Brexit or Euro for the UK? Evidence from Panel Data
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Brexit or Euro for the UK? Evidence from Panel Data Petros E. Ioannatos1
© Association for Comparative Economic Studies 2020
Abstract An alternative course to Brexit for the UK is evaluated. The purpose of the study is to determine whether the UK would have been better off had, instead of Brexit, remained in the EU and joined the Eurozone. The model specification is based on the neoclassical theory of growth extended to include human capital accumulation. Counterfactual analysis in terms of the difference-in-differences methodology is applied to evaluate the effect in UK’s per capita income if the UK had joined the Eurozone when the Eurozone was formed. The dataset is a balanced panel of annual observations for fifteen countries and covers the period from 1980 to 2017. The analysis reveals that had the UK joined the Eurozone, UK’s per capita income would have been 15.48% higher on the average for the period after the formation of the Eurozone. This effect increases to 24.98% if Eurozone’s less performing economies of the southern periphery are excluded from the analysis. The study shows that Brexit is a move toward the wrong direction. The UK should have sought further integration with the EU in terms of presence in the Eurozone than pursue Brexit and leave the EU. Keywords Brexit · European Union · Euro · Eurozone · Neoclassical growth theory · Panel data · Natural experiment · Difference-in-differences · Fixed effects JEL Classification F15 · F17 · F33 · F36 · F60 · C54
Electronic supplementary material The online version of this article (https://doi.org/10.1057/s4129 4-020-00119-y) contains supplementary material, which is available to authorized users. * Petros E. Ioannatos [email protected] 1
Department of Liberal Studies, College of Sciences and Liberal Arts, Kettering University, 1700 University Avenue, Flint, MI 48504, USA Vol.:(0123456789)
P. E. Ioannatos
Introduction On June 23, 2016, the United Kingdom (UK) held a referendum where 51.9% of the thirty million voters that participated supported exit of the UK from the European Union (EU). The impending withdrawal of the UK from the EU became also known as Brexit. On March 29, 2017, the UK invoked Article 50 of the Treaty of the EU which provides a plan for a member to leave the EU. Subsequently, negotiations between the UK and EU took place on several issues including, the trade relationship between UK and EU, the situation of the UK and EU expatriate citizens, the status of the Northern Ireland border, referred to as “backstop,” and UK’s compensation to the EU for the Brexit. The terms “soft” and “hard” Brexit have surfaced implying negotiations could produce, respectively, either Brexit with a mutually beneficial trade agreement or Brexit without a trade agreement, under World Trade Organization (WTO) terms, commonly referred to as no-deal Brexit. On February 1, 2020, the UK pulled out of the EU. However, the status of most major issues separating the two parties is to be determined in future negotiations. Brexit is an unpreceded eve
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