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EU brings great prosperity to its members

23.05.2019

The EU provides its members with high income gains by reducing trade costs. Thanks to the single market, the customs union, the euro, the Schengen agreement, and trade agreements with third parties, real GDP is about 940 billion euros higher each year. Germany alone benefits from an annual plus of a good 170 billion euros. Of all the EU countries, the United Kingdom has the smallest relative profits, while small peripheral countries have the largest.

The internal market, i.e., the abolition of nontariff trade barriers, for example, through the mutual recognition of norms and standards, has brought the greatest welfare gains to the member states, making the European Union as a whole 643 billion euros, and Germany 132 billion euros richer each year. "The internal market is the crown jewel of EU integration," said Gabriel Felbermayr, President of the Kiel Institute for the World Economy (IfW Kiel), on the occasion of calculations made under his leadership.

Together with other researchers, he examined the costs incurred by the EU member states by undoing various integrational steps, in order to show the high welfare gains that the (still) 28 member states were able to derive from them. They calculated the consequences of undoing the EU Customs Union, the EU Single Market, the EU Monetary Union, the Schengen Agreement, and the EU's free trade agreements with third countries.

The effects of fiscal transfers to and from Brussels are also taken into account. The researchers only focus on trade effects, while the effects of the free movement of capital and labor are not taken into account. The results therefore describe lower limits; they have been published as a Kiel Policy Brief ("The (Trading)Costs of a Non-EU”, in German) and as a Working Paper.

Undoing the EU single market would have relatively stronger negative effects on production, trade and income in the member states than the abolition of all other integration steps combined. For large countries such as Germany, the single market accounts for around 80 percent of the overall effect. In smaller countries, which benefit greatly from net transfers, the relative contribution of the single market is smaller. In Poland or Hungary it amounts to only 50 percent of the total effect, in Lithuania it is less than 50 percent.

The United Kingdom benefits least from its membership in the single market because the country is primarily active in the service sector, where the single market offers fewer advantages, and also conducts more trade outside the internal market due to lower language barriers.

"The single market is the EU's welfare engine and access to it is its strongest asset in international negotiations," Felbermayr said. "Therefore, through a multispeed Europe, European policy should also give access to it to countries which think the transfer of competences to the supranational level is too far or too fast. This is not least true with regards to the United Kingdom and the Brexit.”

Measured in terms of per capita income, in particular the smaller EU countries would experience a decline by undoing the single market, such as Luxembourg (-19.7 percent) and Malta (-14.3 percent), as well as Central and Eastern European member states such as Hungary (-10.6 percent), the Czech Republic (-9.5 percent), the Slovak Republic (-9.5 percent), Slovenia (-7.7 percent), Estonia (-7.8 percent), and Poland (-5.9 percent),. The income effects for the larger countries such as Germany (-3.9 per cent), France (-2.9 per cent), Italy (-2.5 per cent), and the United Kingdom (-2.3 per cent), on the other hand, are significantly lower.

The abolition of the EU Customs Union has significantly lower effects. Ireland (-0.7 per cent), the Czech Republic (-0.4 per cent), and the Netherlands (-0.4 per cent) would record the largest income losses. For some EU member states, the income effects due to customs revenues would even be slightly positive.

A dissolution of the euro zone would be accompanied by income losses for all euro zone members. Luxembourg would be hardest hit (-3.9 per cent), Italy least affected (-0.3 per cent). The highest income losses would be suffered by peripheral and poorer member states such as Hungary, Estonia, Slovenia, Latvia, Lithuania, or the Czech Republic if border controls were reintroduced in the Schengen area. A termination of all regional free trade agreements would affect the EU member states relatively weakly, while partner countries of agreements such as Switzerland (-1.2 percent) would suffer income losses.

Kiel Policy Brief

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