Diego Varela: The European Union single market, economic development, and related policies

Diego Varela: The European Union single market, economic development, and related policies


Good morning everyone and welcome to a
new lecture in our Jean Monnet open online course of European integration, which this year is particularly focused on economic development. As you know, this course is part of a Jean Monnet Chair that is funded by the European… by the
European Union through the Jean Monnet programme, and it has co-funding also from the University Alexandru Ioan Cuza from Iasi, and from Stefan cel Mare University
in Suceava. These are our three main sponsors for this course. We have already
more than 80 students taking this course mainly from five different places, from
Zhytomyr, from Chernivtsi in Ukraine, from Nigeria, from Lagos, Nigeria, and from
Suceava and Iasi in Romania, and the number is still growing. Today’s topic is a very
important topic, in fact, it is the most important topic of the whole course
because today we will discuss about the single market, the European single market,
and, you know, the European Union has lots of policies. The European Union has also
a budget, it has some spending. The European Union also has some foreign policy, but the
main policy of the European Union, what is the basis of the whole European Union,
is the so called single market, it’s the internal market. And this is
from the start like that, it still remains the most important policy, but it was
from the creation of the European Economic Community with the Treaty of
Rome in 1957. It created a common market. When the European Economic
Community was presented to people, the common name given to it by everybody,
by newspapers, by commentators, and by the people, is the common market, we are
creating a common market. And a common market is a form of European integration. This course is about European integration and we will see that there
are many kinds of integration that you can have economically. You can have
integration that means that you have a preferential trade agreement, that you
reduced the barriers to trade between the countries, that you reduce for
instance your tariffs with a certain group of countries. This is called a
preferential trade agreement. What you can do is that you can remove all the tariffs for the members of the club, and this would be called a free
trade area. But in a free trade area there’s free trade among the members of the area,
but this doesn’t mean that they have the same policy towards third countries. In a
free trade area you do not have tariffs among members but each member can still have differential tariffs with other third countries. For instance, Norway, or Switzerland, or other countries, they…
they eliminate the tariffs with the European Union but they have their own policies towards third countries. A common… a customs union means that you eliminate
the trade barriers among the members but then you must have a common external
tariff for third members. This is a common… this is a customs union. But from the
start, from 1957 from the Treaty of Rome, from the creation of the European
Economic Community, the EEC was more than that. It was more than a preferential
trade agreement, more than a free trade area, more than a customs union. It was a
common market. And a common market, in addition to eliminating the barriers to
trade, it eliminates the barriers to the movements of factors of production, such
as capital and labour. So from the start, from the creation of the EEC in ’57, the
idea was to eliminate not only the barriers to trade in goods and services,
but also to eliminate the barriers to the movements of factors of production:
the movements of capital and the movement of labour, the movement of
workers, in the European Economic Community. So from the start this is the…
the basis of the European community, and now of the European Union, is this common market. In the late 1980s and early 1990s, there were concerns about the progress
of European integration. There were concerns that the Common Market was not
fully realized, that, yes, it had managed to eliminate barriers to trade such as tariffs, taxes, customs duties between countries, but there were still, there were many barriers to trade remaining among countries, and these barriers were of many
kinds, and they were called non-tariff barriers. They were not tariffs or
customs duties, not taxes at the border. There were barriers of other kind, such
as physical barriers, the fact that there were still border controls and the
trucks… they had to stop in the border and to wait for a long period for border
controls, these are physical barriers. Technical barriers, the fact there were
different regulations in different countries that make it difficult for for
products to be sold in other countries. For instance, probably you have heard about one famous case, it’s called Cassis de Dijon. It was about a French liqueur
called Cassis de Dijon that could not be sold in Germany because this liqueur had
20 degrees of alcohol and in Germany the problem was that with that alcoholic
strength it could not be marketed as a wine because it was too strong to be
sold as a wine, and it could not be sold as a liqueur because liquor should have
more alcohol than that, so it did not fit within the wines,
it did not fit within the liquors, and it was not allowed to be sold in Germany,
and this was a problem. This is a very clear example of a non-tariff barrier of
