The Gains From Economic Integration: The EU Has Still A Long Way To Go

21st January 2019

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Fraser of Allander Institute - January 18, 2019

David Comerford, Chancellor's Fellow, Fraser of Allander Institute, Department of Economics, University of Strathclyde

Sevi Rodriguez Mora, Professor of Economics, University of Edinburgh; CEPR Research Fellow.

Summary

Populists in Europe are contesting the perceived benefits of economic integration between countries. This column uses data on trade frictions to estimate the long-run impact of trade frictions on GDP if countries in Europe were to be more or less integrated. Negative between-country impacts, such as from Brexit or an EU collapse, imply a GDP reduction of between 1-3%. The potential trade benefits of a ‘United States of Europe', on the other hand, may be an order of magnitude greater for its members.

The EU aims to create an integrated economic community where national borders do not impede trade in any way. Recently, Brexit and the populist governments in Italy, Poland and Hungary have challenged this.

Brexit and the rise of populism reflect a wave of anti-globalisation. These challengers are reacting to the view that national economies have become an integrated international economy (Hobolt 2016, Inglehart and Norris 2016, Sampson 2017). In this narrative, Brexit is a reaction to the large (and excessive) degree of integration achieved by the EU. In a recent paper (Comerford and Rodriguez Mora, forthcoming) we present some facts that contradict this narrative - the integration that exists within EU countries is much greater than the integration between them.

We look at the trade flows between most developed countries, including those of the EU, and measure the frictions between pairs of countries as the parameters in a standard modern trade model to explain the observed flows. In doing so, we condition on sizes, distance and common language.

See the full blog HERE