Complex Europe: Quantifying the Cost of Disintegration

54 Pages Posted: 12 Sep 2020

See all articles by Gabriel J. Felbermayr

Gabriel J. Felbermayr

University of Kiel

Jasmin Gröschl

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Inga Heiland

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: August 2020

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 â?? the customs union, the single market, the common currency union, the Schengen Area, free trade agreements â?? 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: European Trade Integration, General Equilibrium, quantitative trade models, structural gravity

JEL Classification: F13, F14, F17

Suggested Citation

Felbermayr, Gabriel J. and Groeschl, Jasmin and Heiland, Inga, Complex Europe: Quantifying the Cost of Disintegration (August 2020). CEPR Discussion Paper No. DP15200, Available at SSRN: https://ssrn.com/abstract=3688152

Gabriel J. Felbermayr (Contact Author)

University of Kiel ( email )

Olshausenstr. 40
D-24118 Kiel, Schleswig-Holstein 24118
Germany

Jasmin Groeschl

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

Inga Heiland

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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