Working Paper: CEPR ID: DP15200
Authors: Inga Heiland; Gabriel Felbermayr; Jasmin Groeschl
Abstract: We propose novel estimates of the economic consequences of undoing European Integration. Using a quantitative general equilibrium trade model for 43 countries and 50 goods and services sectors, we disentangle and decompose two important layers of complexity: First, European integration is governed by various, partly overlapping arrangements – the customs union, the single market, the common currency union, the Schengen Area, free trade agreements – and fiscal transfers, all of which affect trade costs, terms-of-trade, and gains from trade differently. Second, more than any other geography, decades of integration have led to dense cross-border input-output (IO) networks, which would endogenously readjust. We find disintegration to trigger statistically significant welfare losses of up to 21% of the 2014 baseline, but with a strong degree of heterogeneity across EU insiders. The welfare effects from undoing the Single Market dominate quantitatively, but the losses from dissolving the Schengen area or the Eurozone are substantial for many countries as well. Compared to a model variant without IO-linkages, the more complex model predicts statistically significant smaller losses from disintegration in the manufacturing sector but larger aggregate ones, a lesson that may carry over to other integration agreements.
Keywords: Structural Gravity; European Trade Integration; General Equilibrium; Quantitative Trade Models
JEL Codes: F13; F14; F17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Disintegration of European integration (F55) | welfare losses (D69) |
| Dismantling of various integration agreements (F15) | increased trade costs (F19) |
| Increased trade costs (F19) | reduced trade volumes (F19) |
| Reintroducing tariffs (F13) | positive effects on real consumption (E21) |
| Abolishing border controls (F55) | reduces trade costs (F12) |
| Membership in the single market (F55) | increased goods trade (F19) |