a technical kind. There are also fiscal barriers to trade. Also if we are talking
about wine, if you know that France is a big wine producer, also Romania is a big
wine producer. The tax for wine, the excise for for for wine in France is
just three cents per liter, three euro cents per litre, yes? And the tax for wine
in the UK is three euros per liter of wine. These are just different taxes in
different countries yes like you have different taxes on tobacco, or different
taxes on fuel, you can have different taxes on wine. But the fact that in the
UK the tax on wine is three euros per litre and in France is just three cents
per litre is no coincidence. It is because, in the… in France… it’s a wine
producing country and the UK… it is a wine importing country. So creating a
high tax on wine in the UK, you say it’s an internal measure, but it’s an internal
measure that has has external effects for trade, and this is also like a fiscal
barrier, and it needs to be harmonized, yes? So all these kinds of barriers, physical, technical, fiscal barriers, needed to be
eliminated and there was a report, it was called… it was a scientific report
commissioned by… by the European Community. It was called the Cechini Report. It was paid for by the European Commission, that was entitled ‘The Costs
of Non Europe’ and it was about all the benefits that the European Union could
have if it advanced in integration by eliminating these kinds of non-tariff
barriers and creating the so-called internal market. This report identified
big gains from… from eliminating these barriers, and the title of the report, The
Costs of Non Europe, it means precisely that there are these benefits of
integrating Europe and, if we did not achieve these benefits, if we did not
implement this single market program, we will… we would lose those, the potential
benefits. Vlad, welcome we put you in mute. Vlad Kuchevsky has just joined. Now
it’s easier for me to remember the names of the students because they all have
their pictures from the website. There are some students who are afraid, who are
shy, who do not want to put the picture, and so on, but it is something that we
need so that it’s easier for us to know each other. Now we have also introduced
another innovation, which is the creation of teams, so you will be working in teams
with other colleagues, in teams of three people, multinational teams with people
from different universities, and your final grade will be based on the results
of the whole team, so it’s very important for you to know
the members of your team, to know your colleagues. If you are in Iasi, it’s
important for you to know your colleagues in Chernivtsi, or if you are in Suceava, you should know you also your colleagues in Zhytomyr or in Nigeria. This is something that I do to encourage
you to benefit to the most from this course and from the fact that we have so
many students from so many different places, which is something that
differentiates us from other regular courses that you may have at your… in
your universities. They may have few students, and the students usually come from the same place. This is not our case, and that’s why I encourage you to meet your
colleagues, and I encourage you to contact them and to encourage them to
work as hard as as possible. Another… another colleague has joined. So we were
discussing about the single market and the elimination of these barriers. This
single market program was promoted by a British Commissioner. He was called
Lord Cockfield, and he he was the promoter, the big promoter of the single
market initiative. This is an example how the UK has been a big promoter of
European integration and we owe a lot to the UK for what the European Union is
today. It’s a bit real pity if the UK leaves the European Union with this Brexit process. So Lord Cockfield promoted this programme and he identified 300 measures that needed to be taken, 300 pieces of legislation,
and he set a deadline, the end of 1992, in order to achieve the single market. The
single market in general has been a success. By the end of this deadline the
vast majority of those measures had already been implemented, and the single
market… This course that we have in this year should be focused on economic
development, so what’s the effect of the single market on economic development?
The effect of the single market on economic development has been studied by the Cecchini report before the single market, and there have been other studies commissioned by European Union institutions such as the European
Commission or the European Parliament to try to measure empirically the benefits
of the single market. And there have been also independent studies trying to
measure these benefits from the single market. In general these studies differ
from one another as to the extent of these benefits. They agree that the
single market brings benefits, but there are differences between them and those
difference are due to the fact that it is very difficult to measure the
benefits of the single market. Why is it so difficult? Well, it is very difficult
because it is difficult to know what would be the evolution of the economy in
the absence of the single market. So if Ukraine for instance was to join the
single market, and there were some growth in the
economy, it’s always difficult to know if this growth is due to the single
market or to other changes in the circumstances of the Ukrainian economy.
