Jeremy Smith – The slowing economy of the Single Market and NAFTA era

Cross-posted from Prime Economics

Ten years on from the full explosion of the Great Financial Crisis in autumn 2008, and Brexit lurking just round the corner…

A lot of the Brexit arguments revolve around the perceived pros and cons of the EU’s Single Market; meanwhile, President Trump has been using force majeure to overturn aspects of the 1994 NAFTA deal.

Given this conjuncture, I thought it would be instructive to take stock and assess, over a longer time-frame, how the UK and other developed economies have performed from an overall macroeconomic perspective.

To do this analysis, I have taken a group of ten “developed economies”, comprising the G7 plus three northern European countries, Denmark, Sweden and the Netherlands, and compared them since 1971, when the OECD dataset begins, in terms of the annual rate of change in real GDP per head of population. (Coincidentally, 1971 was also the year President Nixon broke up the Bretton Woods system by de-linking the dollar from gold).

Are there provable “gains from trade agreements”?

One issue that particularly interests me is whether – from the data – one can see any discernible impact of the EU’s Single Market (which formally began in 1993) or of NAFTA (which came into effect in 1994).  That is, can we see from the GDP data whether modern trade (and related) agreements really have, as their proponents argue, a positive impact for all signatories? I have therefore looked at the data over two “eras” – the pre-SM/NAFTA era up to 1992, then the period from 1993 to 2017.

Back in 1988 the Cecchini report was commissioned by the European Commission to assess the economic impact of the forthcoming Single Market. It concluded:

“The total potential economic gain to the Community as a whole is estimated to be in the region of ECU 200 billion or more expressed in 1988 prices. This would add about 5% to the Community’s gross domestic product…”

And while a report from Deutsche Bank in 2013 “The Single European Market 20 years on” concluded that the SM had only added around 2% overall to the EU’s “income”, in 2014, the European Parliament’s Research Service published a report, “The cost of non-Europe in the Single Market”, or “Cecchini Revisited” , in which they claimed (with brazen implausibility) that

“In its twenty years of existence, the European Single Market consisted is estimated to have raised GDP by 5%. When dynamic effects are factored in the measurable effect can be seen to rise significantly.”

Well, I’m assuming this meant that the extra 5% (plus more) would come on top of the average pre-existing trend rate of increase, otherwise there would be no added benefit to be seen from the Single Market.

As regards NAFTA, the impact on the US economy was predicted at the outset to be very modest, as reported in this 2001 article in the Journal of Economic Perspectives:

“At the time of the NAFTA debate, studies suggested that Mexico would bear more of the adjustment than would the United States or Canada. For example, the Congressional Budget Office (1993) forecast that Mexico’s economy could increase 6 to 12 percent, or even more, by the end of the NAFTA transition period. In contrast, it predicted the U.S. economy would increase by about one-fourth of 1 percent in the long run due to NAFTA.”

From that one might have guessed that the US economy would proceed post-NAFTA at the same sort of trend rate as it had before, maybe a tad faster. But not a lot slower.

So let’s look at what the actual GDP per head data show – taking the period up to 1992, and then the Single Market / NAFTA era, from 1993 to 2017 – and see if we can detect any impact.

Comparing GDP per head

For the pre-Single Market, pre-NAFTA period up to 1992, we see that the countries whose GDP per capita rose most rapidly were Japan and Italy, followed by Germany and France.  The UK and USA (2.1% average annual change) were middle runners, while Sweden and Canada languished.  The G7 average for the period was 2.4%.

For the period 1993 to 2017, the picture changes dramatically.  Italy and Japan drop to the bottom of the league table, while Sweden – which joined the EU in 1995 after its own banking crisis of 1992 – rises to the top, followed by Germany and the UK.  Italy’s annual average change is a miserly 0.4%. No country sees its GDP pre head rise, over this long period, by 2% or more on average, while the G7’s average, falls from 2.4% previously to 1.3%, dragged down by Italy and Japan, but with France also much lower.

In the absence of a counter-factual, we cannot diagnose simply from the data what would have happened absent the Single Market and NAFTA.  But we can state with certainty that the era of the Single Market and NAFTA has seen a very marked fall in the average annual rate of increase of GDP per head of population.

Next up, a chart combining the data for the two periods by country – 1971-92 and 1993-2017.  What is striking is that only one country – Sweden – has seen a higher annual average change rate for the later period than the earlier. (Green is the earlier era, blue the later).

