IMPACT OF EUROPEAN INTEGRATION:

WHICH RELEVANCE FOR LATIN AND CENTRAL AMERICA?

MARCO LOPRIORE

Atlas Study Visit

Montevideo, November 5, 2002

TODAY’S AGENDA1) Internal market

- Impact on prices, benefits for companies- FDI and trade

2) Cohesion - Impact on closing development gap- Macroeconomic impact on trade balance

3) Enlargement - Impact on trade with Central and Eastern Europe- And with Mediterranean area

4) Economic and Monetary Union - Macro impacts - Regional

INTERNAL MARKET

INTERNAL MARKET – CECCHINI REPORT 1988 (A)

• Delays at frontiers for custom purposes, administrative burdens impose costs on trade, restrictions on competition for public purchases, Restrictions on financial and transport sector;

• Empirical estimates: frontier formalities cost 1,8 % of value of intra EU traded goods; technical regulations cost 2% of companies total cost;

• Forecasted: Increase in GDP of 5% or 20-30% intra EU trade

• Too optimistic ?

INTERNAL MARKET (A)

• Impact on public purchase: imports of public sector from 6% in 1987 to 13% in 1997;

• Impact on peripherical regions: (Portugal, Ireland, Greece);

• Prices are becoming more similar (except for motor vehicle - see table);

• Large industries reap benefits: in particular from smaller countries (Greece, Finland, Denmark, Ireland);

• Difficulties of SMEs (higher fixed costs);

CAR PRICE DIFFERENCES IN EUR10: annual average of difference of highest to lowest price in %

• The introduction of the euro has not yet had an impact on manufacturers’ pricing policies:

• the highest price can still differ more than 25% from the cheapest country within the euro area

PARTICIPATION OF LARGE COMPANIES IN INFRASTRUCTURE PROJECTS

PROJECT MANAGEMENT CONSORTIUM

SUBCONTRACTANT ENTERPRISES

Athens-Sparta airport Athens Internation Airport Co. (Gr-D): Hochtief AG (D)

ABB Airport System (Switzerland-D), Airsys Navigation System (D-F), Milgo Solutions (USA)

Rio-Antirrio Bridge Gefyra (F-Gr): Vinci (F)

Kinopraxia Gefyra (F-Gr): Dumez-GTM (F)

Thessaloniki underground

Thessaloniki Metro SA (F-Can-Gr): Bouygues (F), Bombardier (Can), Systra (F)

Bombardier Transportation (Can), Loughbrough (UK), Alcatel (Can)

Athens underground Attiko Metro (Gr) Olympic Metro JV (D-F-Gr)

Egnatia road Egnatia Odos SA (Gr) Brown&Roots (UK), Sogerleg (F)/ Omec (USA)/Lahmeyer (D), DeLeuwe Cather (USA), Drosch Consult (D)/ Scetaroute (F)/ Ado (Gr)

Medcenter Container Terminal of Gioa Tauroi

Constship Italia (D): Eurokai (D), BLG (D)

BLG (D)

INTERNAL MARKET(B)

• EU attracted 44% FDI in 1990 compared to 28% in 1980;

• While mergers / acquisitions doubled between 1991 and 1999, only 30% between 1986-1995 were between 2 different Member States;

• Foreign businesses reaping benefits?• US companies produced in 1997 48% of value

added and 44% of jobs in UK and respectively 44% and 33% in NL;

EU INTEGRATION AND TRADE

• Pattern of trade tend to become more similar as EU become more interdependent;

• Intra industry trade is high for all EU;

• Exception for Greece, Ireland and Portugal where it is low because of their development gap in the productive structure;

INTRA-EU TRADE INTEGRATION

• BLUE (B + L), IRL and NL intra-EU trade GDP ratio is higher than 30%;

• Small MS intra-EU trade GDP ratio is higher than Large MS ratio;

• D,E,F and I intra-trade GDP ratio is lower than 15%;

COHESION

REDISTRIBUTING INCOME BETWEEN COUNTRIES AND REGIONS

Million €

Period EL E IRL P EU3 ** EUR12 * EU15 *

Annual average % change in GDP 88-98 1,9 2,6 6,5 3,1 2,6 2,0 2,088-93 1,2 2,0 4,4 2,6 2,0 1,7 1,793-98 2,7 3,1 8,6 3,7 3,2 2,4 2,4

projections 98-02 3,7 3,2 8,0 2,5 3,2 2,1 2,2

GDP per head (PPS), EU15=100 *** 1988 58,3 72,5 63,8 59,2 67,8 106,6 100,01989 59,1 73,1 66,3 59,4 68,4 106,4 100,01990 57,4 74,1 71,1 58,5 68,6 106,4 100,01991 60,1 78,7 74,7 63,8 73,0 105,2 100,01992 61,9 77,0 78,4 64,8 72,3 105,3 100,01993 64,2 78,1 82,5 67,7 74,0 105,0 100,01994 65,2 78,1 90,7 69,5 74,4 104,9 100,01995 65,9 78,2 93,3 70,5 74,8 104,8 100,01996 66,7 79,3 94,1 70,7 75,7 104,6 100,01997 65,9 79,9 103,6 74,7 76,5 104,5 100,01998 66,8 79,2 105,7 73,6 76,1 104,5 100,01999 68,2 82,2 111,7 73,7 78,3 104,1 100,02000 69,2 82,5 118,5 73,5 78,7 104,1 100,0

projections 2001 70,9 83,1 121,2 73,4 79,4 103,9 100,02002 72,5 83,2 122,1 73,7 79,8 103,9 100,0