So this is called the problem of the counterfactual, to know what would happen if… if we did not implement the single
market, the economy would not be static. It would evolve anyway and we do not
know how much, so this makes it difficult to measure the impact of the single
market. The second reason why it’s so difficult… it’s because the benefits of
the single market take very long. The benefits of the single market on the
economy are not just benefits that you reap in one single year. Many of those
benefits are related to increased competition, are related to the
reorganization of production, are related to the elimination of monopolies, to the
change in the size of firms, and many of these changes take time. And from an
economic point of view, from the point of view of economic analysis, these changes
can take up to 70 years, so the effects of the… of the single market initiative
from… from the 90s, from… from 1988, from 1992, can be felt even 70 years later to
that, so that’s why it’s very difficult to measure the impact of the single
market. But to summarize a little bit all the studies, and not only those
commissioned by public institutions, but also independent ones, what I can tell you is that the effects of the single market on
economic development in the long run, in 50 years time, are estimated to be
between two point five and ten percent, yes? Between two point five and ten
percent growth due to the single market, but this is in the long run, yes? This is
very funny to say that the benefits of the single market are in the long run, in
50-70 years because then a president or prime minister can tell you
‘the single market is good for you, but the benefit will be in seventy years’. In
70 years either you will no longer be here to complain to the prime minister
or the president, or they will already be dead, or it… it doesn’t matter. There’s
a there’s a joke in Spain that’s about a gypsy and about… I think it’s a donkey,
and says that he can make the donkey speak, he knows how to teach them donkey how to speak, and he may wants to make a bet, and if I manage to make the
donkey speak you give me 10,000 euros, and if I don’t manage I give you 10,000
euros, and he says, okay, I bet this with you. And then he [the gypsy] says: ‘Yes, but you know, it takes time to teach the donkey to speak, it takes me at least 20 years to teach
the donkey to speak’. And the other person says: ‘Okay, it’s reasonable, you
know how to make a donkey speak, it’s difficult, it may take 20 years.’ So they
make the bet, and then they [other gypsies] say: ‘But you are crazy! How did you bet? You will
not manage to make the donkey speak in 20 years!’ And he [the gypsy] says: ‘Don’t worry. You know, in 20 years either the donkey is already dead or I
am already dead or the other person is already dead!’ So this is the problem when
the benefits of the single market take so long. But what I wanted to discuss
with you today is something that I considered to be very important for
regions such as the region of Suceava, the north-east of Romania, or regions
such as the… the Ukrainian regions, such as regions of Donbass, for instance, how European integration effects economic development but not only at the
national level, but also at the regional level inside the nations, yes? And this, I
think, it will help us understand some… some things. We said that European integration was a discriminatory agreement. When you say: ‘I
will integrate with Europe’, you say that you will integrate with Europe more than
you will integrate with other countries in the world. And this is… this is, in
general, this is a liberalizing measure you say: ‘I liberalise trade with EU’ but it’s
not the kind of liberalisation that Adam Smith proclaimed when he said the… the
wealth of nations… free trade, yes? Because he meant free trade with every nation,
not just free trade with a particular set of nations. And the the idea is that… these discriminatory agreements, it’s
true that they liberalise trade, and they can create trade and they can bring
benefits, but it is true also that they can create costs. And there were some
famous economists that analyzed those costs such as Viner or other economists
that mentioned the… the ideas of trade creation and trade diversion. And I
will explain this to you with an example. I like to put examples, and I will put an
example to you now. Let’s ask our people in Chernivtsi. Iryna, are you there? Is
it clear so far? We cannot hear her. Is it clear so far? Because now I will give you an example that is very important for Ukraine and for understanding the consequences of European integration in
Ukraine, ok? Good, thank you. We put you in mute. How about Valentina? Hi, is this clear so far? Now we have two groups in Chernivtsi, yes? So they say
it’s clear too. What I will say now, pay a lot of attention because it will be very
important for Ukraine, but very important not only to understand European
integration and the benefits for the country as a whole, but also in order to
understand some conflicts that can happen inside Ukraine, okay? Good, I put you a mute again. Imagine that you are in Ukraine and you like vodka, yes?
