Comparative Economic Studies (2021) 63:117–138

https://doi.org/10.1057/s41294-020-00119-y

Brexit or Euro for the UK? Evidence from Panel Data

Petros E. Ioannatos1

Published online: 1 September 2020

© Association for Comparative Economic Studies 2020

Abstract
An alternative course to Brexit for the UK is evaluated. The purpose of the study
is to determine whether the UK would have been better off had, instead of Brexit,
remained in the EU and joined the Eurozone. The model specification is based on
the neoclassical theory of growth extended to include human capital accumula-
tion. Counterfactual analysis in terms of the difference-in-differences methodology
is applied to evaluate the effect in UK’s per capita income if the UK had joined
the Eurozone when the Eurozone was formed. The dataset is a balanced panel of
annual observations for fifteen countries and covers the period from 1980 to 2017.
The analysis reveals that had the UK joined the Eurozone, UK’s per capita income
would have been 15.48% higher on the average for the period after the formation of
the Eurozone. This effect increases to 24.98% if Eurozone’s less performing econo-
mies of the southern periphery are excluded from the analysis. The study shows that
Brexit is a move toward the wrong direction. The UK should have sought further
integration with the EU in terms of presence in the Eurozone than pursue Brexit and
leave the EU.

Keywords Brexit · European Union · Euro · Eurozone · Neoclassical growth theory ·

Panel data · Natural experiment · Difference-in-differences · Fixed effects

JEL Classification F15 · F17 · F33 · F36 · F60 · C54

Electronic supplementary material The online version of this article (https​://doi.org/10.1057/s4129​

4-020-00119​-y) contains supplementary material, which is available to authorized users.

* Petros E. Ioannatos
pioannat@kettering.edu
1
Department of Liberal Studies, College of Sciences and Liberal Arts, Kettering University, 1700
University Avenue, Flint, MI 48504, USA

Vol.:(0123456789)

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118 P. E. Ioannatos

Introduction

On June 23, 2016, the United Kingdom (UK) held a referendum where 51.9% of
the thirty million voters that participated supported exit of the UK from the Euro-
pean Union (EU). The impending withdrawal of the UK from the EU became also
known as Brexit. On March 29, 2017, the UK invoked Article 50 of the Treaty
of the EU which provides a plan for a member to leave the EU. Subsequently,
negotiations between the UK and EU took place on several issues including, the
trade relationship between UK and EU, the situation of the UK and EU expatriate
citizens, the status of the Northern Ireland border, referred to as “backstop,” and
UK’s compensation to the EU for the Brexit. The terms “soft” and “hard” Brexit
have surfaced implying negotiations could produce, respectively, either Brexit
with a mutually beneficial trade agreement or Brexit without a trade agreement,
under World Trade Organization (WTO) terms, commonly referred to as no-deal
Brexit. On February 1, 2020, the UK pulled out of the EU. However, the status of
most major issues separating the two parties is to be determined in future nego-
tiations. Brexit is an unpreceded event, and both sides are exploring unchartered
territory.
Historically, the relationship of the UK with the EU has not always been har-
monious. The UK had to overcome ten years of French vetoes before joining the
EU in 1973, then, referred to as the European Economic Community (EEC). The
distinctly opposing views in UK’s political establishment on matters relating to
the EEC led to a 1975 referendum with regard to exit of the UK from the EEC. In
this first referendum, the electorate voted 67.2% in favor of staying in the EEC.
Despite the outcome of the referendum, UK’s relations with the EEC continued to
be tense regarding concerns that the UK places own interests above the collective
interest of the EEC partners. The Thatcher years (1979–1990) that followed this
first referendum are notorious for UK’s Eurosceptic attitude. The odd partnership
continued unabated and after the Thatcher years echoing British fears that the
EEC, which became EU on November 1, 1993, is expanding to a “super-state”
with a federal structure, increased centralization in decision making and legal
authority to exercise political and economic dominance over the member states.
There was no surprise when the UK did not follow the EU in the next stage
of integration. In 1999, the majority of the EU members pegged the nominal
exchange rate of their domestic currencies to a new currency, the euro, creating
the European Monetary Union (EMU) or Eurozone which is the largest monetary
union worldwide. However, the UK was conspicuously absent from participat-
ing in the Eurozone over fears of reduced sovereignty in terms of the authority
assumed by the European Central Bank (ECB) and the role of the Stability and
Growth Pact (SGP). Thus, the UK assumed a segmented membership with the
EU in that continued to participate in the single market but abstained from adopt-
ing the euro.
Whereas the literature on Brexit concentrates on the consequences of Brexit
for the UK and the EU, the alternative course for the UK to remain in the EU
and become further integrated with the EU by joining the Eurozone has not been

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Brexit or Euro for the UK? Evidence from Panel Data 119

evaluated. In view of the impending Brexit, this study aims to fill this gap in the
relevant literature and contribute to the Brexit debate by evaluating this alterna-
tive. Therefore, the purpose of the study is to determine whether Brexit is, indeed,
the correct decision for the UK as compared to becoming a Eurozone member.
The study relies on the theoretical foundation of the neoclassical growth model
extended to include human capital accumulation. Counterfactual analysis is applied
in terms of the Differences-in-Differences (DiD) methodology to evaluate the effect
of UK’s per capita income had the UK joined the EU when the EU was formed in
1999. This involves the counterfactual evaluation of the direction and significance
of the sum of the average difference in per capita income between the Eurozone and
the UK from before to after the formation of the Eurozone. The empirical analysis is
based on a balanced panel dataset composed of fifteen countries for the period from
1980 to 2017.
It is demonstrated that had the UK adopted the euro when the Eurozone was
formed, UK’s per capita income would have been higher by a significant 15.48% for
the period after the formation of the Eurozone. If Eurozone’s less performing econo-
mies of the southern periphery are excluded from the study, the effect is even higher
in that UK’s per capita income would have been higher by a significant 24.98%.
The robustness of the results is evaluated by a number of sensitivity tests, thus, by
extending the analysis to the entire non-Eurozone EU group (UK, Denmark, Swe-
den), by accounting for the recent global financial crisis, by changing Eurozone’s
start date from 1999 to 1992 when the Maastricht Treaty was signed, and lastly, by
using an alternative model specification based on the endogenous growth theory.
The analysis shows the UK’s per capita income would have been significantly
higher had the UK been a Eurozone member. This result is compatible with Campos
et al. (2019) where it is demonstrated that UK’s per capita income has increased sig-
nificantly from participating in the EU. Thus, this study not only supports the result
by Campos et al. (2019) but goes further as to show that the UK not only should
have remained in the EU but also should have been further integrated into the EU
by seeking membership into the Eurozone and adopting the euro. Thus, the evidence
suggests that Brexit is not the correct action for the UK.

