Error! No text of specified style in document. Optimal Integration in the Single Market: A Synoptic Review A Europe Economics report for BIS April 2013 - 1 - Europe Economics is registered in England No. 3477100. Registered offices at Chancery House, 53-64 Chancery Lane, London WC2A 1QU. Whilst every effort has been made to ensure the accuracy of the information/material contained in this report, Europe Economics assumes no responsibility for and gives no guarantees, undertakings or warranties concerning the accuracy, completeness or up to date nature of the information/analysis provided in the report and does not accept any liability whatsoever arising from any errors or omissions © Europe Economics. All rights reserved. Except for the quotation of short passages for the purpose of criticism or review, no part may be used or reproduced without permission. Contents Summary .................................................................................................................................................................................... 0 1 Introduction .................................................................................................................................................................... 7 2 What is the Single Market and what Policies are used to Create and Sustain it? ......................................... 8 2.1 Trade and comparative advantage .................................................................................................................... 8 2.2 Barriers to trade ................................................................................................................................................... 8 2.3 International trade agreements ......................................................................................................................... 9 2.4 Non-tariff barriers .............................................................................................................................................. 11 2.5 Customs union vs Single Market ..................................................................................................................... 13 2.6 Mutual Recognition, Harmonisation and Best Practice spreading........................................................... 15 2.7 Alternative goals for the Single Market project and their import for mutual recognition versus harmonisation ................................................................................................................................................................... 18 3 How to Assess Optimal Integration in a Single Market ..................................................................................... 20 3.1 The Trade-offs in a Single Market ................................................................................................................... 20 3.2 Procedure for Assessing How Optimal Integration is ............................................................................... 27 4 Measuring Economic Integration ............................................................................................................................. 28 4.1 Methodological issues: “Input” vs “Output” Measures of Integration ................................................... 28 4.2 “Input” Measures of Integration ...................................................................................................................... 31 4.3 “Output” Measures of Integration .................................................................................................................. 35 4.4 Effects of Policy Inputs on Output Measures of Integration .................................................................... 49 4.5 So in which Sectors has Integration been Proceeding most? ................................................................... 51 4.6 Summary ............................................................................................................................................................... 53 5 Concrete Benefits from the Single Market ........................................................................................................... 54 5.1 Gains from Trade Creation .............................................................................................................................. 54 5.2 Competition ......................................................................................................................................................... 58 5.3 Efficiency gains ..................................................................................................................................................... 60 5.4 Innovation ............................................................................................................................................................. 63 5.5 Indicative Quantitative Results ........................................................................................................................ 67 6 Concrete Costs of the Single Market .................................................................................................................... 70 6.1 Trade diversion ................................................................................................................................................... 70 6.2 Process costs ....................................................................................................................................................... 73 6.3 Costs of Regulation ............................................................................................................................................ 74 6.4 Conclusion ............................................................................................................................................................ 77 7 Policy Costs and Benefits .......................................................................................................................................... 78 7.1 How can one Measure Sovereignty Costs and Benefits? .......................................................................... 78 7.2 Sovereignty costs dimension 1: Over-rule and dissent ............................................................................. 79 Error! No text of specified style in document. 7.3 Sovereignty costs dimension 2: Changing balance of your influence over others versus their influence over you — Case study: The financial services sector ......................................................................... 82 8 Conclusions .................................................................................................................................................................. 97 - 2 - Summary This report was commissioned by BIS from Europe Economics, and is an input to BIS’ synoptic review of the Single Market. That review has three key objectives: to consider the broad issues and main debates underlying the Internal Market as a whole, in particular exploring the level of market integration thought to be necessary for an effective Internal Market, and the mechanisms (such as harmonisation or mutual recognition) for achieving it; to explore the interrelationships between the Internal Market and other areas of competence, and to assess the strength of the arguments that certain other areas of competence are needed to enable the Internal Market to operate effectively; as a result, to assess the implications for the UK national interest of the current state of integration and EU competence in the Internal Market field. This report has considered the following questions: What is the Single Market and what are its goals? The Single Market can be regarded as a trading relationship, extending the European customs union to encompass the stripping away of non-tariff barriers and free movement in capital and labour as well as goods and services, and that has been the main basis of our analysis here. However, the promotion of trade is not the only (or even, arguably, the main) goal of the Single Market — from the beginning its architects have openly identified other goals for the project such as the deepening of political and social linkages between the peoples and regions of Europe. What are the tools by which integration in the Single Market is promoted? Key tools include the stripping away of internal tariffs and the imposing of a common external tariff Treaty commitments by governments to the principles of free movement of goods, services, capital and labour, to the liberalisation of markets, and to common principles of competition and the addressing of externalities mutual recognition of the regulatory and other requirements of other Member States harmonisation of regulatory and other requirements across the EU the spreading of best practice common frameworks for economic regulation (e.g. of utilities) How should we understand the question of whether integration within the Single Market is optimal? Membership and development of the Single Market entails a number of trade-offs, between numerous benefits and costs of participation. In order to evaluate how optimal Single Market integration is (allowing consideration of in which sectors integration should go further and in which sectors integration has already achieved all it can or even, perhaps, gone too far), it is necessary to assess the balance within these trade- offs. We identify the following positives of enhancing the Single Market: Summary