I think I have a cold now because on Sunday I had an ice cream. I was working very hard the whole week and on Sunday I said, now I have an
ice cream. And I had the ice cream and I got cold, and vodka is very good when you
are cold, yes? But imagine that in Ukraine you like
vodka very much, yes? And imagine that you buy your vodka from Russia, and you buy
Stolichnaya Vodka from from Russia, and this… this vodka imagine that you
buy it from Russia because it’s good and because it’s cheap, because it’s good and
because it’s cheap, and and the… the idea is that when you make an agreement
with the European Union, with European integration, this agreement is a
discriminatory agreement. It means that you eliminate your tariffs with the
European Union but you do not eliminate them with Russia, for instance. And what
can happen in these cases is that sometimes you were importing vodka from
Russia because it was better and cheaper, but after the elimination of tariffs
with the European Union, you will end up buying your vodka from a
country like Finland, for instance, and this is because consumers, when they go
to the supermarket, when they go to Auchan, or when they go to a shop, and
they have to buy, they will see maybe that Finnish vodka will be cheaper than
the Russian vodka. But it will be cheaper not because it’s really cheaper for
Ukraine, but it’s because the Finnish vodka does not have the taxes… the import
taxes that the Russian vodka will have. So this means that your trade is
determined no longer by the comparative advantage between the
countries. It is determined in this case by taxes, yes? And this is something that is
called trade diversion, and it’s considered something bad, yes? But what I
will do now… when you join the European Union you have to look at trade creation
and trade diversion and you say: ‘it pays, because trade creation is more’. But what
I want to tell you is that the benefits, such as trade creation, and the costs of
European integration, such as trade diversion, are not are not evenly
distributed in a country, and I will give you an example now. And I have here with
me, because today is Spain’s day, I have some people with me that will help me. It’s a holiday today. Say ‘hola’. Say ‘dobroho ranku’. Dobroho ranku! Very Good! Good morning! This is my my wife Anca. I don’t know
if you can see her, yes? When I was in… when I was in Romania many
years ago, before we got married, we liked to go to Chernivtsi, yes? And we liked to
go to Chernivtsi to the bazaar in Chernivtsi to buy things there. And in fact
we went there twice, I think, to Chernivtsi bazaar, yes? And one of those times even
we we bought a wedding dress for the wedding we bought it in Chernivtsi… David… The wedding dresses there were so good, and so cheap, yes, that she was like trying
them, and so on, and she said: ‘I don’t know which one to buy, I like this one, I like
the other one…’ And I said buy both because they were so good and so cheap, and it
was very good. And who was it who took us there to Chernivtsi, it was your aunt? Yes, it was my aunt, tanti Maricica. She took
us there because she was in the business of going to Chernivtsi from Suceava and buying in Chernivtsi and then bringing things to Suceava and sell them
in the Suceava bazaar, yes, in the market in Suceava, and it was
it was very good. I liked also… I liked going to the bazaar in Suceava very much,
and I… and I liked to go to the areas where… what they called the
Russians were. They were not Russians. They were Ukrainians, but we call them
the Russians there in Suceava, and I bought many things there. I bought
watches, and I bought chocolate from
Ukraine, Roschen chocolate, I bought many, many kinds of of things there. I liked it very
much. But with the passage of the years something changed, something
changed there, because when I went to the bazaar in Suceava, I couldn’t find the
products that I used to buy. The so-called Russians that were Ukrainians
were not there so much. The products were not there and when I told tanti Maricica take us again to Chernivtsi because if you want to go to Chernivtsi you need to go to a specialist person to cross the border, yes, and you went in a special…
in a van with other people who were experts in import-export from there. You had to bribe the border guards and… and it was good, it was fast. But this changed because Tanti Maricica at one given point told me: ‘I’m no longer
going to Chernivtsi’ and I said what happened? She said: ‘now it’s impossible to… it’s too many problems in the border, to cross
the border, it’s much more controlled due to the European Union, and now I can no
longer go there and I now I buy my… I buy clothes from from the Turks, Turkish
clothes, I go to Bucharest and I buy Turkish clothes there.’ Why? because they
are better than those produced in Chernivtsi? No, it’s because the ones
in Turkey… Turkey is in a common market with the European Union and has free
trade with the European Union, but Ukraine does not have it, and this is
called trade diversion when you change your trade not because of the real
advantage, the real reduction in costs, but also because in one case they do not
have tax and in the other case they have the tax. And this is what happened to me
and this made me… this made me frustrated because I liked going to Chernivtsi very much, you know, but I didn’t like to be there at the border for one hour, yes,
with the increased controls, and I didn’t like that prices were higher, and customs duties, and so on, and I didn’t like going to the Bazaar
in Suceava and not seeing the products that I had before. And I realized how
European integration can affect some region differentially from other region
because when I saw, for instance, Timisoara in Romania, I saw that Timisoara, you know where Timisoara is, Timisoara is close to Hungary, and when they joined the
European Union, Timisoara boomed economically, yes, because they had a
country next to them where they could export and everything had to go through
Timisoara and Timisoara a lot of trade and lot of foreign investment and so on. But the Northeast region of Romania, the region that was close to Ukraine, that
was close to the Republic of Moldova, was suffering very much from European
integration. There was even a train station in… what was the name of this train station, not the main one, not the one… Itcani!