It appears that – far from the Single Market adding some 5% to GDP over its first 25 years – the evidence makes it almost impossible to conclude that the Single Market (or for that matter NAFTA) made any positive difference to the trend in evolution of GDP!

For those interested in comparative performance over the whole period (almost 50 years), the next Chart shows the average annual increase in GDP per head per country over this long run:

Comparing economic performance over the last three decades

The period from 1988 to 1997 saw huge changes internationally, with the fall of the Soviet Union and end of Cold War, leading to German reunification and the apparent triumph of neoliberalism – not to forget the EU’s preparation for monetary union. And although the growth of deregulated financial capitalism may be traced back to the early 1970s, the private debt (credit) boom really began to take off around 1988, so GDP data for this and the following decades reflect this growth in private debt – and its consequences.

The next chart is from McKinsey for total debt from 1990, but the rapid growth is very largely private debt.

Japan is still at the top in this period, but this is largely due to high growth in the early part of the decade, before Japan’s economy hit deeper trouble.  The Netherlands shares top slot, while the UK also fared comparatively well, at 2.3%, despite (or because of) being forced out of the ERM, and the early 90s recession – but surely also because of the exponential growth of private credit and debt.  Sweden and Canada were still languishing, with average increases of under 1% per year (as stated above, Sweden suffered a severe banking crisis in 1992).

Taking the next decade, 1998-2007, the pre-crisis period which also saw the birth of the Euro, we see Sweden surge ahead as it recovered form crisis, with an average growth rate in GDP per head of over 3%.  And second, though well behind, comes the United Kingdom on 2.4%, with financial services a key (if under-regulated) player.  France and Germany are both well behind, while Japan has collapsed to last place, with just 0.9% average change.  We may note that the EU as a whole (with enlargement from 2004) outperformed the Eurozone.

Last and by far least (in terms of economic performance), next comes the chart which shows the data for the decade 2008 to 2017. Here we see (no big surprise) that Germany has done least badly (average 1% per year increase in GDP per head), while Italy’s performance over the most recent decade is catastrophically bad.

We can also see the very poor result for both France (Eurozone member) and Denmark (not in Eurozone), and the fact that – despite Germany – the Eurozone as a whole averages a puny 0.3% per year.  On the other hand, Japan has again started to climb up the “league table”; whilst its GDP performance is modest, its declining population means that GDP per head is stronger.

Since the Eurozone has done considerably worse than the EU as a whole, as well as US and Canada, we may fairly contend that its institutional and economic/fiscal policy failings were the cause.

Finally, in this section, the next Chart puts together the rates of change in GDP per head for each country by decade, from the above. “Post crash” is of course 2008-17, and “millennial” the 1998-2007 decade of neoliberal hubris.

I have put all this high-level data into a single table, and added a final column showing the percentage change in thew annual average percentage rate of change in GDP for the pre- and post-1992 eras, i.e. pre-Single Market/NAFTA, and for the Single Market/NAFTA era.

As leaps out of the digital page, there is only one real ‘winner’ in this – Sweden. All the rest have distinctly lower rates of change in GDP per head in the post-1992 period than in the previous one.

Conclusion

The data show clearly that the age of hyper-financialised neoliberalism has achieved lower average rates of increase in GDP per person than the previous period. It is also certain that the earlier rate of change (in the so-called Keynesian era to 1970) would have been even stronger. In assessing the impact of the Single Market and NAFTA on the 10 countries looked at, we can conclude (a) that the so-called free trade agreements made no difference, (b) that they worsened the economic performance of most of these states, or (c) that any small positive impact was outweighed by other downside effects of the economic system of which they form an integral part.

After some 25 years, the economic relationships between the respective states involved in the SM or NAFTA are so inter-woven that a sudden break (like an ill-prepared Brexit) is likely to have at least some negative economic effects, even if in the longer run, new relationships and arrangements can be put in place. (I remain a Remainer in the Brexit arguments, since I see a huge geopolitical downside, and no economic benefits.)

The economic performance of the EU states, and especially of the Eurozone, offers no evidence that the impact of the Single Market – taken as part of a wider neoliberal economic framework – has been a positive factor in improving economic performance compared to the previous period..

On the contrary, the Cecchini Committee’s 1988 wildly optimistic forecast of direct and major GDP gains from the Single Market has proved to be wildly wrong.