Literature Review

The impending Brexit has provided the motivation for related research. The lack of
a historical precedent makes such research challenging. Nevertheless, a substantial
number of studies on the subject have surfaced. Vollaard (2014) argued that eco-
nomic disintegration is not integration in reverse but a multicausal and multifaceted
process. Ottaviano et al. (2014) found that the standard of living in the UK would
be compromised regardless of Brexit with a trade agreement or without. Booth
et al. (2015) argued that Brexit without a trade agreement will result in a contrac-
tion of UK’s GDP, whereas, a trade agreement will have a favorable impact on UK’s
GDP. Crafts (2016) found that the economic impact on the UK would depend on
the terms of Brexit and how the political and economic freedom of the UK from the
EU will be utilized. Breinlich et al. (2016) examined how the costs of Brexit will

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120 P. E. Ioannatos

be distributed across income groups and found that middle incomes would suffer
slightly more in proportionate terms than the richest and poorest households. Ebell
et al. (2016) discussed the modeling of long-run shocks to the UK economy after
leaving the EU with an agreement and without. Matthews (2016) found that the
Brexit would cause broadly adverse effects for the EU farm and food sectors. Dhin-
gra et al. (2017) argued that UK’s living standards would be adversely impacted due
to increasing trade costs and reduced foreign investment.
Luo (2017) attributed the Brexit to the structural flaws of EU governance for ade-
quately addressing economic inequality, the distributive injustice, and the misman-
agement of the euro crisis. Kuznar and Menkes (2017) argued that the Brexit may
strengthen UK’s economic ties with the United States of America (USA) but may
also cause Scotland to seek independence. Begg (2017) considered how the UK’s
economic linkages with the EU might evolve after the Brexit and examined some
of the ensuing political and economic challenges. Adler-Nissen et al. (2017) pre-
sented a performative theory of Brexit where the UK plays a major role in advanc-
ing national identity over EU federalism. Sampson (2017) focused on the future of
European and global integration with emphasis on the structural forces that may
develop and cause disintegration. Portes and Forte (2017) found that reductions in
migration due to Brexit are likely to have a significant adverse impact on UK’s per
capita income with marginal favorable impacts on wages in the low-skill service
sector. Kotlinski (2018) concluded that the effects of the Brexit will be more unfa-
vorable for the UK than for the EU with the losses to depend on the type of Brexit.
Hantzsche et al. (2019) argued that Brexit in the long-run would lower UK’s per
capita income by 2–3% and Eichengreen (2019) discussed the international financial
implications of Brexit.
Notable is the work of Campos (2019) which is a comprehensive survey of the
economics academic literature on Brexit. The survey stresses the short-term and
long-term consequences of Brexit with emphasis on trade, foreign direct investment,
migration and capital flows. It is concluded that Brexit will likely harm the UK
economy with particularly severe effects in the financial sector. In addition, Campos
et al. (2019) recognized that there is a gap in the literature in evaluating the growth
effect of an EU member had it not joined the EU. In fact, Campos et al. (2019) used
counterfactual analysis that includes all EU members in evaluating the question of
“what would have been the per capita income for an EU member if it had it not
become an EU member the year it did?” The finding for UK is that UK’s per capita
income has increased significantly from participating in the EU.
There is a similar gap in the literature in evaluating the growth effect for a non-
Eurozone member had it joined the Eurozone. In view of the impeding Brexit, this
study assesses the growth effect for the UK had it been in the Eurozone by evaluat-
ing the question of “what would have been the per capita income of the UK if it had
become a Eurozone member when the Eurozone was formed?” In fact, the analysis
extends to cover the entire non-Eurozone EU group (UK, Denmark, Sweden). In this
manner, this study supplements the study by Campos et al. (2019) for the Eurozone
case.
Thus, while the literature on Brexit has focused on how the UK and the EU would
each be affected from the upcoming Brexit, this study takes a different approach in

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Brexit or Euro for the UK? Evidence from Panel Data 121

that it evaluates whether the UK would have been better off, in terms of per capita
income, had instead of Brexit remained in the EU and sought further integration
with EU by joining the Eurozone.

Model Specification

The theoretical foundation of the model specification is based on the neoclassi-

cal growth model as discussed in Solow (1956) and later extended in the seminal
work of Mankiw, Romer and Weil (1992)—henceforth, as in relevant literature,
MRW (1992)—to include human capital accumulation. This model assumes a
Cobb–Douglas production structure

Yt = Kt𝛼 Ht𝛽 (At Lt )1−𝛼−𝛽 (1)

specified as:where Yt is real gross domestic product (GDP), Kt is capital, Ht is stock

of human capital, At is level of technology and Lt is units of labor in terms of work-
ing-age population, respectively, at time t. Parameters α and β represent, respec-
tively, the shares in income of Kt and Ht and, as a result, 1 − α − β represents the
income share of the effective labor units, At Lt . It is assumed that α + β < 1 implying
decreasing returns to capital and steady state convergence. Lt and At are assumed to
grow exogenously at rates nt and μ, respectively. Thus, At Lt is expected to grow with
rate nt + μ. It is assumed that Kt depreciates with rate δ and that μ + δ = 0.05. Follow-
ing MRW (1992), expression (1) becomes:
( )
Yt
ln = 𝛾0 + 𝛾1 ln(It ) + 𝛾2 ln(Nt ) + 𝛾3 ln(Ht ) (2)
Lt

where ln refers to the natural logarithm, Lt is real GDP per working-age person, as in
Y
( ) t

MRW (1992), ln Lt will be referred to as per capita income, It is total investment

