Theorie und Politik der Europäischen Integration Prof. Dr. Herbert Brücker Lecture 8 Growth effects and capital market integration Theory and Politics.

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1 Theorie und Politik der Europäischen Integration Prof. Dr. Herbert Brücker Lecture 8 Growth effects and capital market integration Theory and Politics of Eropean 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 EU trade and … ·Facts –Intra-EU trade –Extra-EU trade –Commodity composition of exports and imports –MFN tariff levels ·Contingent Protection ·EU External Trade Preferences –GSP –EU-Mediterranean Trade Area –CIS and Balkans –Former colonies –Non-regional PTA’s

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 … competition policies ·EU competencies ·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) ·Leftovers –merger control –state aid 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 Theory and Politics of European Integration Growth effects and capital market integration Merger control Initially P=AC. Merger implies lower AC to AC’, but raises the price to P’. CS=-a-b; ‘ripoff’ PS=+a+c Net welfare = -b+c ; ambiguous, ‘efficiency defence’ Laissez-faire (in US and increasingly in EU); if free entry then eventually P driven down to AC’. As in BE-COMP diagram. euros Quantity C’C P’ P=AC a b c Demand curve AC’ Williamson diagram

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 Theory and Politics of European Integration Growth effects and capital market integration State aid economics Look at two cases: Restructuring prevention. Unfair competition.

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 Theory and Politics of European Integration Growth effects and capital market integration Restructuring prevention Consider subsidies that prevent restructuring Specifically, each governments make annual payments to all firms exactly equal to their losses i.e. all 2n’ firms in Figure 6-9 analysis break even, but not new firms Economy stays at point A This changes who pays for the inefficiently small firms from consumers to taxpayers. Number of firms Mark-up COMP BE FT BE 2n’n”n’ E’ A 1 E” '' AA

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 Theory and Politics of European Integration Growth effects and capital market integration Restructuring prevention: size of benefit Pre-integration: fixed costs = operating profit = area “a+b” Post-integration: operating profit = b+c ERGO: Breakeven subsidy = a-c Net Benefit: b+c+a-c=a+b Sales per firm AC Price Total sales Demand curve Numbe r of firms Mark-upeuros x’ COMP BE FT 2n’ p’ C’CACA pApA x A = 2C A /2n’ pApA a bc E’ A A A MC E’

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 Theory and Politics of European Integration Growth effects and capital market integration Restructuring prevention: welfare impact Sales per firm AC Price Total sales Demand curve Numbe r of firms Mark-upeuros x’ COMP BE FT 2n’ p’ C’CACA pApA x A = 2C A /2n’ pApA a bc E’ A A A MC E’ d Change producer surplus = zero (profit is zero pre & post) Change consumer surplus = a+d Subsidy cost = a-c Total impact = d+c

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 Theory and Politics of European Integration Growth effects and capital market integration Only some subsidise: unfair competition If Foreign pays ‘break even’ subsidies to its firms All restructuring forced on Home 2n’ moves to n”, but all the exit is by Home firms Unfair Undermines political support for liberalisation

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 Theory and Politics of European Integration Growth effects and capital market integration EU policies on ‘State Aids’ 1957 Treaty of Rome bans state aid that provides firms with an unfair advantage and thus distorts competition. EU founders considered this so important that they empowered the Commission with enforcement.

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 Growth effects … Some facts on EU post-WWII growth The neoclassical growth model (Solow-model) Integration in the neoclassical growth model … and 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 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’.

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 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).

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 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.

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 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 → better investment climate → 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

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 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

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 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

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 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+ 24.0 Germany4,2819+ 55.0 Italy3,42513+ 24.9 UK6,8472-52.4

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 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

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 Theory and Politics of European Integration Growth effects and capital market integration Shows medium run growth effects in simple diagram 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

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 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

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 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*

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 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

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 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

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 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

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 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)

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 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 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% (Keuschnigg/Kohler 2002)

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 Theory and Politics of European Integration Growth effects and capital market integration Microeconomics of capital market integration

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 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

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 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.

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 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.

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 Theory and Politics of European Integration Growth effects and capital market integration NEXT LECTURE The Integration of European Labour Markets Reading: Baldwin/Wyplosz (2006), 2006, Ch. 7 Boeri, T./H. Brücker (2005), Why Are Europeans So Tough on Migrants?, Economic Policy, 44, 631-703. December 11.