuros x’ BE 2n’ x” n”n’ E’ E” C’C” E’ A 1 E” A MC p” p’ pApA '' AA p” p’ Home market E” E’ C Average cost curve Welfare gain: C. Consumer benefit from (i) lower prices, (ii) higher consumption. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

10 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Economic logic Integration: no-trade-to-free-trade: BE curve shifts out (to point 1). (Larger market effect) Defragmentation: PRE typical firm has 100% sales at home, 0% abroad; POST: 50-50, Can’t see in diagram. Pro-competitive effect: Equilibrium moves from E’ to A: Firms losing money (below BE). Pro-competitive effect = mark-up falls. short-run price impact p’ to p A. Theory and Politics of European IntegrationLecture 4 Market Size and Scale Effects

11 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration This lecture Trade Policy Growth effects Some facts on EU post-WWII growth The neoclassical growth model (Solow-model) Integration in the neoclassical growth model Capital market integration Microeconomics of capital market integration

12 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU Trade Policies Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

13 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Trade: Facts Two-thirds of EU28 exports are to other EU28 nations. More than 90% of this is actually among the EU15 trade (10 new Member States are fairly small economically). Add all other European nations, three-fourth of Europe’s trade is within Europe. North America and Asia are the EU25’s main markets outside Europe, each accounts less than one-tenth of EU exports. Africa, Latin America and the Middle East are not very important. The pattern on the import side is very similar Rounding off, three-fourth of EU imports are from Europe, with the fourth quarter split into two more or less even groups of nations – Asia, and all other nations. Trade with non- European nations is balanced. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

14 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Facts: Patterns of Trade Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy Eurostat (2014), own calculations.

15 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Facts: Differences across Member States: non-EU trade Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

16 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Composition of imports and exports, aggregate trade Manufactured goods 90% of total exports (half of all exports being machinery and transport equipment). Import side, two-thirds on manufactured goods. EU-25 is a big importer of fuel (18 % of imports). Only 6% food and agriculture. Other types of goods play a relatively minor part in the EU’s trade. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

17 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU External Trade Policy: Institutions and trade in goods Recall: Customs Union requires common trade policy Trade policy among the ‘first pillar’ since Rome Treaty European Commission has the right to set tariffs and negotiate on trade issues at WTO EC Trade Commissioner negotiates, has a mandate assigned by the council of ministers Council has final say Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

18 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU Trade Policies: other areas World trade negotiations involve far more than trade in goods. Trade-related intellectual property rights (TRIPs) Trade-related investment measures (TRIMs), Service trade Technical Barriers to Trade (TBTs), trade facilitation, etc. Treaty of Rome only gave Commission power over trade in goods Treaty of Nice (& Amsterdam) extended Commission’s authority to some aspects of Services trade and TRIPs, & made QMV the rule in Council on such matters. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

19 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Contingent protection WTO allows members to raise tariffs to: Counter ‘unfair’ trade practices, e.g. Antidumping measures, e.g. penalty tariffs Countervailing duties, e.g. ‘voluntary agreements’ of ‘price-undertakings’ ·Firms charge higher prices, but EU loses tariff revenue Provide temporary protection “safeguards” Widely applied by US and EU The various WTO articles on these require a procedure; in EU the Commission is in charge of these procedures, but the final decision is subject to QMV approval of the Council. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

20 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU External Trade Policy: MFN Tariffs MFN tariff structure reflects comparative advantage of EU industries Low tariffs in manufacturing ·Exception: textiles and clothing High in food and agriculture, especially diary products Interest groups matter Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

21 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU’s MFN tariff structure (Common External Tariff – CET) Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

22 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU External Trade Policy: Preferential Agreements EU has special deals with 139 nations; often more than one per partner. Each can be very complex... Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

23 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU External Trade Policy Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

24 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Preferential agreements: logic ‘Hub’ and ‘Spoke’ System EU is a regional ‘hub’ in ‘hub’ and ‘spoke’ system of trade deals ·Morocco is a typical case: 71% of exports to EU, but only 1% of EU imports from Morocco ·Asymmetry gives EU high leverage in dealing with these nations Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

25 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU External Trade Policy: European circle European-Mediterranean area: West, Central and Eastern Europe = Single market in industrial goods; ·EU + EEA + Swiss bilateral agreements Euro-Mediterranean Association Agreements: ·Morocco, Algeria, Tunisia, Egypt, Israel, the Palestinian Authority, Lebanon, Jordon, Syria and Turkey. ·Asymmetric (EU cuts its tariffs faster) FTAs in manufactures, by 2010. ·Turkey unilaterally in Customs Union in manufactures. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