Y
t
in physical capital as a percent of GDP, Nt = nt + μ + δ, henceforth, referred to as
population growth, 𝛾0 is a constant and 𝛾1 , 𝛾2 , 𝛾3 represent, respectively, the elasticity
of per capita income with respect to It , Nt , and Ht . The transition from (1) to (2) is
discussed in great detail in MRW (1992) and need not be repeated here.
MRW (1992) used empirical evidence to evaluate the validity of the growth pro-
cess as indicated by (2) using cross-country data for the period 1960–1985 for three
groups of countries: (1) 98 non-oil producing countries (oil-producing economies
are excluded because most of GDP represents the extraction of existing resources,
not value added), (2) 75 intermediate countries (sample excludes countries whose
populations in 1960 were less than one million) and iii) 22 OECD countries (with
populations greater than one million). MRW (1992, p. 433) concluded that “… dif-
ferences in saving, education, and population growth should explain cross-country
differences in income per capita. Our examination of the data indicates that these
three variables do explain most of the international variation.”
The MRW (1992) specification is well researched and widely cited among
growth theorists. Durlauf and Quah (1999) used the MRW (1992) model as a basis

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122 P. E. Ioannatos

for their empirical work to explain patterns of cross-country growth. Bernanke and
Gurkaynak (2001) examined the validity of the MRW (1992) model by extending
the dataset for the same three groups of countries through 1995. They found that
“MRW’s basic estimation framework is broadly consistent with any growth model
that admits a balanced growth path—a category that includes virtually all the growth
models in the literature.” Breton (2013) also worked on the validity of the MRW
(1992) model and concluded that “The empirical results in this analysis provide evi-
dence that MRW’s growth model is a valid representation of the growth process”.
The work of MRW (1992) has also been used as a basis for further augmentation of
the neoclassical growth model by using ad hoc variables in the basic specification of
the MRW (1992) model, such as cognitive ability and institutional quality as in Ram
(2007), IQ level of societal groups as in Burhan et al. (2014) and various types of
spatial externalities as in Ertur and Wilfried (2007) and Fischer (2011, 2018).
Despite the extensive recognition that the neoclassical MRW (1992) model has
received among growth theorists, for the robustness of results, an alternative model
specification based on the endogenous growth theory (or new growth theory) as in
Romer (1986, 1990), Barro (1996) and Temple (1999) will also be considered. In
contrast with the neoclassical growth theory where technological progress is exog-
enous, the endogenous growth theory assumes that technological progress is endog-
enous and, thus, government action and policy measures can be used to affect tech-
nological progress and, as a result, economic growth. Therefore, the determinants
of endogenous growth models are flexible and depend on what is thought to affect
economic growth. For this reason, the determinants of endogenous growth models
vary widely among researchers. For the purposes of this study, a Barro (1996) type
of endogenous growth model is specified as:
( )
Yt
ln = 𝛾0 + 𝛾1 ln(It ) + 𝛾2 Govtt + 𝛾3 Inft + 𝛾4 Compt (3)
Lt

where Govtt stands for general government final consumption expenditure (% of

GDP), Inft accounts for inflation in terms of consumer prices (annual %) and Compt
for competitiveness based on relative consumer prices, respectively, at time t. As per
the endogenous theory of growth, Govtt , Inft , Compt are subject to action and policy
measures from central authority.

Experimental Design

The study relies on the fact that the formation of the Eurozone results in a natural
experiment. Such experiment occurs when a population receives a treatment from a
process determined by nature, outside the control of the researcher. In such a case,
counterfactual analysis can be applied in terms of the difference-in-differences
(DiD) methodology to determine the effect of the treatment on the population of
interest, referred to as the treatment group, in comparison with the behavior of a
similar population which has not received the treatment, referred to as the control
group. In this case, the euro is the treatment, the treatment group is the Eurozone,

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Brexit or Euro for the UK? Evidence from Panel Data 123

whereas the control group is the UK. Therefore, the Eurozone acts as a counterfac-
tual for the UK as it simulates UK’s per capita income in the hypothetical situation
the UK had joined the Eurozone when the Eurozone was formed.
The Eurozone is composed of the eleven countries that formed the Eurozone
in 1999, thus, Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxem-
bourg, Netherlands, Portugal, Spain and Greece who joined in 2001, for a total of
12 countries. There are 19 countries in the Eurozone but seven (Cyprus, Estonia,
Latvia, Lithuania, Malta, Slovakia, Slovenia) of the 19 joined the Eurozone between
2007 and 2015. Those seven countries are not included in the study due to insuf-
ficient data. In addition, due to their small size, the excluded countries jointly exert
an inconsequential impact on the Eurozone. The Eurozone will also be referred to as
Euro Area 12 or EA12.
To strengthen the analysis, in terms of the robustness of the results, the experi-
mental design will be modified in several ways to determine whether the average
treatment effect will still hold under alternative circumstances. Thus, a series of
robustness checks will be conducted. First, an additional treatment group will also
be considered. This treatment group excludes Eurozone’s less performing economies
of the southern periphery—Greece, Italy, Spain, Portugal—and, thus, will be com-
posed of Eurozone’s core economies; namely, Austria, Belgium, Germany, Finland,
France, Ireland, Luxembourg and Netherlands. This treatment group is essentially
a “sub-treatment” group of EA12 and will be referred to as EA8. The reason for
considering EA8 is that the characteristics of UK’s economy resemble more those
of Eurozone’s core economies than those of Eurozone’s southern periphery. In this
manner, a more meaningful comparison can emerge. Thus, two treatment groups
will be considered; EA12 and EA8.
Second, the robustness of the experimental design is further strengthened by
including Denmark and Sweden as additional countries to the control group. Thus,
this control group will be composed of the non-Eurozone members of the EU;
namely, UK, Denmark and Sweden. This control group will be indicated as EU3.
As a result, the experimental design will include two treatment groups—EA12 and
EA8—and two control groups—UK and EU3. Each of the two treatment groups is
to be evaluated against each of the control groups, thus, there will be four pairwise
comparisons.
Third, to demonstrate the robustness of the results in terms of the recent global
financial crisis, estimation is also conducted by excluding the period after 2007.
Thus, estimation is conducted for two data periods: (1) the period from 1980 to 2017
(entire data set) and (2) the period from 1980 to 2007 (period prior to the global
financial crisis). This will help determine whether the global financial crisis had an
impact on the average treatment effect.
Fourth, to eliminate concerns regarding anticipatory effects in that the countries
involved may have changed their behavior in anticipation of the introduction of the
euro, estimation will be conducted for two different start dates of the Eurozone: (1)
year 1999 when Eurozone members pegged their currencies to the euro and (2) year
1992 when the Maastricht Treaty was signed establishing the Eurozone. The change
of the start date will determine whether anticipatory effects may have impacted the
robustness of the average treatment effect.