There’s a train station in Itcani, beautiful one, architecturally very
beautiful, and it is now completely empty, and it is now closed, full of dogs, you know, straw dogs, and full of criminals. It’s closed there, Itcani, yes? And this was the railway station that connected Romania with
Ukraine, yes? So you can see the effects of European integration and you can see
that these effects can be felt differently in different regions. In the
case of my political aunt Tanti Maricica, it meant that she no longer could
do her business of going to Chernivtsi and bringing things from there, yes? In
the case of people who work in bazaar in Suceava it means that bazaar is almost
closed now, and now you have Auchan and you have Carrefour but you do no longer
have the bazaar, yes? You have the mall. Yes, maybe now you may… you may have Carrefour and you have Chinese clothes or Turkish clothes or from other countries because they are cheaper
than the ones produced in Chernivtsi, yes? So this was an example of how
European integration was not so good for the Northeast region of Romania. Let’s speak to Carmen Nastase, because she’s with us now. Carmen, remove your mute,
please. Carmen! I think she cannot remove the mute, because I cannot
hear her. No, she doesn’t know how to remove it. It doesn’t work. It doesn’t matter. Carmen Nastase is from Suceava. I wanted confirmation about this thing, but
the main idea is about Ukraine, yes, and this is a message for the people in
Chernvtsi, yes, and it’s a message to tell them: if you join the European Union,
you will not be like Suceava, yes? If you join the European Union you will be
like Timisoara, and it will be very good for you, Chernivtsi, if you join the
European Union. And it is very understandable that you like European… the European Union very much and that you are very excited about joining
the European Union because it will be really good for you. It will be even good
for Suceava too, yes, because Suceava will no longer be the end of the world,
yes? Because the European Union has an external border that is very closed. It’s
sometimes called fortress Europe and if you have the external border you are in
the end of the world. It’s not good for your economy. But if Ukraine joins, it
will be good for Suceava too. In Ukraine it will be also very good for
Lviv, next to Poland, and they like the European Union very much. It will be very
good for them, yes? But you know what will happen to Donbass if Ukraine joins the
European Union? What will happen to them is the same that happened to the
northeast region of Romania. What will happen is that their whole industry, their
whole business, will be destroyed, and that they will be the end of Europe, yes? They will be the external border of the EU, they will be forced to implement
strong controls in the border. People who like to import things from Russia, they
will no longer be able to import them, yes? And it it it will be really hard for
them, yes? So the European Union, European integration can be something great for
Ukraine, yes? But it is important for us to understand that the effects of
European integration are differential. There are different effects in different
regions and this can explain some conflicts that were created in Ukraine
when the decision was taken to integrate in Europe. These are not crazy conflicts. There’s reason behind them, yes? And I explained to you one of the reasons the
European Community, the European Union now, they have policies to try to, how do
you say, compensate for some losses. The European Union has a regional policy,
structural funds, it has a social policy. It has policies to give money to those
regions that are suffering the most, that are lagging behind, or even to those social
groups that are lagging behind. In Suceava they know about this very much
because all their industry in Suceava has disappeared, and a new industry has been created, which is not about producing anything. It
is about receiving European funds, yes? It’s the industry of applying for
European funds, yes? This could happen in Donbass too but maybe they don’t like it
so much, yes, this kind of industry. So we should understand all these
differences. Also, these differences, they can happen at the level of people. If
European integration, if you export something, if you are a producer that
exports something in other countries, it will be beneficial to you, because your
demand will increase, yes? If you are an importer of foreign goods and now they
will be cheaper, it will be good for you also, if you are a consumer that buys
imported goods, yes? But if you are a consumer of goods that are exported you
will not like that so much. For instance, if you are a consumer of wheat, wheat
flour produced in Ukraine, and now Ukraine will export that to the EU at a
greater price the prices for wheat will increase in Ukraine in you, as a consumer,
