Integrating Regulated Network Markets in Europe

Abstract

This paper assesses the integration strategy of the European Union in regulated network markets. The paper argues that in these markets integration should not be an end in itself. In regulated markets the conventional gains from trade or freedom of establishment may be outweighed by significant welfare losses if integration involves the choice of a misguided deregulation model. Moreover, the design of the integration process will affect the distribution of the gains from integration, and this may be unacceptable to some of the countries and/or social groups involved, leading to the failure of the process. The integration strategy should carefully balance several potentially conflicting interests, with priorities that may not be the same across industries.

The paper provides a comparative analysis of the cases of banking, telecoms and electricity. It suggests that the design of the deregulation cum integration process should ensure the maintenance of a level playing field and the preservation of country-specific strategic interests to varying degrees, depending on the industry under consideration. A reasonable equilibrium of this sort is illustrated in the case of banking, but it has not yet been achieved in electricity. In other instances, for example telecoms, the key goal may be very different, with a focus on avoiding excessive regulatory rigidity. Altogether, this implies that integration strategies should combine strong harmonization of some regulations with a large degree of freedom at the Member State level in other domains.

Keywords: network markets, European Union integration, deregulation

JEL Classification: L51, L89, L94, L96