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124 P. E. Ioannatos

Finally, the robustness of the average treatment effect is evaluated with respect
to the model specification. Thus, besides the neoclassical MRW (1992) model
specification in (2), the experimental design will include the estimation of a Barro
(1996) type of endogenous growth model in (3). This will determine if the results
are robust to the assumptions of the neoclassical growth theory as well as to those of
the endogenous growth theory.

Methodology

Following Meyer (1995) and Wooldridge (2002, 2013), expression (2) can be aug-
mented to incorporate the DiD methodology as well as to accommodate panel data
allowing for i individual countries classified in g groups at time t. Note that g con-
sists of two groups; the Eurozone (treatment group) and the UK (control group).
That is,
Yigt
( )
ln = 𝛾0 + 𝛾1 ln(Iigt ) + 𝛾2 ln(Nigt ) + 𝛾3 ln(Higt ) + 𝛾4 D2igt + 𝛾5 DEigt + 𝛾6 EUROigt + 𝜀igt
Ligt
(4)
where D2igt is a time dummy variable for the post-Eurozone time period. Thus, D2igt
takes the value of one if the ith country is observed in the period after the forma-
tion of the Eurozone and zero for the time period before the formation of the Euro-
zone. Its coefficient, 𝛾4, captures the average difference in per capita income for the
UK from before to after the formation of the Eurozone. DEigt is a treatment dummy
for being in the Eurozone. Thus, DEigt takes the value of one if the ith observation
belongs in the Eurozone and zero if belongs in the UK. Its coefficient, 𝛾5, captures
the average difference in per capita income between the UK and the Eurozone prior
to the formation of the Eurozone. As a result, 𝛾5 measures the average difference in
per capita income not attributed to the euro. The term EUROigt = D2igt ⋅ DEigt is an
interaction dummy for being in the Eurozone after receiving the treatment (after the
formation of the Eurozone). It takes the value of one if the ith observation belongs
in the Eurozone as well as in the period after the implementation of the Eurozone
and zero if otherwise.
The coefficient of EUROigt , 𝛾6, is the DiD coefficient and the coefficient of inter-
est for this study. This is because 𝛾6 accounts for the sum of two differences, i.e.,
difference-in-differences: (i) the average difference in per capita income for the
Eurozone from before to after the formation of the Eurozone and (ii) the average
difference in per capita income for the UK from before to after the formation of the
Eurozone. Thus, 𝛾6 stands for the average difference in per capita income between
the Eurozone and the UK from before to after the formation of the Eurozone. As a
result, the DiD coefficient measures the average effect of the treatment. The question
for this study is to determine the direction of this difference and whether this differ-
ence is statistically significant. Thus, the Eurozone serving as the counterfactual for
the UK allows the DiD coefficient to capture the effect on UK’s per capita income
had the UK joined the Eurozone. The intercept term, 𝛾0, captures the expected effect

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Brexit or Euro for the UK? Evidence from Panel Data 125

on the per capita income for the UK prior to the formation of the Eurozone. Finally,
𝜀igt is the error term.
Likewise, the endogenous growth model in (3) can be augmented to integrate the
DiD methodology as:
Yigt
( )
ln = 𝛾0 + 𝛾1 ln(Iigt ) + 𝛾2 Govtigt + 𝛾3 Infigt
Ligt (5)
+ 𝛾4 Compigt + 𝛾5 D2igt + 𝛾6 DEigt + 𝛾7 EUROigt + 𝜀igt .

Data Sources and Unit Root Testing

The dataset is a balanced panel of annual observations covering fifteen countries.

The data period is from 1980 to 2017, thus, there is a symmetry regarding the years
before and after the introduction of the euro. The sample size can vary, for example,
when EA12 is the treatment group (with UK being the control group), there will be
thirteen cross-sections; twelve for the EA12 and one for the UK. Thus, when i = 13
and t = 38, there will be 494 observations. However, when the treatment group is
EA12 and the control group is EU3, there will be 15 cross-sections, twelve for the
treatment group and three for the control group, thus, when i = 15 and t = 38, there
will be 570 observations.
To make meaningful comparisons between countries and over time, real out-
put, Yigt , is measured by output-side real GDP at chained Purchasing Power Parities
(PPPs) in millions of 2011 US dollars. The relevant series is from the Penn World
Table (PWT) 9.1, last updated on 4/11/2019. The data for total investment as a per-
cent of GDP ( Iigt ) are also taken from PWT 9.1 and from the series labeled as share
of gross capital formation at current PPPs. Data details for PWT 9.1 can be found in
Feenstra et al. (2015). Note that the data for Yigt and Iigt in MRW (1992) came from
Summers and Heston (1988) which is a direct predecessor of PWT 9.1. As in MRW
(1992), the data for working-age (15–64) population, Ligt , is from the World Bank,
World Development Indicators, series on population ages 15–64, total, last updated
on March 21, 2019. The growth of labor, nigt , is computed using the data in Ligt . Pop-
ulation growth (Nigt ) is nigt augmented by the constant μ + δ, thus, Nigt = nigt + 𝜇 + 𝛿.
MRW (1992) measure human capital ( Higt ) in terms of educational attainment,
thus, by the fraction of working-age population enrolled in secondary education.
However, they point out that this approximation is imperfect due to several compu-
tational and conceptual issues. For this reason, Higt is measured by the human capi-
tal index in PWT 9.1. As discussed in Feenstra et al. (2015), the human capital index
in PTW 9.1 is superior to the measure used in MRW (1992) not only because it uses
data on average years of schooling from Barro and Lee (2013) but also because, as
in Psacharopoulos (1994), it accounts for returns to education which is an important
determinant for the creation of human capital. Thus, with the exception of Higt , all
data for the MRW (1992) specification are taken from the same sources as in MRW
(1992).

