To some extent it seems as if national markets have been replaced by a pan-
European market. More competition on such a market improves the efficiency,
or welfare, of the economy, as price convergence limits the differences in the
consumers’ marginal utilities of the consumption of specific goods.
Furthermore, welfare will increase because the more fierce competition reduces
the mark-up in the price formation.
However, Figure 3 also shows that a potential for further equalisation of the
price levels in Europe still exists. Surveys thus indicate that the geographic
price differences are larger in the EU than in the USA, i.e., in general, the
markets for goods and services continue to be less integrated in the EU than in
the USA.2
Markets for factors of production
Contrary to the markets for goods and services, the labour market, especially
for unskilled labour, is much less integrated across the Member States. The
mobility of labour across Member States has remained on a very low level
leaving only marginal impacts on wage or employment dispersion. The reasons
for this low mobility are mainly language and other cultural barriers, which, by
and large, have remained unaffected by the endeavours to integrate the EU
economies into one economy.
However, indirect integration effects have appeared on the labour market. The
integration of the goods market and the introduction of the euro have
emphasised the need for a more flexible labour market. As a consequence, the
national trade unions have demonstrated more caution in their wage demands,
because demand for labour in the national market has become more sensitive to
wage claims, cf. EU Commission (1999b) and Buti & Sapir (1998).
Foreign direct investment (FDI) and mergers and acquisitions have expanded
rapidly in the 1980s and 1990s and intra-EU FDI flows have significantly
gained importance (see e.g. Commission, 1996). In some cases, where the
mobility of goods is rather limited, the rationale for establishing subsidiaries
2 A survey by the EU Commission based on price data excluding taxes thus shows that the
dispersion of aggregate price levels for goods and services is 14% in the EU, but only 11% in
the USA for 1996 (EU Commission (1999a), p 217).
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