26 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker EU External Trade Policy: European circle (cont.) European-Mediterranean area (cont.): Asymmetric dependence (e.g. 70% of Morocco’s exports to EU, but <1% of EU to Morocco) EFTA’s “FTA union” with EU; EFTAns mimic EU to avoid discrimination against EFTA-based exporters. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

27 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Former Soviet Republics & Western Balkans Partnership and Cooperation Agreements (PCAs). These are GSP+ (GSP=Generalised System of Preference). Russia, Ukraine, Georgia, Belarus, Armenia, Azerbaijan, Kazakhstan, Kyrgyzstan, Moldova and Uzbekistan. Asymmetric tariff reduction without requiring PCA partners lowering theirs. Stabilisation and Association Agreements (SAAs). Former Yugoslavian states. Croatia is today EU member; others might follow. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

28 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Preferential arrangements with former colonies Colonial preferences conflicted with Common External Tariff EU made exception for these nations to avoid imposing new tariffs; signed “unilateral PTAs” ·Yaoundé Convention and Arusha Agreement When UK joined 1974 exceptions extended to many Commonwealth nations. ·“ACP nations” (Africa, Caribbean & Pacific); the new agreement = Lomé Convention. ·Duty-free but subject to quota for sensitive items (sugar, banana, etc.) Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

29 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Preferential arrangements with former colonies These didn’t help the ACP nations much c.f. Asian success without tariff preferences When Lomé Convention renewed in 2000, the EU and the ACP nations agreed to modernise the deal Cotonou Agreement; eventually reciprocal free trade stepwise reduction of tariffs on ACP nation side general outline of principles details fixed in bilateral Economic Partnership Agreements (EPAs) Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

30 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Generalised System of Preferences (GSP) 1971 GATT provision allows tariff preferences. EU grants GSP to almost all poor nations. General GSP. “Super-GSP” more generous on market access. ‘Everything but Arms’ (EBA) for least developed nations. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

31 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Generalised System of Preferences (GSP) (cont.) On paper, EBA grants zero-tariff access all goods, except arms and munitions. Goods in which these nations’ are most competitive are in fact excluded from the deal. Tariffs on bananas, rice and sugar – products where these poor nations could easily expand their EU sales – are to come down only in the future. Moreover, even though all tariffs on these items are gone by 2009, the exports quantities are limited by bilateral quotas. 49 nations qualify for EBA in principle in 2005. Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

32 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Non-regional FTA Mexico, Chile, and South Africa. Mercosur Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates). Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

33 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Finally, non-preferential trade Only 6 main nations: US, CAN, JAP, AUS, AT, KOR But about 1/3rd of extra-EU imports are not granted some sort of preferential treatment The ongoing EU-Canadian und EU-US free trade agreements (Transatlantic Trade and Investment Partnership – TTIP) tempt to change this But many controversies are pending: transparency, national sovereignty and Investor State Dispute Settlements (ISDS), different health and safety regulations, particularly for food Theory and Politics of European IntegrationLecture 4 Competition and Trade Policy

34 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Growth effects

35 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Growth effects European leaders have long emphasised a different the pro- growth aspects of European integration These operate in a way that is fundamentally different from the way allocation effects operate; they operate by changing the rate at which new factors of production – mainly capital – are accumulated, hence the name ‘accumulation effects’.

36 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Verbal logic of growth Growth in income per worker requires more output per worker Nation's labour force can produce more goods and services year after year only if they have more/better 'tools' year after year. 'tools' means capital broadly defined: ·physical capital (machines, etc.), ·human capital (skills, training, experience, etc.), ·knowledge capital (technology).

37 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Verbal logic of growth ERGO, rate of output growth linked to rate of physical, human and knowledge capital accumulation. Most capital accumulation is intentional and it is called investment. Thus: European integration affects growth mainly via its effect on investment in human capital, physical capital and knowledge capital.