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126 P. E. Ioannatos

As for the endogenous growth model specification, the data for Govtigt and Infigt
come from the World Bank, World Development Indicators, last updated on Decem-
ber 20, 2019, from the series labeled general government final consumption expend-
iture (% of GDP) and from the series labeled inflation in terms of consumer prices
(annual %), respectively. The data for Compigt are from the OECD, Economic
Outlook 106, November 2019, with the data being represented by an index where
2015 = 100.
Y
To determine whether the panel data in ln( Ligt ), ln(Iigt ), ln(Nigt ), ln(Higt ), Govtigt ,
igt
Infigt and Compigt are subject to a unit root process, panel unit root testing is applied
as in Levin, Lin and Chu (2002). An individual intercept is included in the auxiliary
regression to account for possible individual fixed effects. The results presented in
Table 1 reject the null hypothesis of a unit root process, thus, ensuring that the rele-
vant variables are stationary.

Qualifying Assumptions

The key identifying assumption for the DiD methodology is based on the idea that in
the absence of the treatment, the trend of the treatment group would be parallel to
the trend of the control group. This is often referred to as the parallel or common
trends assumption. In this case, the assumption is that the trend of the average per
capita income of the Eurozone in the absence of the euro would be parallel to the
trend of the per capita income of the UK. Because it is impossible to test for the par-
allel trends assumption after the treatment has taken place, the practice is to examine
whether the trends of treatment and control groups are parallel for the pretreatment
period. Thus, any change in trends after the treatment can be attributed to the treat-
ment. Since the literature has yet to produce a formal test for the parallel trends

Table 1  Panel unit root testing: Lenin, Lin and Chu

(Y )
ln Ligt ln(Iigt ) ln(Nigt ) ln(Higt ) Govtigt Infigt Compigt
igt

EA12 and − 2.928*** − 1.742** − 2.754*** − 2.915*** − 2.558*** − 8.173*** −1.714**

UK (0.001) (0.040) (0.002) (0.001) (0.005) (0.000) (0.043)
1980–2017
EA12 and − 2.790*** − 1.352* − 2.772*** − 3.184*** − 2.973*** − 9.284*** − 2.261**
EU3 (0.002) (0.088) (0.002) (0.000) (0.001) (0.000) (0.011)
1980–2017
EA8 and − 1.857** − 1.442* − 1.983** − 1.676** − 1.892** − 5.060*** − 1.664**
UK (0.031) (0.074) (0.023) (0.046) (0.029) (0.000) (0.048)
1980–2017
EA8 and − 1.767** − 1.399* − 1.631* − 1.991** − 2.331*** − 8.497*** − 2.054**
EU3 (0.038) (0.080) (0.051) (0.023) (0.009) (0.000) (0.019)
1980–2017

H0: presence of a unit root process

p values in parenthesis. Inference: ***p < 0.01, **p < 0.05 and *p < 0.1

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Brexit or Euro for the UK? Evidence from Panel Data 127

80
Average Outcome Effect, per capita income

70

Euro
60
EA12
EA8
50
UK

40

30

20
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Year

Fig. 1  Average outcome effect, per capita income

assumption, the convention is to visually inspect the trends of the treatment and con-
trol groups prior to the treatment. Figure 1 provides the trend for the average out-
Y
come effect in terms of Ligt for each treatment group along with the trend for the con-
igt
trol group, UK. It is shown that for the pre-treatment period (1980–1998) the trend
of each group holds mostly steady and the trends are close together. However, trends
deviate for the post-treatment period (1999–2017) in that the distance between UK
and treatment groups EA12 and EA8 increases in favor of EA12 and EA8. Note that
Y Y
Fig. 1 displays the trends for the average outcome effect of Ligt instead of ln( Ligt ).
igt igt
Y Y
However, since ln( Ligt ) is a monotonic transformation of Ligt either could be used. The
igt igt
Y
advantage of using Ligt is that it reflects the actual values of the per capita income.
igt
Important for the DiD analysis is the common shocks assumption as well as the
absence of anticipatory effects assumption. The common shocks assumption postu-
lates either the absence of external shocks or that external shocks such as, for exam-
ple, the 2008 global financial crisis, impact the treatment and control groups in a
similar manner. Alternatively stated, exogenous variables affecting the behavior of
treatment and control groups either remain unchanged in the pre- and post-treatment
periods or affect the treatment and control groups in the same way. To determine
the impact of the 2008 global financial crisis, estimation is conducted for the entire
dataset (1980–2017) as well as using only the dataset prior to the global financial
crisis (1980–2007).
The anticipatory effects assumption implies that neither the treatment nor the
control group changed their behavior in anticipation of the treatment, in this case,
the introduction of the euro. To prevent such anticipation effects, the treatment (for-
mation of the Eurozone) is set for 1999—when the Eurozone members pegged their
currencies to the euro but their individual currencies remained in circulation—rather
than 2002 when the euro become physically the official currency of the Eurozone

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128 P. E. Ioannatos

and replaced the individual currencies of the Eurozone members. To further account
for anticipatory effects, analysis is also conducted when the start year of the Euro-
zone is set for 1992 when the Maastricht Treaty was signed.
Also important for the DiD methodology is the assumption of no interdepend-
ency between the treatment and control groups. This assumption is easier satisfied in
a microeconomic environment than a macroeconomic context as general equilibrium
effects can present challenges. For example, the UK’s per capita income could be
affected by the formation of the Eurozone and, in addition, developments in the UK
after 1999 could have had an effect on the Eurozone as both markets are not inde-
pendent. Moreover, if remaining outside the Eurozone adversely affects UK’s per
capita income, Eurozone members would most likely be adversely impacted should
there be spillover effects from the UK. Likewise, in the hypothetical situation that
the UK was part of the Eurozone, the potentially positive spillover effects from the
UK would likely have a positive effect on Eurozone’s output. It should, therefore, be
assumed that such general equilibrium effects remain small to meaningfully affect
UK’s per capita income and that of the Eurozone. For example, it could be argued
that the average trade links between the UK and the Eurozone are not of such mag-
nitude and significance to considerably impact the per capita income of either the
UK or the Eurozone as to affect the application of the DiD methodology.

