27 April 2016

VoxEU: Rich countries can benefit from EU membership

The authors estimate that rich countries benefited substantially from joining the EU. Furthermore, while the benefits from EU membership to poorer countries tend to be mostly in terms of per capita income, for richer countries the benefits tend to be mostly in terms of productivity.

[...] A legitimate concern is that poor countries may benefit more than rich countries – indeed, that advanced economies (like the UK) have little to gain from being a member of the EU. In other words, a critic may charge that our results are driven by the fact that the enlargements of the 1980s and 2004 were ‘poorer country’ enlargements and their ‘per capita income gaps at entry’ were hefty. The per capita income gap at entry is the percentage difference between the average per capita income of existing members and that of candidate countries in US dollar PPP for the official accession year. We calculate that candidate countries in 1973 had on average 96% of the per capita income of existing members; in the 1980s this was 63%; in 1995 it was 103%; while in 2004 it was 45%.  Larger gaps should be associated with sizeable catch-up benefits from integration. To put it bluntly, it may be easy to see why Portugal and Latvia, for example, benefit so much from joining the EU, but it may be harder to see how, say, Sweden or the UK could possibly benefit as much. This column shows that richer countries also benefit considerably but they may do so differently: while the benefits from EU membership to poorer countries tend to be mostly in terms of per capita income, for richer countries these benefits tend to mostly in terms of productivity. 

Is this a rich man’s world?

In the summer of 1961, Denmark, Ireland, and the UK submitted official applications for accession to the European Communities.[...] The results suggest that per capita GDP would be considerably lower in these countries had they not joined the EU in 1973. [...] For example, the benefits from EU membership for the UK (although substantial throughout) may have slowed down in later years, while for Ireland they seem to have accelerated instead. This suggests that the UK benefited more from the single market while Ireland did benefit mostly from the common currency. [...]

How big are these benefits?

A measure of the magnitude of the economic benefits from EU membership is given by the difference between the actual per capita GDP for each country (or labour productivity) and that of its SCM artificial control group. We find substantial benefits for the 1973, and modest benefits for the 1995 enlargement. For the first ten years post-accession, per capita incomes for the former would be approximately 12% lower, while that for the latter would be about 4% lower (without EU membership). Alternatively, if we consider all years since accession, the respective figures would be about 34% for the former, and 5% for the latter. We find that per capita incomes in the UK and Denmark would have been 25% lower (if they had not joined the EU in 1973), but that the benefits for Ireland are even larger. Our estimates suggest that per capita income in Ireland would have been about 50% lower if it had not joined the EU in 1973.

Conclusions

This column presents new estimates of the economic benefits from EU membership focusing on the 1973 and 1995 enlargements. The main conclusion is that of substantial and positive pay-offs with benefits from EU membership clearly above direct costs, and with larger gains for the 1973 than for the 1995 enlargement.5 Moreover, the difference between the estimated benefits for 1973 and 1995 enlargements is considerable and, thus, should not be attributed solely to differences in per capita incomes at the time of joining. We conjecture that institutions may provide a more promising explanation of these differences if one believes that Austrian, Finnish, and Swedish institutions were better developed or aligned with the EU when these countries joined the European Union.

Full article on VoxEU

© VoxEU.org