Single European Market

Ideally

• When an economy produces more output it will be based on two outcomes

– The economy should be experiencing full employment

– The real GDP per capita should be growing so that the population can reap the gains and the workers can receive greater compensation

What happened in Europe

• From the 1970s to the 1990s they had economic growth or increases in output

• But they had high levels of unemployment there was no increase in jobs

• And the Labor Compact prevented gains from increases in wages

The Economy of the European Union in Perspective

• By 1993, treaties set up the European Union– EU-15 (The first big group)

• United Kingdom• Ireland• Spain• Portugal• Germany• Belgium• Netherlands• Luxembourg• France • Austria• Italy • Greece• Sweden• Denmark• Finland

More Joined in May 2004

• Eastern Europe and Baltic States– Cyprus– Czech Republic– Estonia– Hungary– Latvia– Lithuania– Malta– Poland– Slovakia– Slovenia

Two more in January 2007

– Bulgaria– Romania

• 2013– Croatia

• By 2013, we are up to 28 members• Note that the definition of what it means to be

Europe is evolving over time—many are beyond the Iron Curtain

Major EconomiesCountry 2006 GDP

(Billions of 2006 $)2006 Population

(Millions)2006 Per Capita

GDP(2006 $)

Germany $2,580 82 $31,300

France $1,899 61 $31,000

United Kingdom $1,941 60 $32,100

Italy $1,657 59 $28,200

Spain $1,225 44 $27,800

Netherlands $579 16 $35,400

Sweden $319 9 $33,100

Belgium $301 10 $32,500

EU-27 (Before Croatia)

$13,018 (2005) 493.0 $26,500 (2005)

Jobs and Productivity:A Trade-Off in Reverse?

• !970s to the !990s– High investment and high productivity growth– Low or no job growth

• US pattern– High job growth– Low productivity growth

• Europe was not following a sustainable path– Not with very high unemployment

Europe was experimenting with different labor market policies

• With different policies, countries were following different paths

• Germany—Bad situation getting worse– Had unemployment rates above 9% for several

years in the late 90s– 2004-2006 had unemployment over 10%

• France—Bad situation getting a little bit better– Had unemployment rates above 11% for 6 straight

years in the 1990s– 200-2006 came down to about 9%

• Italy—Bad situation getting a lot better– Italy had unemployment rates above 11% for the

last part of the 90s– By 2006, unemployment was down below 7%

• United Kingdom—Bad situation getting a whole lot better– Above 10% in 92 and 93– But 2005 and 2006, they were more like 5%

What caused the divergences?• Netherlands and the United Kingdom led the way

in reforming labor market policies– Continue to protect the unemployed, but also provide

incentives to find and take a job• Netherlands as an example– Unemployment compensation had been 80% of

previous wages– The reduced it to 70% (Way above US levels)– Made it more difficult to declare yourself disabled– Taxes for long-term sick leave were tied to number of

employees that end on long-term sick leave• Old way—do not lay off, but declare them sick so that they

could get sick benefits. New way—that would increase corp taxes

General Terms

• Protect the worker not the job• Do not discourage workers from hiring– Too high wages– Too many required benefits– Block firing– Preventing expanding

Where is EU behind?• They are further beyond in areas of

information techno• Especially in areas of retail trade– Like our Walmart and Target

• In areas of wholesale trade• In areas of financial services• Other service based industries that use the

new techno– Like the hospital story

Why is the US ahead?

• We are so much more flexible and willing to reorganize– Both in the front end with the customers and the

back end with production

What could Europe do?

• Single Market Project– Aims to increase productivity by increasing

competition across countries– Many barriers were reduced, but there were still

many different rules and laws– Single European Act in 1986– Single Market Act of 1992• To unify regulations (like safety regulation)• Help to expand competition

More Single Market

• Four freedoms– People– Goods– Service– Capital

• Harmonized literally thousands of regulations across countries (labeling laws, testing procedures, consumer protection laws)

• Limited custom checks (Many rules completely elimated)

More Single Market

• Many now have the right to live, work, and study across Europe

• You can have your bank account in any country

• Use your cash card in any country• Euro• Easier for firms to invest in different countries• Europe has anti-trust policy

What are the gain?

• The first pass shows the gains to be modest– 1986-2006: 1.8% extra GDP and 2-3 million extra

jobs• More Exports outside the EU– 7% of European GDP in 1992– 12% of European GDP in 2005– More competitive and more integrated with

international markets

Limited, but

• Although the gains are limited, there is a hope– Setting the ground work for future growth and

integration– Stable framework– Allow higher savings and investment– Not just a one-time boost, but a sustained

increase

Loss in Momentum • Big start in the 90s, but by the late 2000s

many feel there was a loss in momentum– Cross border investment among the EU-15 in 2000

was 14 times larger than in 1992– But by 2004 investment was only 4 times as large

as in 1992– Why?• 90s had many mergers across borders• But many were reversed in the early 2000s• Trade growth continued to grow, but slowly

Why? Cont..

• Very little labor movement– In the EU-15 before 2004 only 0.1% of the

working-age population changes its country of residence in a given year

– Only about 1% move between a region within a country in a given year

– To contrast about 3% of the population in the US moves to a different state each year

What could Europe do?• Lisbon Agenda: A European Knowledge-Based

Economy?– In March 2000, as it became clear that

productivity was slowing and the economy was not using the new techno as the US,

– Heads of state gathered in Lisbon• Make the European Union the most dynamic and

competitive knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion, and respect for the environment by 2010

European Commission

• Set up to bring harmony to regulations across countries

• Has become a big regulator itself– About 3,500 directives per year• On everything from recycling to noise pollution

– Maybe it is better that the European Commission is issuing these rules as compared to each country

– Attitude has been to limit and constrain business as compare to let it grow or innovate

Limits Limits Limits

• Limits on hours worked• Limits on the ability of the business to expand• Limits on the ability to sign certain contracts• Conditions for hiring• On and on

• They need the ability to shake themselves up

United States of Europe?

• There are people that make that claim– Helmut Kohl, former Chancellor of Germany• The great goal that we and our European friends have

in common—”a United States of Europe”

– EU anthem – May 9 is Europe Day

• Less talk than a decade ago especially with the financial issues