38 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Verbal logic of growth: summary European integration (or any other policy) → allocation effect → improved efficiency → new profitable investment opportunities → more investment in machines, skills and/or technology → higher output per person. In neoclassical growth model medium run effects eventually peter out Growth rate returns to its long-run rate In endogenous growth models long run effects raise long-run rate of technological progress, and, hence, the growth rate of output, capital stock and consumption forever

39 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Shows medium run growth effects in simple diagram Key assumptions: Saving rate is constant Depreciation rate is constant Exogenous technological progress Constant returns to scale To simplify, start with whole EU as a single, closed economy with fully integrated capital and labour markets and the same technology everywhere. Neoclassical growth: The Solow diagram

40 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration The Solow diagram A B K/L euros/L GDP/L s(GDP/L)  K/L) Y/L* K/L* K/L o IoIo DoDo

41 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration The Solow diagram A B K/L euros/L GDP/L s(GDP/L)  K/L) Y/L* K/L* K/L o IoIo DoDo GDP per worker increases with increasing capital endowment per worker (K/L), but marginal returns to capital decline

42 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration The Solow diagram A B K/L euros/L GDP/L s(GDP/L)  K/L) Y/L* K/L* K/L o IoIo DoDo Saving (investment) rate is constant, such that savings are a constant share of GDP per worker

43 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration The Solow diagram A B K/L euros/L GDP/L s(GDP/L)  K/L) Y/L* K/L* K/L o IoIo DoDo constant depreciation rate involves that the capital stock increases before we achieve point A, but declines thereafter

44 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration The Solow diagram A B K/L euros/L GDP/L s(GDP/L)  K/L) Y/L* K/L* K/L o IoIo DoDo Thus, the long-run dynamic equilibrium is achieved at point A. This is called “steady state”. The economy grows here only at the rate of the technological progress. Can’t see in diagram.

45 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Allocation effect via trade, scale economies and competition Capital accumulation effect as consequence of higher allocative efficiency Knowledge accumulation, i.e. higher rate of technological progress, through higher allocative efficiency and, perhaps, market size How does integration affect growth?

46 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Induced capital formation C E D B K/L euros/L GDP/L s(GDP/L)  K/L) GDP/L’ A s(GDP/L)’ Y/L c Y/L’ Induced capital formation effect, i.e. medium-run growth bonus Allocation effect Y/L* K/L* Growth impact of a technological push or efficency gain from integration K/L*’

47 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Induced capital formation C E D B K/L euros/L GDP/L s(GDP/L)  K/L) GDP/L’ A s(GDP/L)’ Y/L c Y/L’ Induced capital formation effect, i.e. medium-run growth bonus Allocation effect Y/L* K/L* K/L*’

48 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration C D B K/L GDP/L s(GDP/L)  K/L) K/L*’ A s’(GDP/L) Y/L ’ Medium-run growth bonus Y/L* K/L* Integration induced investment rate rise

49 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration K/L =Knowledge/L euros/L GDP/L s(GDP/L)  K/L) Y/L* K/L* B A Long-term endogenous growth

50 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Integration increases market size Larger market size is related to higher allocative efficiency and scale economies Higher market size increases e.g. knowledge pool High knowledge pool is related to higher rate of knowledge accumulation Similar for higher allocative efficiency: higher returns to knowledge accumulation Higher knowledge accumulation increases rate of technological progress Higher rate of technological progress increases long- term (permanent) growth rate Long-term growth effects: Knowledge acculation

51 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Long-term growth impact of integration K/L =Knowledge/L euros/L GDP/L s(GDP/L)  K/L) Y/L* K/L* B A s’(GDP/L) C

52 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Long-term growth impact of integration K/L =Knowledge/L euros/L GDP/L s(GDP/L)  K/L) Y/L* K/L* B A s’(GDP/L) C Integration improves efficiency → improves investment climate → higher investment rate (s rises to s’) → faster growth (knowledge capital accumulates more rapidly)

53 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Empirical evidence: Are growth and integration related? Prima facie evidence EEC countries grew at 4.2% p.a. 1950-73 EFTA countries grew at 3.4% p.a. 1950-73 Poor countries grew at 4.2% p.a. 1950-73

54 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Facts: European Growth Phases, 1890-1992 PeriodReal GDPReal GDP per capita Real GDP per hour 1890-19132.61.71.6 1913-19501.41.01.9 1950-19734.63.84.7 1973-19922.01.72.7 Whole Period 1890-19922.51.92.6

55 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Facts: Growth in the WWII Reconstruction Phase. The Set-Back: (Pre- war year when GDP equalled that of 1945) Back-on-Track Year (Year GDP attained highest pre-war level) Reconstruction Growth (rate 1945 to col. 2 year) Austria1886195115.2% Belgium192419486.0% Denmark1936194613.5% Finland19381945n.a. France1891194919.0% Germany1908195113.5% Italy1909195011.2% Netherlands1912194739.8% Norway193719469.7% SwedenThese nations grew during WWII Switzerland UK