Estimation

The study focuses on evaluating the effect of the euro on UK’s per capita income in
the hypothetical situation that the UK had participated in the Eurozone from 1999.
Thus, the empirical question is to determine the direction and the significance of
the difference in per capita income between the Eurozone (EA12) and the UK from
before to after the creation of the Eurozone. Likewise, the same difference is evalu-
ated between EA8 and UK.
Estimation is conducted using fixed effects. The choice of fixed effects is based
on the Hausman (1978) specification test which for the case where EA12 is the treat-
ment group and UK is the control group produced a χ2 statistic of 26.227 with a p
value of 0.0001 which rejects the random effects model. Likewise, when EA8 is
the treatment group and UK is the control group, the same test produced a χ2 sta-
tistic of 54.940 with a p value of 0.0000 rejecting the random effects model. The
fact that the data favor fixed effects over random effects is not a surprising result as
the assumption of unobserved effects which are not correlated with the independ-
ent variables is the exception rather than the rule. Furthermore, in testing whether
the fixed effects are redundant, for the case of EA12 and UK the relevant likeli-
hood ratio test produced an F statistic of 438.745, whereas, for the case of EA8 and
UK an F-statistic of 161.168 with a p value of 0.0000 in each case, thus, rejecting
the hypothesis that fixed effects are redundant, essentially, enforcing the results of
the Hausman (1978) specification test. The advantage of fixed effects estimation is
that it produces unbiased parameter estimates even in the presence of time-invariant
omitted variables as well as other time-invariant unobserved and/or non-measurable
effects and characteristics.

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Brexit or Euro for the UK? Evidence from Panel Data 129

The treatment dummy DEigt is collinear with the fixed effects in that it is
“absorbed” by the fixed effects. Thus, estimation is conducted without this term. In
fact, the interpretation of its coefficient, 𝛾5, is only ceremonious for the analysis as it
measures the effect not attributed to the introduction of the euro. To ensure robust-
ness in terms of cross-sectional (contemporaneous) correlation (period clustered)
and cross-sectional heteroskedasticity, the regression coefficients are estimated
using the cross section seemingly unrelated regressions (SUR) procedure. For the
same reason, the standard errors are computed using the White’s (1980) heteroske-
dasticity consistent cross-section coefficient covariance matrix.
A number of studies have used the DiD methodology in a macroeconomic con-
text, in fact, studying matters of the EU and Eurozone. Goncalves et al. (2009) used
DiD analysis to study the correlation of business cycle in the Eurozone and Campos
et al. (2014) used the DiD methodology as a supplement to synthetic counterfactual
analysis for estimating the benefits from membership in the EU. Neither study used
fixed effects, thus, implicitly assuming that omitted variables and unobserved effects
impact treatment and control groups in the same manner, essentially, utilizing the
common shocks assumption. Christodoulopoulou (2014) also used DiD analysis to
study the effect of the Eurozone on business cycle corrections and, likewise, Conti
(2014) who discussed the impact of the euro on Eurozone’s growth. Both studies
used fixed effects as an arbitrary choice to account for the possibility of omitted
variables and unobserved effects. However, the choice of fixed effects came without
considering the possibility of random effects, in terms of the Hausman (1978) speci-
fication test, and without testing for the possibility that fixed effects may be redun-
dant. In this study, the choice of fixed effects in the DiD analysis has been supported
by the Hausman (1978) specification test that rejects the random effects model and
also from the finding that fixed effects are not redundant.

Results

Table 2 presents estimation results for the neoclassical growth MRW (1992) speci-
fication for treatment groups EA12 and EA8 with control groups UK and EU3 for
data periods 1980–2017 and 1980–2007 when the start date of the Eurozone is set
for 1999. The coefficients of interest for this study are the DiD coefficients, thus the
coefficients for EUROigt . The DiD coefficient when EA12 is the treatment group and
UK the control group for period 1980–2017 assumes the value of 0.144 and is sta-
tistically significant. Thus, the average difference in per capita income between the
Eurozone and the UK from before to after the formation of the Eurozone is a signifi-
cant [exp(0.144) − 1] × 100 = 15.48% in favor of the Eurozone. Since the Eurozone
serves as the counterfactual for the UK, this implies that if the UK had joined the
Eurozone in 1999, UK’s per capita income would have been 15.48% higher on the
average for the period after the formation of the Eurozone. For the same data period,
when the control group changes from UK to EU3, the DiD coefficient becomes a
significant 0.049 which implies that the aforementioned difference stands at a sig-
nificant [exp(0.049) − 1] × 100 = 5.02% in favor of the Eurozone. Thus, the DiD

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130 P. E. Ioannatos

(Y )
Table 2  Dependent variable: ln igt
Ligt

Treat- EA12 EA8 EA12 EA8

ment
Control UK EU3 UK EU3 UK EU3 UK EU3

Data 1980– 1980– 1980– 1980– 1980– 1980– 1980–2007 1980–

period 2017 2017 2017 2017 2007 2007 2007
𝛾0 1.510*** 1.470*** 0.617*** 0.447*** 1.681*** 1.594*** 0.919*** 0.774***
(0.095) (0.078) (0.188) (0.110) (0.069) (0.067) (0.218) (0.159)
ln(Iigt ) 0.255*** 0.262*** 0.184*** 0.187*** 0.028*** 0.057*** 0.122*** 0.128***
(0.008) (0.007) (0.012) (0.009) (0.010) (0.006) (0.018) (0.010)
ln(Nigt ) 0.041*** 0.037*** − 0.005 − 0.038* 0.476*** 0.435*** 0.537*** 0.451***
(0.013) (0.012) (0.023) (0.020) (0.015) (0.015) (0.041) (0.034)
ln(Higt ) 2.386*** 2.407*** 2.933*** 2.996*** 3.180*** 3.156*** 4.034*** 3.927***
(0.078) (0.068) (0.144) (0.082) (0.051) (0.047) (0.159) (0.104)
D2igt 0.129*** 0.226*** 0.061** 0.168*** − 0.015 0.104*** − 0.085*** 0.068***
(0.016) (0.013) (0.025) (0.013) (0.009) (0.010) (0.017) (0.011)
EUROigt 0.144*** 0.049*** 0.223*** 0.110*** 0.176*** 0.063*** 0.277*** 0.131***
(0.009) (0.005) (0.012) (0.007) (0.010) (0.005) (0.015) (0.008)
Adj-R2 0.977 0.981 0.939 0.946 0.987 0.990 0.951 0.962
Sample 494 570 342 418 364 420 252 308

