Edited by Adriaan Dierx, Fabienne Ilzkovitz and Khalid Sekkat
Chapter 2: The impact of a single currency in Europe on product markets: theory and evidence
Michael Gasiorek, Russell Davidson, Steve Davies, Bruce Lyons, David Ulph, Richard Vaughan and Alan Winters INTRODUCTION A key economic objective of integration in Europe is to increase economic welfare by reducing or eliminating barriers between markets. That process of barrier reduction inevitably leads to structural changes in European markets which impacts upon both allocative and technical efﬁciency. The (positive) impact on efﬁciency may yield static welfare gains as well as dynamic welfare gains through engendering a potential increase in growth rates. The extent and nature of the impact of any process of integration depends to a large degree on the effect that barrier reductions or eliminations have on product markets. Hence the primary impact of the Single Market Programme (SMP) was to reduce the costs of trade or market access between European economies. The mechanisms generating structural changes in product markets are then typically seen to be the following. The reduction in trade costs should in the ﬁrst instance increase the intensity of competitive interaction in European markets. In imperfectly competitive industries the increase in competition leads to reductions in price–cost margins, potentially reductions in proﬁts, and hence to a degree of industrial restructuring. The direct impact of barrier removal as well as any subsequent restructuring could in turn also lead to a greater exploitation of economies of scale. The welfare gains thus derive from the standard triad of potential gains under imperfect competiton – increased variety, economies of scale and the procompetitive effect. The creation of...
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