56 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Facts: GDP per capita & Rankings, 1950 and 1973 (1990 international dollars). 1950 GDP (1990 $) European Rank 1950 Change in Rank 1950- 1973 GDP Growth Rate EEC average 4,8258.0+ 1.24.2 EFTA average 6,8353.6-1.43.0 France5,2217.0+ 24.0 Germany4,2819.0+ 55.0 Italy3,42513.0+ 24.9 UK6,8472.0-52.4

57 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration 1950 GDP (1990 $)European Rank 1950Change in Rank 1950- 1973 GDP Growth Rate EEC average4,8258.0+ 1.24.2 Netherlands5,85053.4 Belgium5,3466-23.5 France5,2217+ 24.0 Germany4,2819+ 55.0 Italy3,42513+ 24.9 EFTA average6,8353.6-1.43.0 Switzerland8,939103.1 UK6,8472-52.4 Sweden6,7383+ 13.1 Denmark6,6834+ 13.1 Norway4,9698-43.2 Finland4,1311004.2 Austria3,73111+ 24.9 Others average2,40114.3-0.35.2 Ireland3,51812-33.1 Spain2,39714+ 15.8 Portugal2,13215+ 15.6 Greece1,5581606.2 For Comparison USA9,5732.4 Japan1,8738.0

58 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration 1950 GDP (1990 $)European Rank 1950Change in Rank 1950- 1973 GDP Growth Rate EEC average4,8258.0+ 1.24.2 Netherlands5,85053.4 Belgium5,3466-23.5 France5,2217+ 24.0 Germany4,2819+ 55.0 Italy3,42513+ 24.9 EFTA average6,8353.6-1.43.0 Switzerland8,939103.1 UK6,8472-52.4 Sweden6,7383+ 13.1 Denmark6,6834+ 13.1 Norway4,9698-43.2 Finland4,1311004.2 Austria3,73111+ 24.9 Others average2,40114.3-0.35.2 Ireland3,51812-33.1 Spain2,39714+ 15.8 Portugal2,13215+ 15.6 Greece1,5581606.2 For Comparison USA9,5732.4 Japan1,8738.0

59 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Empirical evidence: Are growth and integration related? Econometric evidence Medium term growth bonus, but no long-run effects ·Badinger 2005a, 2005b, ·Coe/Moghadem 1993; Italianer 1994, Henrekson 1997 EU Eastern enlargement: CGE simulation evidence GDP level effect of 0.2-0.3% for EU-15 GDP level effect of 2-4% for NMS-10 Germany: GDP level effect of 0.4-0.6% e.g. Baas/Brücker/Hönekopp 2007; Baas/Brücker/Hauptmann 2009; Keuschnigg/Kohler 2002

60 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Capital Market Integration

61 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Microeconomics of capital market integration

62 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Microeconomics of capital market integration Consider case where in initial situation capital per worker differs across countries. Interest rates differ as well.

63 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Microeconomics of capital market integration Integration implies that capital stock per worker converge, such that eventually capital stocks and interest rates are the same across countries.

64 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Microeconomics of capital market integration Home country (left axis) receives capital from foreign country (* denotes the foreign country), while foreign country (right axis) sends capital to home country.

65 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Microeconomics of capital market integration ‘Native’ capital-owners in Home lose area ‘A’; Home labour gains area A+ B; Total economic impact on Home citizens equal to area B

66 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Microeconomics of capital market integration Foreign capital still employed in Foreign gains F; Foreign labour loses D+F; total impact on Foreign-based factors is -D.

67 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Microeconomics of capital market integration if we count the welfare of Foreign capital owners whose capital now works in Home (gains C+D), so overall Foreign welfare gain is C.

68 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Growth effects and capital market integration Microeconomics of capital market integration Thus, net earnings increase in both countries, but labour loses in foreign and capital loses in home country.

69 Prof. Dr. Herbert Brücker Lehrstuhl für Volkswirtschaftslehre, insbesondere Integration Europäischer Arbeitsmärkte Universität Bamberg | herbert.bruecker@uni-bamberg.de | www.uni-bamberg.de/sowi/bruecker Theory and Politics of European Integration Integration of Labour Markets NEXT LECTURE December 10