The conventional wisdom is that the European countries that are part of the European Union have done better economically, but by how much? The Euro crisis made that question pretty important. The countries that had traditionally devalued their currencies to compete—Italy, Spain, Portugal—couldn’t do so anymore. So their exports—and their economies—suffered. If the benefits aren’t worth the cost, the Euro won’t survive.
So what is the advantage? Several researchers have looked into the question. They found that EU membership added significantly to almost every country’s income. On average, per-capita income across the EU would be 12% lower without the connection. This holds true for each individual country, with the exception of Greece. The gains came from three sources: increased trade, improved labor productivity, and institutional reform.
Trade is clear—everyone benefits from selling what they do best. Labor reforms help: when workers are free to work where the jobs are, they are more productive. And institutional reforms—like freeing up lending rules, or decreasing subsidies to preferred sectors—reduce a lot of waste. Until the Euro crisis, Greece hadn’t changed many of these rules, and that has held them back.
Making connections is hard, and adjustments are never easy. The United States had several secession crises in its early years. Let’s hope the EU’s long-term benefits remain clear to everyone.
Douglas R. Tengdin, CFA
Chief Investment Officer