Specification: Neoclassical growth, MRW (1992). Eurozone Start date: 1999 (member currencies pegged
to euro)
Standard errors in parenthesis. Inference: ***p < 0.01, **p < 0.05 and *p < 0.1

coefficient is robust to the change of the control group from UK to EU3 as the aver-
age treatment effect continues to hold.
For the case of EA8 and UK and for period 1980–2017, the DiD coefficient is
statistically significant and takes the value of 0.223. Thus, the average difference
in per capita income between EA8 and the UK from before to after the formation
of the Eurozone is a significant [exp(0.223) − 1] × 100 = 24.98% in favor of EA8.
This difference is much higher in comparison to the 15.48% difference for the case
of EA12 and UK. This implies that the difference is even higher when Eurozone’s
less performing economies of the southern periphery are excluded from the anal-
ysis and only Eurozone’s core economies in EA8 are considered in the treatment
group. In fact, this is a more meaningful result as the features of UK’s economy are
closer to those of the economies in EA8 than those of Eurozone’s southern periph-
ery. For the case of EA8 and EU3 for the same data period, the DiD coefficient is
a significant 0.110 and, thus, the difference becomes a significant [exp(0.110) − 1]
× 100 = 11.62% in favor of EA8 which is higher than the 5.02% difference for the
case of EA12 and EU3 for the same data period, consistent with the difference being
greater when the southern periphery is excluded.
To determine whether the DiD coefficients are robust to the recent global finan-
cial crisis, estimation is also conducted for the period from 1980 to 2007 which
excludes the years after the global financial crisis. In particular, the DiD coefficient
for the EA12 and UK pair shows that the per capita income for EA12 is higher than

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Brexit or Euro for the UK? Evidence from Panel Data 131

that of UK by a significant [exp(0.176) − 1] × 100 = 19.24% and for the EA12 and
EU3 pair higher by a significant [exp(0.063) − 1] × 100 = 6.50% in favor of EA12.
Further, the DiD coefficient for the EA8 and UK pair shows that the per capita
income of EA8 is higher than that of the UK by a significant [exp(0.277) − 1] ×
100 = 31.91% and for the EA8 and EU3 pair higher by a significant [exp(0.131) − 1]
× 100 = 13.99% in favor of EA8.
The evidence this far shows that the average treatment effect remains robust to the
choice of treatment group (EA12, EA8), the choice of control group (UK, EU3) and
to the recent global financial crisis. That is, in all situations the average treatment
effect expressed by DiD coefficient remains positive and significant implying that
the treatment group outperforms significantly the control group.
The remaining coefficients of Table 2 play a peripheral role for the matter under
study, but nevertheless, the interpretation of the coefficients in the case of EA12
and UK for period 1980–2017 is provided. The like coefficients of Table 2 may be
interpreted similarly. Note that the coefficients of ln(Iigt ), ln(Nigt ) and ln(Higt ) rep-
resent, respectively, the elasticity of per capita income with respect to It , Nt , and
Ht . The coefficient of ln(Iigt ), 𝛾1, is statistically significant and shows that when Iigt
increases (decreases) by 1%, the per capita income is expected to increase (decrease)
by 0.255%. The coefficient of ln(Nigt ), 𝛾2, is statistically significant and indicates
that a 1% increase (decrease) in Nigt would raise (lower) the per capita income by a
0.041%. Likewise, the coefficient of ln(Higt ), 𝛾3, is statistically significant and shows
that a 1% increase (decrease) in Higt would raise (lower) the per capita income by
2.386%. The coefficient of D2igt , 𝛾4, shows that the average difference in per capita
income for the UK from before to after the formation of the Eurozone is a significant
[exp(0.129) − 1] × 100 = 13.76%. In terms of fixed effects estimation, the intercept
term, 𝛾0, represents the average fixed effect. Adj-R2 stands for adjusted R2. The sam-
ple size is also indicated for each case.
Table 3 presents estimation results for the same experimental design as in Table 2
but the start date of the Eurozone is changed from year 1999 when member coun-
tries pegged their currencies to the euro to year 1992 when the Maastricht Treaty
was signed. The objective is to determine the sensitivity of the average treatment
effect in terms of possible anticipatory effects that could have affected the behavior
of the countries involved in anticipation of the impending formation of the Euro-
zone. In this case, all DiD coefficients are significant and assume a positive sign as
their counterparts in Table 2. Thus, in all cases, the treatment group outperforms the
control group in a significant manner. This implies that the average treatment effect
is robust to anticipatory effects in that the change of the start date of the Eurozone
from 1999 to 1992 does not affect the average treatment effect.
To determine whether the average treatment effect is robust to the model specifi-
cation, estimation is also conducted using a Barro (1996) type of endogenous growth
model. Thus, Tables 4 and 5 keep the same experimental design as in Tables 2 and
3, respectively, but the model specification changes from the neoclassical growth
MRW (1992) specification in (4) to an endogenous growth Barro (1996) type speci-
fication in (5). The respective DiD coefficients show that the average treatment effect
holds in that all the DiD coefficients assume a positive sign and are statistically sig-
nificant just like their counterparts in Tables 2 and 3. Thus, the average treatment

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 132

igt
Table 3  Dependent variable: ln Ligt
(Y )

Treatment EA12 EA8 EA12 EA8

Control UK EU3 UK EU3 UK EU3 UK EU3

Data period 1980–2017 1980–2017 1980–2017 1980–2017 1980–2007 1980–2007 1980–2007 1980–2007
𝛾0 0.991*** 0.872*** − 0.264 − 0.516*** 1.993*** 1.864*** 0.974*** 0.950***
(0.098) (0.085) (0.161) (0.093) (0.079) (0.072) (0.267) (0.167)
ln(Iigt ) 0.150*** 0.130*** 0.083*** 0.062*** − 0.039*** − 0.057*** 0.063*** 0.009
(0.008) (0.007) (0.013) (0.009) (0.014) (0.010) (0.020) (0.014)
ln(Nigt ) 0.108*** 0.135*** 0.038*** 0.019 0.638*** 0.641*** 0.676*** 0.672***
(0.016) (0.012) (0.028) (0.018) (0.020) (0.019) (0.045) (0.037)
ln(Higt ) 2.935 3.081*** 3.737*** 3.875*** 3.218*** 3.303*** 4.271*** 4.198***
(0.075) (0.063) (0.105) (0.063) (0.064) (0.063) (0.193) (0.114)
D2igt 0.025*** 0.115*** − 0.096*** 0.036*** − 0.043*** 0.058*** − 0.148*** − 0.002
(0.012) (0.008) (0.019) (0.008) (0.011) (0.009) (0.028) (0.013)
EUROigt 0.168*** 0.067*** 0.283*** 0.138*** 0.185*** 0.078*** 0.285*** 0.145***
(0.009) (0.004) (0.016) (0.009) (0.009) (0.007) (0.023) (0.011)
Adj-R2 0.975 0.980 0.949 0.962 0.985 0.986 0.947 0.963
Sample 494 570 342 418 364 420 252 308

