Europe Revision: Single Market

Revision notes on aspects of the EU single market

Economics of the Single Market
1. Free Trade in Goods: Businesses can sell their products anywhere in the EU’s member states and consumers can buy where they want with no penalty.
2. Mobility of Labour: Citizens of EU member states can live and work in any other country. The aim is to improve the mobility of labour.
3. Free Movement of Capital: Currencies and capital can flow freely between member states and EU citizens can use financial services in any member state.
4. Free Trade in Services: Professional services such as pensions, architecture, telecommunications and advertising can be offered in any member state.

Single market and economic concepts

1. EU Single Market is a “positive sum game” for member states if trade and competition enhances productivity and reduces costs and prices
2. Lower prices should boost consumers’ real living standards and an increase in competition will lead to improved allocative efficiency / less X inefficiency
3. The size of EU single market allows businesses to exploit economies of scale and scope leading to improvements in productive efficiency.
4. Economic and social costs and benefits from a freer movement of labour
5. Competition should lead to a degree of price convergence between countries – but there will always be price variations within EU for the same products!
6. Encourages cross-border technological alliances – a boost to dynamic efficiency?
7. Strong internal EU economy may be less vulnerable to global external shocks?

Foreign direct investment (FDI) – both within the EU and into/out of EU

Consider the main motivations for foreign direct investment
• Resource seeking – where a business seeks specific resources which are unavailable in the home country
• Efficiency seeking – e.g. businesses seeking to benefit from a more productive workforce, lower wages or from the external economies of scale available in a region.
• Market seeking – e.g. investment to take commercial advantage of growing demand in faster-growing emerging market countries

Vertical FDI is where a company separates / outsources production across a number of locations depending on where unit costs are lowest. For example, Nokia produces mobile phone components and batteries in Hungary and assembles phones in Germany and Finland, where it also has research and development facilities.

Horizontal FDI is where a company locates the same production process in a number of different locations, for example car manufacturers which invest in several European countries.