Is there an economic rationale for leaving or joining the EU? Evidence from a political economy framewor

Over the past few years, European Citizens have become increasingly skeptical of the EU and its institutions. The recent Brexit is a striking illustration of this trend. This questions the rationale and the relevance of European Integration. In this paper, we rely on the median voter approach to identify the driving forces behind the binary choice of economic integration in the EU and to estimate the relevance of such integration for the EU as a whole and for each country pair. Our model is based on the political-economy framework while it also accounts for recent developments such as the interdependence effects (Baier et al. 2014) and imperfect competition (Baier and Bergstrand, 2004). From this theoretical basis, we develop a conditional fixed-effect logit model. The model relates the relative utility for economic integration to various observables, such as differences of countries in factor endowments and technology, to estimate the likelihood of economic integration in the EU. Our database includes the partners of all effective economic integration agreements in the world, i.e. 105 countries (10,920 country pairs), from 1981-2013. Results show that the probability for economic integration in Europe overall is equal to 82.6%. It is even greater for most Western EU countries and most country pairs. Thus, these results suggest that economic integration is generally very relevant for EU countries, including Great Britain.