Growth Effects, Services and Factor Markets Integration. Introduction into Economic System of the EU

Transcription

1 Miroljub Labus Growth Effects, Services and Factor Markets Integration Introduction into Economic System of the EU Faculty of law, Belgrade R.Baldwin and C.Wyplosz: The Economics of European Integration, Ch.7 and 8 J.Pelkmans: European Integration, Ch.7 and 9 Thursday, November 24, :00 20:25

2 Five topics 1. From product market integration to the entire market integration 2. Financial and other services 3. Free movement of capital 4. Free movement of labor 5. Growth effects Goods Services/ Financial services Labor mobility/ unemployment Capital mobility/ Accumulation and growth

3 1. Market services integration

4 Contribution of services to GDP 1. EU 17 (Millions of EUR) 2. From 1995Q1 to 2012Q2 2,500,000 Gross Value Added at market prices 2,000,000 1,500,000 1,000, ,000 - Agriculture Manufacture Services

5 Breakdown of services 1. EU 17 (Millions of EUR) 2. From 1995Q1 to 2012Q2 2,500,000 Services in the Euro Zone 2,000,000 1,500,000 1,000, ,000 - Entertaiment Insurance Real estate Communication Professional Information Public service Whole/Retail

6 A list of services Tourism Consulting Market research Broadcasting Postal services Telecom Electricity and gas Transportation Advertising Construction Audio-visual Banking Insurance Government services Education Health services Local communal services Hotel services Restaurants Coffee shops Entertainment Internet services Cleaning Printing shops Weather forecasting Legal services

7 Classification of services in the internal market Tradable Non-regulated Tourism Consultancy Market research Regulated All services Network-based services Broadcasting Postal Telecoms Gas and electricity Non-Tradable Government services Public education Public health Local services Non-network based services Real Transport Advertising Audio-visual Construction, Financial Banking Insurance Investment Consumer services Hotels, restaurants Health Education Entertainment

8 Services market integration Cross-border services are not tangible and are not subject to tariffs ToR had no specific principles on services market liberalization In 1990 share of services in GDP was 48%, in 2012 it was 70% Job creation in the services sector between amounts to 10 millions compared to 3.5 millions job losses in the manufacturing Tradable services are twice larger than non-tradable services B2B services are less regulated than B2C services Two principles were crucial to promote liberalization of services Free movements Freedom of establishments They directly apply to economic (tradable) services The main obstacle is related to the general-good clause ( fit and proper ), i.e. a general clause that introduces a minimum standard of soundness of market behavior of banks and insurance companies, that is implemented by national supervisory boards

9 From freedom of services to financial market integration European financial area Internal market for financial services Internal market for financial capital and money A single currency Fiscal and accounting approximation For major types financial services Banking Insurance Investment Assets management Banks in the EU provide most of the investment services Banks and insurance companies can merge in EU across the borders The EU case law extends policy of liberalization of goods to liberalization of services Mutual recognition principle (EU passport or license)

10 Financial market integration path 1957 The ToR Unclear, to many conditions 1986 Single European Act Breakthrough The first major revision of the ToR Basic objective was to create a single market in goods by Maastricht Treaty codified four freedoms Impossibility trinity Free movement of capital Pegged exchange rates, and National autonomy in macroeconomic policy Freedom for financial capital

11 Impossible trinity Free capital flow No financial services liberalization Hard peg Monetary autonomy

12 Impossible trinity Free capital flow Financial services liberalization + EUR Hard peg Monetary autonomy

13 Impossible trinity Free capital flow Financial services liberalization Hard peg Monetary autonomy Free float threatens trade

14 Banking sector HQ Branches Branches Branches Subsidiaries

15 Banking sector in Serbia: Exposure to HQs France 12% Others 4% Italy 31% Greece 26% Austria 27%

16 Deepening financial market after 1992 Wholesales Securities settlement Mutual fund directive Pension fund directive Retail Payment directive Insurance directive Anti money laundering directive Horizontal Accounting rules Supervision Financial conglomerate dir. Re-Insurance supervision Basel III directive Cooperation of supervisions EBA Corporate restructuring European company statute Takeover bid directive

17 2. Capital market integration

18 Growth Effects European leaders have long emphasised two different progrowth aspects of European integration: allocation and accumulation effects Better allocation of capital was initial result of free trade across Europe or goods market integration Accumulation effects 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.

19 Verbal logic of growth Growth in income per worker requires more output per worker Nation's labor force can produce more goods and services year after year only if they have more and better 'tools' year after year Tools' means capital broadly defined: Physical capital (machines) Human capital (skills, training, experience) and Knowledge capital (technology) ERGO, rate of output growth is linked to rate of physical, human and knowledge capital accumulation. Most capital accumulation is intentional and its annual addition is called investment Thus: European integration affects growth mainly via its effect on investment in human capital, physical capital and knowledge capital.

20 Verbal logic of growth: summary Higher European output per integration worker Accumulation effects Allocation effects More investments Better investment climate Improved efficiency

21 Solow diagram Shows growth effects in a simple diagram To simplify, start with whole EU as a single, closed economy with fully integrated capital and labor markets and the same technology everywhere.

