Was It a Mistake for Britain to Enter the EU?

I have written an earlier post (here) showing the effect on Gross Domestic Product (GDP) of Britain leaving the EU and pursuing a Go-It-Alone Scenario. The effect, based on the UK20 model run with no inputs, was that GDP would peak in 2020. The pro-BRitain EXIT (Brexit) model makes the argument that Britain should have never joined the EU. I will investigate that counterfactual in the following post.

The way to construct a BrNoEU (Britain No EU) counterfactual would be to estimated a statistical model using only data prior to the assumed entry point. Then the model prediction for some variable, such as GDP, would be forecast into the future and compared with what actually happened. If entering the EU was good for GDP, the fictitious future should have shown slower growth than actually happened.

The history of Britain's entry into the European Union (EU) is somewhat complex (here), but let's for the sake of simplicity use the signing of the Maastricht Treaty on Nov 1, 1993 as the starting point. For a number of reasons to be discussed next, I decided to start the model in the year 2000 and do an attractor-path simulation with the UK2000 model model starting in 1960. The best UK2000 model has no inputs meaning that the best way to think about Britain in the late 20th century was as a Go-It-Alone nation.

To understand the counterfactual, look at the time plot above. The dark solid line is the actual path of GDP displayed here from 1980 to 2012. The dashed red line is the attractor path constructed by simulating the UK2000 model from 1960 to 2040. The dashed green and blues lines are the 98% upper and lower prediction intervals. The prediction intervals are relatively narrow for the period where we have data and start to get wider apart in the future as our confidence in the prediction decreases.

Looking at the actual path for GDP (dark solid line), prior to the Maastricht Treaty, Britain was having some trouble staying on the attractor path. The economic bubble that started in the mid-1980s had popped by the point the Maastricht treaty was signed. At the time, it must have looked as if Britain needed some help maintaining economic growth and joining the EU offered that hope. Indeed, from the 1990s till the Financial Crisis of 2007-2008, it looked as if joining the EU had been a success. The hope that Britain would keep growing (red arrow) above the attractor path, however, was an unrealistic expectation. Currently, the British economy is on the attractor path looking as if there was not much benefit from entering the EU.

How do we understand this counterfactual? If the pro-Brexit position is that the British economy would return to the growth rates of the 1993-2007 period by leaving the EU, the model shows that joining the EU would most likely lead to the departure from the attractor path and the 2007-2008 Financial Crisis put an end to the boom. The pro-Brexit position confuses membership in the EU with the effects of the 2007-2008 Financial Crisis. Leaving the EU will not increase GDP growth and will likely take the British economy back to the boom-and-bust period of the 1980s.

If you look back at my earlier post (here), you will also see that whatever Britain does, attractor path growth for the economy is slowing. The economy is maturing and Brexit will not change that and will probably only make matters worse. This, of course, would not be an easy argument to sell to the British public.