Jacques Pelkmans

The GSM standard: explaining a success story

The study offers an in-depth analysis of the Groupe Spécial Mobile (GSM) standard, a network compatibility standard for digital cellular mobile telecommunications in Europe. It highlights the central role played by governance in securing the successful adoption of GSM in Europe, detailing the complex coordination process among an arrayof actors, private and public, at different levels. The study concludes by showing the striking difference between the European experience and the non-cooperative process of adopting digital mobile standards in the United States.

The Economics of EU Railway Reform

This article inspects the main economic aspects of EU rail reform. After highlighting the dramatic loss of market share of rail since the 1960s, the case for reform is argued to rest on three arguments: the need for greater competitiveness of rail, promoting the (market driven) diversion of road haulage to rail as a step towards sustainable mobility in Europe, and an end to the disproportional claims on public budgets of Member States. The core of the paper deals respectively with market failures in rail and in the internal market for rail services; the complex economic issues underlying vertical separation (unbundling) and pricing options; and the methods, potential and problems of introducing competition in rail freight and in passenger services. Market failures in the rail sector are several (natural monopoly, economies of density, safety and asymmetries of information), exacerbated by no less than 6 technical and legal barriers precluding the practical operation of an internal rail market. The EU choice to opt for vertical unbundling (with benefits similar in nature as in other network industries e.g. preventing opaque cross-subsidisation and greater cost revelation) risks the emergence of considerable coordination costs. The adoption of marginal cost-plus pricing is problematic on economic grounds (drawbacks include arbitrary cost allocation rules in the presence of large economies of scope and relatively large common costs; a non-optimal incentive system, holding back the growth of freight services; possibly anti-competitive effects of two-part tariffs). Without further detailed harmonisation, it may also lead to many different systems in Member States, causing even greater distortions. Insofar as freight could develop into a competitive market, we also discuss the theoretically more attractive combination of Ramsey pricing (given the incentive for service providers to keep market share) and price ceilings based on stand-alone costs. The incipient cooperative approach for path coordination and allocation is welcome but likely to be seriously insufficient. The arguments to introduce competition, notably in freight, are valuable and many e.g. optimal cross-border services, quality differentiation as well as general quality improvement, larger scale for cost recovery and a decrease of rent seeking. Nevertheless, it is not correct to argue for the introduction of competition in rail tout court. It depends on the size of the market and on removing a host of barriers; it requires careful PSO definition and costing; also, coordination failures ought to be pre-empted. On the other hand, reform and competition cannot and should not be assessed in a static perspective. Conduct and cost structures will change with reform. Infrastructure and investment in technology are known to generate enormous potential for cost savings, especially when coupled with the EU interoperability programme. All this dynamism may well help to induce entry and further enlarge the (net) welfare gains from EU railway reform. The paper ends with a few pointers for the way forward in EU rail reform. JEL Codes: L5, L9, O52, F15.

Mutual recognition in goods. On promises and disillusions

Abstract Mutual recognition (MR) is rightly applauded as an ingenious innovation. Nevertheless, it is very demanding in actual practice. The article addresses the pros and cons of MR in EU goods markets and seeks to find effective remedies to be applied by the authorities and, to some extent, by business. MR is a demanding form of ‘governance’. Not only should judicial MR be distinguished from regulatory MR, but MR is best understood when placed in a context of alternative ways of accomplishing free movement in the internal market. A critical distinction in the regime consists in the way existing barriers to free movement are tackled as against potential barriers caused by new legislation in member states. At the same time MR is associated with many substantial benefits and costs, in particular for judicial MR. The article explores several routes which would result in more and better MR.

Mutual Recognition in Goods and Services:an Economic Perspective

Mutual recognition is a remarkable innovation facilitating economic intercourse across borders. In the EUs internal goods market it has been helpful in tackling or avoiding the remaining obstacles, namely, regulatory barriers between member states. However, there is a curious paradox. Despite the almost universal acclaim of the great merits of mutual recognition, the principle has, in and by itself, contributed only modestly to the actual realisation of free movement in the single market. It is also surprising that economists have not or hardly underpinned their widespread appreciation for the principle by providing rigorous analysis which could substantiate the case for mutual recognition for policy-makers. Business in Europe has shown a sense of disenchantment with the principle because of the many costs and uncertainties in its application in actual practice. The purpose of the present paper is to provide the economic and strategic arguments for employing mutual recognition much more systematically in the single market for goods and services. The strategic and the ‘welfare’ gains are analysed and a detailed exposition of the fairly high information, transaction and compliance costs is provided. The information costs derive from the fact that mutual recognition remains a distant abstraction for day-to-day business life. Understandably, verifying the ‘equivalence’ of objectives of health and safety between member states is perceived as difficult and uncertain. This sentiment is exacerbated by the complications of interpreting the equivalence of ‘effects’. In actual practice, these abstractions are expected to override clear and specific national product or services rules, which local inspectors or traders may find problematic without guidance. The paper enumerates several other costs including, inter alia, the absence of sectoral rule books and the next-to-prohibitive costs of monitoring the application of the principle. The basic problems in applying mutual recognition in the entire array of services are inspected, showing why the principle can only be used in a limited number of services markets and even there it may contribute only modestly to genuine free movement and competitive exposure. A special section is devoted to a range of practical illustrations of the difficulties that business experiences when relying on mutual recognition. Finally, the corollary of mutual recognition – regulatory competition – is discussed in terms of a cost/benefits analysis compared to what is often said to be the alternative, that is ‘harmonisation’, in EU parlance the ‘new approach’ to approximation. The conclusion is that the manifold benefits of mutual recognition for Europe are too great to allow the present ambiguities to continue. The Union needs much more pro-active approaches to reduce the costs of mutual recognition as well as permanent monitoring structures for its application to services (analogous to those already successfully functioning in goods markets). Above all, what is required is a ‘mutual recognition culture’ so that the EU can better enjoy the fruits of its own regulatory ingenuity.