* Growth rates 88-98 and 88-93: excluding new German LSnder

** EL + E + P

*** ESA95 methodology from 1995 onwards

Source: Eurostat (national accounts) + calculations DGREGIO

GDP and population growth in cohesion countries, 1988-2002

MAP OF EUROPE:THE MODEL CENTRE-PERIFERY

THE PENTAGON:

London, Paris, Milan, Munich, Hamburg

• 20% of territory;

• 40% of population;

• 50% GDP of EU

TRADE EFFECTS OF COHESION POLICY(see next table)

• 25% of the Cohesion Fund returned to rich countries through imports;

• in 1999 this estimation has reached an average of 35%;

• Structural funds have an impact on trade balance in cohesion countries

• In a short term: Greece and Portugal increased their imports towards rest of Europe;

• In a long term: the trade balance will improve;

MACRO ECONOMIC IMPACT OF SF: Trade balance variations in % relative to GDP

COUNTRIES FORECASTS2000

FORECASTS2005

FORECAST2009

Greece -1,56 -1,50 0,01

Spain -0,62 -0,58 0,12

Portugal -2,36 -1,40 0,26

Ireland -0,58 0,02 0,34

FOREIGN DIRECT INVESTMENT AND STRUCTURAL FUNDS (1989-1993)

% of GDP

ENLARGEMENT

• CEEC are already oriented to EU since 1990 - Trade between EU and CEEC grew 20% annually;

• Export compatibility;• Benefits for border countries: Germany, Italy,

Austria;• But strong growth from Portugal, Ireland,

Switzerland and Spain;• UK is compatible but not using it;• Regional effects and frontier regions?

TRADE IMPACT OF ENLARGEMENT

SIMILARITIES IN TRADE STRUCTURESBETWEEN EU MEMBER STATES AND CEEC (1993 and 1997)

Tabella: Similitudini nelle strutture commerciali tra paesi della UE e paesi PECO negli anni 1993 e 1997 

Country EU exports and CEEC imports ("Trade creation")

EU imports and CEEC exports ("Trade diversion")  1993 1997 1993 1997

Austria - 0.98 - 0.92

Germany 0.98 0.96 0.69 0.86

Greece 0.31 0.39 0.53 0.48

Ireland 0.78 0.81 0.51 0.71

Italy 0.94 0.92 0.72 0.86

Sweden - 0.94 - 0.90

United Kingdom

0.93 0.95 0.67 0.87

IMPACT OF EUROMED PROCESS(see next table)

• Free-Trade Area 2010;• 4 of 15 EU Member States are benefiting (F, I, G, UK);• EU invest to improve production process of traditional

sectors: – 80% of textile FDI – 50% of Motor vehicle FDI (sector particularly sensitive

to trade zones – Turkey)• US however important presence:

– 50% of telecoms FDI ;– 41% chemicals FDI;– 48% beverages FDI;

MAIN EUROPEAN AND FOREIGN INVESTORS IN SECTORS OF

MEDITERRANEAN ECONOMIESSectors Principle investors Larger European

countriesTelecommunications

USA (50%); UE (41%) France (15%); UK (6%)

Tourism UE (42%); USA (40%)Arab Countries (15%)

France (21%); Italy (6%)

Car UE (50%); USA (28%); Japan (16%)

Italy (23%)

IT UE (46%; USA (41%) Germany (13%); Italy (13%); France (12%)

Chemical USA (41%); UE (40%) Germany (10%); France (8%); Italy (7%); UK (7%)

Textile/clothing UE (80%; USA (19%) Italy (40%); France (24%)

Food /beverage USA (48%); UE (28%; Switzerland (10%)

France (16%); Denmark (7%)NL (5%)Petrol and gas

resourcesUE (49.5%); USA (38%) France (10%); Italy

(10%); UK (7%); NL (4%)

Economic and Monetary Union

MORE STABILITY THROUGH EMU

• Enhanced stability in all EU countries through coordination and surveillance of economic policies (Ireland, Germany)

• Price inflation reduced from 20% in Greece and 13% in Portugal in 1999 to less than 5% in 2000.

• Lower transaction costs (no exchange costs, risk) with the euro brings increasing market integration and growth: especially for EU countries wich trade a lot with other Euro-area countries

CONCENTRATION AND SPECIALISATION WITHE EMU ?

• Regional specialisation in US – see manufacturing sector in Lake district – Chicago, Theories of Mundell

• Euro and Single Market will bring the same in Europe?

• Vulnerability to sector-specific shocks (assymetric)

• Studies show no fast specialisation/concentration• Ireland only very specialised in IT industries