Did EU Membership Accelerate UK Economic Growth?

The Brexit debate has been distorted by several myths. One of the most persistently and widely quoted, including during the 2016 referendum campaign and subsequently as in here, is that the UK’s economic performance improved after joining the EU in 1973. Performance is usually measured as GDP per head, and on this measure the UK economy did not improve after joining the EU. Indeed, it clearly grew more slowly than it had in pre-accession decades.

Using Conference Board data at purchasing power parity (PPP), the slowdown was from 2.4% per annum from 1950-73 to 2.0% per annum for 1973-2007.This slowdown is of course greater if the period is extended to include the post-banking-crisis years. It is also somewhat greater if the UK National Accounts data is used, and is also similar if we take account of the transition period to full UK alignment with the EU tariff regime up to 1978.

The claim that membership of the EU was beneficial in terms of UK GDP per head comes instead from a comparison with the original six EEC members (the EU6). Over the period 1950-73, per capita GDP in the EU6 grew at an unprecedentedly rapid average rate of 4.6% per annum measured using PPP data. This was almost twice as fast as the UK’s sedate 2.4% per annum. The UK ‘s growth rate was reasonably rapid by its own historical standards and was sufficient to maintain full employment through most of the period. Perhaps ironically, the period 1950-73 in the UK is often termed the ‘golden age’ in the UK, even by economists who argue that joining the EU was beneficial for UK economic growth – and would take the view that the UK could grow significantly more rapidly by joining the fast-growing EEC.

Another irony was that growth in the EU6 economies slowed down very soon after UK accession to the EEC. From 1979 to 2007 growth in per capita GDP in the EU6 was only 1.6% per annum, well under half the pre-1973 rate. Per capita GDP in 2015 was at the same level as in 2007 although growth has picked up since then. Protagonists of UK economic benefit from EU membership argue that its growth improved relative to the EU6. Prior to accession in 1973 UK economic growth at 2.4% per annum had been 2.2 percentage points a year slower than the EU6 (see above). After accession, and up to the banking crisis starting in 2007, UK growth was 0.3 percentage points faster than that of the EU6. It is this improvement of 2.5 percentage points that is taken as the prime evidence of a gain from membership. Before joining the EU, the UK was a laggard relative to the EU6. After accession, the UK actually performed a little better than these economies for most of the period.

We should notice, however, that the UK’s relative improvement was wholly due to the slowdown in the EU6. To repeat, there was no tangible improvement in economic growth in the UK itself. To believe that the growth of the UK economy stemmed from EU membership, we must believe that it would have deteriorated outside the EU. If the slowdown in EU6 growth was due to general world factors, including the six-fold increase in the real oil price between 1973 and 1980, this may be plausible. Such factors should however have also affected other major economies including the USA, Canada and Australia, but here the post-1973 slowdown was minor and much less than in the EU6.

The slowdown in the EU6 has a much more obvious explanation. Rapid growth in these countries was initially due to post-war reconstruction and then to post-war economic reforms. In 1950 per capita GDP in the EU6 was only half that of the USA. By 1979 it was close to 90% of the US level. This meant that catch-up with the technological frontier represented by the USA was largely complete by the end of the 1970s. After that, growth could not be faster than the USA unless innovation, skills and efficiency rose above US levels, which they did not. Growth thus settled down at close to the US rate. Importantly, we would not expect the same slowdown for the UK which neither mirrored the EU6’s post-war catch-up with the USA, nor has approached close to the US level of per capita GDP.

A better counterfactual for the UK economy is the USA. In this case, UK GDP per head has remained close to 72% of the US level throughout the post-war period. There is no sign that joining the EU improved UK economic growth relative to the USA. The only small improvement came after 2000 and was due to a minor slow-down in US growth.

We can conclude that there is no evidence that joining the EU improved the UK’s rate of economic growth. Growth in the UK, as elsewhere, is constrained by technology, skills and investment. None of the latter features has been better than the USA and hence the USA experience puts a ceiling on potential long-term growth in the UK, as it does in the EU6. The irony is that the UK joined the EEC just as the EU6 catch-up ended. The UK thus joined on a false prospectus that accession would accelerate growth. Also ironic is the fact that the previously slow-growing Commonwealth markets have actually expanded faster than the EU over the long period since 1973. If the performance of the EU had been better, and the Commonwealth worse, the UK may have felt less temptation to leave, but this was not the case. Those advocating Remain must take an asymmetric view that although joining the EU did not improve UK growth, leaving will damage growth.