22 Solow diagram euros/l GDP/L K/L

23 Solow diagram euros/l GDP/L Y/L* B d(k/l) Depreciation s(gdp/l) I o D o A Investment K/L o K/L* K/L

24 Technological progress (capital saving one) euros/l Y/L Y/L c Y/L* Induced accumulation effect Allocation effect C B E GDP/L GDP/L d(k/l) D s(gdp/l) s(gdp/l) A K/L* K/L K/L

25 Integration induced investment rate rise euros/l Y/L Y/L* Growth bonus D B C A GDP/L d(k/l) s (GDP/L) s(gdp/l) K/L* K/L K/L

26 Solow model with population growth Y S S t K L t t A F ( K t 1 I t 1 t s Y t t t, L (1 d) K (1 ) L t t t ) I t K 1 d K 1 s A F( K, L t 1 t t t t k Per-capita terms 1 d k 1 s A f ( k t 1 t t t ) ) A t 1 (1 ) A t Factors of growth k t+1 y t+1 =f(k t+1 ) s δ λ Low(high) level Growth rate f(k t+1 )/f(k t ) Faster(slower)

27 The four poor countries: Growth record befor Global recession GDP per capita compared to France Ireland % 140% 120% 100% 80% Greece 1981 Spain Portugal 1986 Catching-up 60% 40% 20% 0% Greece Ireland Portugal Spain

28 What happened to the Irish Miracle? What created the miracle? 1. Tax haven and inflow of foreign capital 2. Increased public spending and commitments 3. Increased private and public borrowing on the Euro market 4. Heavy investments in the real estate sector...and what caused the crises? 1. Credit crunch and sudden stop of capital inflow 2. Fall of prices of real estate and increase in number of defaults 3. Expensive bailing-out of banks, unsustainable pensions and social programs 4. Borrowing under unfavourable terms 5. Treat of defaults and bankruptcies IMF SBA

29 What happened to Serbia? Use the Solow diagram to analyses the following situation: 1. Serbia s K/L was pushed bellow its equilibrium by war damage to its capital stock 2. EU granted ATP to Serbia that have two effects 1. It increases the efficiency of the Serbian economy (allocation effect) and 2. It raises the Serbian investment rate (s) over next ten years (accumulation effect) Show where the Serbian economy would end up in the long-run.

30 What happened to Serbia after war damage GDP per capita in Serbia $6,000 $5,000 $4,000 $3,000 Recovery Growth $2,000 $1,000 $ Post-war shock

31 What happened to Serbia after war damage euros/l Y/L aw Y/L Y/L 0 B B 0 C B* D A* GDP/L GDP/L d(k/l) s aw (GDP/L) s 0 (GDP/L) A 0 K/L o K/L* K/L aw K/L

32 3. Labor market integration

33 Population change by components, EU-27, per 1000 population Immigration has outperformed natural population change since Turning point Reactions to recession and imbalances

34 Luxembourg Cyprus Latvia Estonia Spain Austria Belgium Ireland Germany Greece Italy United Kingdom Sweden Denmark France Malta Netherlands Portugal Slovenia Czech Republic Finland Hungary Slovakia Lithuania Bulgaria Croatia Romania Poland Average Immigration density Share of foreigners in the resident population, as of Non-EU foreigners EU foreigners Source: Eurostat, YB2013

35 Romania Poland Italy Portugal UK Germany France Bulgaria Netherlands Spain Turkey Morocco Albania China Ukraine Russia India Algeria USA Ecuador Immigration by origin Main countries of origin of non-nationals, as of Citizens of non-member countries Citizens of other EU-27 Member States Source: Eurostat, YB2013

36 Age structure of the EU population in 2011 Age structure of the national and non-national populations Age % 2% 1% 0% 1% 2% 3% Men Nationals Foreigners Women Source: Eurostat, YB2013

37 ECB: Unemployment in the euro zone Shares in total labor force

38 ECB: Unit labor cost (compensation per employee and labour productivity) Rate of growth

39 Labour market is regulated Existing institutions differ from country to country They are the outcome of a long, and often conflicting, history Various forms Collective negotiations Minimum wage legislation Unemployment insurance Payroll taxes

40 Collective negotiations Social objective: protect workers from bosses excessive powers Economic impact: unemployment The role of the degree of centralization Plant level: induces some wage restraint National level: induces some wage restraint Branch level: less restraint The integration and monetary union impact One big market: current degree of coordination in collective negotiations decline One central bank: more wage discipline Will trade unions respond by organizing at EU level?

41 Minimum wage legislation Social objectives Protect the weakest Reduce inequality Economic impact: unemployment of the least skilled The integration and monetary union impact Enhanced competition favors low cost countries Accessions of CEECs sharpens this aspect Trade unions fear social dumping and call for harmonization of social norms

42 Unemployment insurance Social objective: protect workers from a major risk Economic impact: more unemployment The integration and monetary union impact Asymmetric shocks create temporary unemployment Generous insurance may prolong the adjustment Pressure to reduce generosity, mainly duration, of benefits Trade unions fear social dumping.

43 Payroll taxes Social objective: solidarity among workers in financing unemployment, health, retirement Economic impact: raises cost of labor, or reduces wages, or both The integration and monetary union impact Enhanced competition favors low cost countries Incentive to either reduce welfare payments or raise other taxes Politically difficult.

44 How to respond to deeper integration? Deeper integration desirable because it enhances competition on the good markets More competition raises the economic costs of many labor market institutions A sharpening of the conflict between economic effectiveness and social objectives Existing arrangements are threatened by the present crisis.

45 Three possible evolutions Two-speed Europe Deep reforms Social harmonization

46 Possible evolution No.1 Two-speed Europe Some countries flex their labor markets, others retain their highly social existing arrangements Firms and risk-taking individuals move to the most flexible countries Welfare-conscious are attracted by welfare-magnet countries Part of Europe grows fast with low unemployment, another part grows slowly with permanently high unemployment.

47 Two-speed Europe: already there?

48 Possible evolution No.2 Deep reforms Thatcher takes over Europe Labor market institutions made more flexible Labor taxes reduced.

49 Possible evolution No.3 Social harmonization The large countries export their welfare systems through social norms applicable to all EU countries.

50 In the end There is no better way, just different socio-economic equilibria.