European Integration and Productivity: Exploring the Early Effects of Completing the Internal Market*

Abstract

The completion of the internal market was the EU structural response to the so-called ‘Euro-sclerosis’ of the early 1980s. By eliminating the existing non-tariff barriers to the free circulation of goods, services, workers and capital by the end of 1992, the EU aimed to deliver substantial welfare gains in terms of higher productivity and lower costs, prices and mark-ups. While there exists some evidence that the measures undertaken have increased competition across the EU, the impact of such policies on productivity has received less attention and still remains an open issue. Using a difference-in-difference approach, this article shows that the completion of the internal market significantly increased the productivity of the EU sectors which were more likely to be affected by these policies, already during the implementation phase of the different measures (1992 and 1993). These results point to the fact that the firms that were mostly exposed to the reforms seem to have reacted promptly to the structural changes deriving from them. The estimated gains appear quantitatively important.