The Services Directive: Trojan Horse or White Knight?

Abstract The European Union’s internal market has been at the heart of the integration process since the Treaty of Rome. The 2004 Services draft Directive (known as the Bolkestein proposal) launched an avalanche of protest despite substantial purported economic gains. A proper appreciation of the Services Directive requires a tri‐disciplinary approach, which we intend to provide. It became a lightning rod for criticism and a rallying cry for those opposing further market integration, social dumping and the extension of the Anglo‐Saxon social model. The directive purportedly served as a Trojan horse for increased liberalism in the eyes of opponents, whereas supporters saw it more akin to a white knight that would rescue Europe from its inflexible labour market. Indeed, the Services Directive (both the 2004 Bolkestein draft and the adopted directive 2006/123) is misunderstood in that it is both bolder and more timid than its critics and proponents, respectively, would have one believe. We show that the development of the Services Directive can be understood far better when economic, legal and political science analysis is employed together, in particular, for the meaning, scope and timing of both versions. Services remain a key sector of economic growth for the EU and the directive is likely to have important implications economically, legally and politically, possibly with long‐term effects on EU integration.

The Significance of EC-1992

The tortuous ratification process of the Maastricht Treaty, the turmoil in European currency markets in the autumn of 1992, the lack of political leadership ever since the Maastricht negotiation, and the recession would seem to have created a sense of disillusion about the much heralded post-1992 period for the European Community (EC). Is the Community drifting back to Europessimism? Was the impact of EC-1992 a fata morgana? What, if anything, was accomplished by EC-1992? This article shows that EC-1992 has enormous significance for the EC. There are four reasons. The first and most fundamental one is found in the induced transformation of the process of European integration in many ways. Second, EC-1992 has fulfilled a locomotive function, pulling the Community out of stagnation, bickering, and deadlock to great economic policy and political and market dynamism. Third, EC-1992 has bolstered the Communitys position in the world economy and diplomacy. Fourth, the successful pursuit of EC-1992 has enabled the EC to assume the leadership in the post-Communist pan-European turmoil; although the EC role is not satisfactory, without EC-1992 and its impact, a disastrous leadership gap would have shown up.

The Economics of Single Market Regulation

In the vast domain of the internal market, ‘regulation’ is EU’s core business. Therefore, a good appreciation of European economic integration requires a sound analytical economic perspective of EU regulation. Since the Single European Act, economists have gradually improved the economic analysis of EU regulation. EU policy-makers began to accept cost/benefit analysis with the Maastricht treaty and nowadays the rigorous logic of Better Regulation and regulatory impact analysis has become routine in the EU circuit, although less with the EU legislator (EP and Council). The present BEEP Briefing provides an accessible survey of the state of the art of the evidence-based, economic approach to EU Single Market regulation. This approach puts the subsidiarity test, proportionality and necessity on a firmer analytical footing and offers a healthy discipline of the precautionary principle. The acceptance of economic, evidence-based regulatory logic has caused a change of mind-sets in the European Commission: EU regulation is now routinely discussed in terms of incentives, asymmetries of information, multiple policy options (instead of going for a single one only), market-based instruments, quantification of benefits and costs, red-tape alerts and cost-effectiveness. Last but not least, this also matters for national regulation. Given an ever deeper and wider internal market than two decades ago, not to speak of the Eurozone, the regulatory autonomy of Member States has to be balanced against the possible consequences of undermining or preventing the ‘proper functioning’ of the internal market. The key words here are pro-competitive reforms and ‘diversity’’, based on distinct national preferences, yet minimizing costly ‘regulatory heterogeneity’ arising from decentralized decision-making but without being rooted in genuine differences in preferences.

Business dimensions of EU’s new FTAs

Abstract Recent Free Trade Area (FTA) agreements of the EU are ‘deep and comprehensive’. This can be explained by the various and complex ‘trading costs’ that business encounters when accessing a foreign market and which business is keen to reduce as much as possible. The paper examines what ‘deep and comprehensive’ means more precisely in four EU FTAs: CETA and EU/Korea, and two FTAs that have not yet been completed (TTIP and EU/Japan). It provides a tentative explanation of the nature of these four modern EU FTAs by taking a closer look at the business dimension, in particular transnational value chains in some prominent sectors, the growing importance of services and inter-sectoral linkages.

Customs union and technical efficiency

SummaryCustoms unions are frequently suggested to have a salutary effect upon the efficiency of production. However, this is not part of received customs union theory. It is shown that the essence of the competitive ‘cold shower’ is very difficult to accommodate in standard theory, given its underlying theory of intrafirm behaviour, the assumed nature of competitive firm behaviour and the static framework. Neither can it be satisfactorily worked into X-inefficiency theory. A Schumpeterian view of competitive firm behaviour can explain how the customs union will be perceived by certain firms as an opportunity, causing them to intensify experiments and search for new forms of production, attempt new intrafirm decison rules and change market behaviour.

China’s “Socialist Market Economy”: A Systemic Trade Issue

The socialist market economy with Chinese characteristics has turned into a systemic trade and investment issue both bilaterally and multilaterally. The hope that WTO membership would eventually transform China into a market economy with distortions that would gradually become tolerable and negotiable has not been borne out.