you will not like that. If you buy Roschen chocolate in Ukraine, but now
they join the EU and export Roschen chocolate to Spain or Portugal, or to
France or Germany, and the price will increase and it will be bad for people
who buy that chocolate in Ukraine. But this happens, you know, the common market is also about the movement of people. If you are a Ukrainian worker and you say, ‘now I will be able to go and work in the UK’ or maybe the UK is no longer a member
and you go to work in Germany, and you will like it very much, because
you will be able to have a higher wage there. But the workers in Germany or the
workers in the UK, in the country that receives you, they will see competition
from cheaper workers and better workers from Ukraine, and they will not like it. And this is what happened in the UK, yes? In the last…, in the last year, 74,000
people from Romania and Bulgaria arrived in the UK, yes, to live and work
there, and this creates social problems, because many local workers that see
that they lose their jobs because of this competition from other workers. So the general idea: European integration is a really, really good thing. European
integration can increase your productivity and can increase
national income by up to 10% in the long run, so it’s something really, really good,
really positive. But these benefits… they are not evenly distributed, they vary
across regions, they vary across social groups, and we should be aware of that.
In the next lecture, next week, we will concentrate on some policies that the
European Union has to redistribute income between countries, such as regional policy, or social policy, expendidure… expenditure policies. I hope it’s clear
so far. Is it clear with Iryna’s group in Chernivtsi? Or with Valentina’s group, it doesn’t
matter, yes? Okay. The European Union also has some other policies that try to
increase efficiency, try to make the single market work better, yes, and they
try to solve some problems that may happen with the market, to solve some
cases of market failure. These are for instance competition policy, it’s very
important in the EU. Competition policy is the fight against monopolies,
or competition policy it’s the fight against agreements between firms in
oligopolies, when the… the oligarchs… they agree between them to increase the
prices. The European Union has policies against… against imperfect competition,
yes? The European Union also has a European environmental policy. For
instance, if you have a coal power station, and you burn coal to produce
electricity, and this coal when it burns creates pollution,
and this pollution is in the air, and this pollution with the wind goes to
different countries, and the European Union has some environmental standards
that try to avoid these kind of problems that are called, in economics,
they are called externalities, external effects, yes? So European Environmental Policy fights externalities. Also you think about
transport policy in the EU, when the EU creates Trans-European Networks, when the EU creates a highway that goes from Romania to
Germany, who should pay for that highway? Should it be Romania, should it be Hungary,
should it be Austria or should it be Germany? Who should pay for it? The European Union
manages that. Many more examples. Fisheries! I don’t know, in Ukraine, if
fishing is very important but the European Union also has a Common
Fisheries Policy to try to regulate fishing and to prevent overfishing,
because the waters are like the air, they are also common. If you overfish in some
place, it can have a negative effect over other places. There are common pool
resources and the European Union deals with that. These are some examples,
competition policy, environmental policy, transport policy, fisheries policy, that
try to solve some market problems and to make the single market a better
market. Next week we will deal with redistributive policies such as regional,
and social policy, and we will deal also… try to explain why the European
Union has some kinds of policies, but you will see that they are related to the
single market, and what I mentioned before about the effects of the single
market that are unevenly distributed. And, therefore, here you have another
reason why the topic today, today’s topic, the single market, is so important,
because it’s not only the most important policy in the European Union. It has
always been, and it still is the most important policy, but also it affects all
the other policies that are created on the basis of this core policy, which
is the single market. Thank you very much for your attention and see you next week. It’s nice to have so many people from
different countries. Good bye, Carmen, good bye Caterina, good bye Lehaci, Valentina and Iyna. Goodbye everyone!

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