Growth inside and outside the EU: the history of the UK and Sweden

A couple of weeks ago, Macro Man noted that markets seemed, if not sanguine, at least relatively calm about the prospects of Brexit.  The evidence for this assertion was an apparent tilt in the polls towards the "remain" camp and the fact that the 2m/1m calendar spread in cable vol was actually smaller than the prior spread between 3m and 2m (when only the far date captured the poll, naturally).  Fast forward a couple of weeks and things look somewhat different.   Not only have the polls narrowed, but hedgers and punters are now reaching for cable vol; the 2m/1m spread has widened by more than a vol since the original post was written.

Now, at the moment Macro Man doesn't have a dog in the Brexit fight.   He is no longer a UK resident, has only derisory assets remaining in Blighty, and isn't even a citizen.  However, by virtue of his long-time residency in the country, the nationality of Mrs. Macro, and the UK's importance to the financial industry, he is naturally interested in the vote and the outcome.

Almost as interesting as the outcome itself is the nature of the debate.   While HMT has attempted to quantify the negative economic impact of a Brexit via some (occasionally lampooned) equations, comments like David Cameron's warnings about the potential for war really don't belong in a serious political debate.    At the same time, Macro Man has yet to see the leave campaign provide any quantification of how the UK will be better off outside of the EU while offering plenty of quasi-Trumpian arguments about those damned foreigners.  However, based on Macro Man's experience any notion that the UK will reap some sort of efficiency windfall from exiting the (admittedly labyrinthine)  EU bureaucracy looks laughably wide of the mark, as anyone who's had the "pleasure" of dealing with the UK immigration authorities can attest.

Putting aside the unprovable (how long will it take for the UK negotiate entry into the EEA?   What will the conditions be?), Macro Man thought it would be interesting to look at some empirical evidence about economic performance inside and out of the EU.  Obviously, no two countries' circumstances are identical, and it can be difficult to isolate the economic impact of EU membership from other cyclical considerations.  However, at least reviewing the historical record has got to be better than simply making emotional assumptions, so let's see where the data takes us.

Macro Man found GDP data going back to 1955 for the UK.   Happily, he also has it for France, a similarly-sized economy at the heart of the European project.  He also downloaded it for the US to serve as a "control" group to sense check the global economic cycle.  The chart below shows y/y GDP growth for the three countries going back to 1956.

The key dates that Macro Man considered were the following:

1955:  Start of the dataset
1973:  UK entry into the EEC
1997: Bank of England gains independence to set monetary policy

Macro Man considered UK growth relative to that in France and the US over several windows of time.  The results are set out below:

As you can see, prior to UK membership in the EU the country's economic growth lagged behind that of the United States and especially France.  A portion of the latter, of course, can be attributed to rebuilding after the war and trade ties to Germany.  Then again, membership in the predecessor to the EU is one of the reasons that French ties to Germany were so strong, but we digress...

Since the UK joined the EEC in 1973, its economic growth has been on a par with France's (a smidge better, actually), though continuing to lag that of the US.  A key turning point was clearly the allocation of monetary policy duties to the Bank of England (and away from the Chancellor.)  From '73 -'97, the UK narrowed its growth gap to France but saw it widen vs. the US.   Since BOE independence, however, the UK has handily overtaken France and more or less eliminated the growth gap to the United States.  Indeed, since acceding to the EEC UK growth has remained remarkably stable, even as that in France and the United States has steadily slowed.  It's hard to see the negatives in that.  As an aside, in the years prior to EU membership UK y/y growth outpaced that of France in a mere 16% of possible quarters; since joining, the UK has performed better 55% of the time.

As a sense check, Macro Man performed a similar analysis for Sweden, which like the UK is a member of the EU but not the Eurozone, thus retaining an independent monetary policy.  Obviously, Sweden's EU membership is of a more recent vintage, thus providing a different sample window with which to analyze our data.  For this study, Macro Man used the following milestone dates:

1960: Start of Swedish GDP data
1973: To align with UK entry into EEC
1995: Swedish entry into EU

The results are set out in the table below.

Like the UK, Sweden under-performed both France and the US from the beginning of the data until EU entry.  Since then, however, the country has done very well indeed, outperforming not only the French but also the United States.   The shift can be observed in the chart below:  in the 20 years prior to joining the EU, Swedish y/y GDP bested that of France just 36% of the time; in the two decades since, Sweden has performed better a resounding 81% of the time.

Of course, while that may be a compelling argument that EU membership is great for Sweden, it doesn't automatically follow that it will be so for the UK.   After all, the Swedes run large external surpluses while the UK....doesn't.  (The question of why is perhaps left to another time.)

Nevertheless, based on this cursory reading of the data it is possible to make the claim that EU membership has benefited the UK economy (at least on a relative basis) and very difficult to state that it has hurt.  Certainly the evidence suggests that having an independent monetary policy is helpful, both given UK and Swedish economic outperformance and the sclerotic growth registered in France, which is tied to ECB policy and a fixed exchange rate.

There may be other reasons to oppose EU membership (some justified, some probably not), but the historical record suggests that from an economic perspective, remaining inside the EU and outside the euro is not a bad place to be.