Specification: Neoclassical growth, MRW (1992). Eurozone Start date: 1992 (Maastricht Treaty)
Standard errors in parenthesis. Inference: ***p < 0.01, **p < 0.05 and *p < 0.1

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P. E. Ioannatos
 igt
Table 4  Dependent variable: ln Ligt
(Y )

Treatment EA12 EA8 EA12 EA8

Control UK EU3 UK EU3 UK EU3 UK EU3

Data period 1980–2017 1980–2017 1980–2017 1980–2017 1980–2007 1980–2007 1980–2007 1980–2007
𝛾0 4.037*** 4.101*** 4.049*** 4.040*** 3.968*** 4.066*** 4.051*** 4.181***
(0.046) (0.032) (0.084) (0.066) (0.527) (0.028) (0.061) (0.043)
ln(Iigt ) 0.264*** 0.280*** 0.281*** 0.281*** 0.199*** 0.212*** 0.133*** 0.166***
(0.014) (0.008) (0.024) (0.016) (0.016) (0.011) (0.026) (0.018)
Govtigt − 0.018*** − 0.017*** − 0.015*** − 0.014*** − 0.029*** − 0.027*** − 0.033*** − 0.032***
Brexit or Euro for the UK? Evidence from Panel Data

(0.001) (0.001) (0.002) (0.001) (0.001) (0.001) (0.002) (0.001)

Infigt − 0.015*** − 0.016*** − 0.013*** − 0.122*** − 0.019*** − 0.019*** − 0.016*** − 0.017***
(0.001) (0.001) (0.002) (0.001) (0.001) (0.001) (0.001) (0.001)
Compigt 0.019*** 0.016*** 0.020*** 0.020*** 0.004*** 0.030*** 0.039*** 0.032***
(0.002) (0.002) (0.002) (0.002) (0.002) (0.001) (0.001) (0.002)
D2igt 0.395*** 0.420*** 0.420*** 0.455*** 0.264*** 0.299*** 0.254*** 0.286***
(0.022) (0.018) (0.030) (0.030) (0.020) (0.018) (0.026) (0.023)
EUROigt 0.128*** 0.104*** 0.166*** 0.138*** 0.146*** 0.112*** 0.147*** 0.137***
(0.011) (0.006) 0.0143) (0.011) (0.016) (0.008) (0.020) (0.016)
Adj-R2 0.967 0.986 0855 0.884 0.988 0.989 0.890 0.902
Sample 494 570 342 418 364 420 252 308

Specification: Endogenous growth, Barro (1996) type. Eurozone Start date: 1999 (member currencies pegged to euro)
Standard errors in parenthesis. Inference: ***p < 0.01, **p < 0.05 and *p < 0.1

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133
 134

igt
Table 5  Dependent variable: ln Ligt
(Y )

Treatment EA12 EA8 EA12 EA8

Control UK EU3 UK EU3 UK EU3 UK EU3

Data period 1980–2017 1980–2017 1980–2017 1980–2017 1980–2007 1980–2007 1980–2007 1980–2007
𝛾0 3.274*** 3.390*** 3.579*** 3.778*** 3.245*** 3.512*** 3.700*** 4.000***
(0.056) (0.036) (0.073) (0.030) (0.039) (0.026) (0.064) (0.045)
ln(Iigt ) 0.055*** 0.049*** 0.104*** 0.105*** − 0.041*** − 0.016* − 0.180*** − 0.175***
(0.0156) (0.007) (0.019) (0.017) (0.011) (0.008) (0.019) (0.017)
Govtigt − 0.003*** − 0.002*** − 0.008*** − 0.009*** − 0.025*** − 0.026*** − 0.049*** − 0.051***
(0.001) (0.001) (0.002) (0.001) (0.001) (0.001) (0.002) (0.001)
Infigt − 0.009*** − 0.010*** − 0.007*** − 0.007*** − 0.007*** − 0.009*** − 0.004*** − 0.003***
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
Compigt 0.003*** 0.002*** 0.002*** 0.010*** 0.006*** 0.004*** 0.005*** 0.003***
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
D2igt 0.349*** 0.372*** 0.298*** 0.322*** 0.215*** 0.238*** 0.209*** 0.243***
(0.027) (0.024) (0.029) (0.033) (0.016) (0.014) (0.025) (0.016)
EUROigt 0.126*** 0.107*** 0.195*** 0.147*** 0.145*** 0.116*** 0.1580*** 0.129***
(0.012) (0.007) (0.016) (0.011) (0.013) (0.007) (0.016) (0.010)
Adj-R2 0.981 0.987 0.860 0.886 0.988 0.992 0.944 0.947
Sample 494 570 342 418 364 420 252 308

Specification: endogenous growth, Barro (1996) type. Eurozone Start date: 1992 (Maastricht Treaty)
Standard errors in parenthesis. Inference: ***p < 0.01, **p < 0.05 and *p < 0.1

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P. E. Ioannatos
Brexit or Euro for the UK? Evidence from Panel Data 135

effect remains robust when the model specification changes from the neoclassical
growth MRW (1992) model to the endogenous growth Barro (1996) type model,
implying robustness to the assumptions of either model. It should be noted that the
regressors of the endogenous growth specification assume the expected signs and
are statistically significant. In particular, size of government and inflation exert an
adverse impact on growth, whereas investment spending and competitiveness pro-
mote growth.
The analysis shows that all DiD coefficients in Tables 2, 3, 4 and 5 are consist-
ently positive and significant implying that the treatment group in each case out-
performs the control group enforcing the idea that the UK’s per capita income
would have been significantly higher if the UK had become a Eurozone member in
1999. This result as expressed by the average treatment effect is robust to each and
every sensitivity test conducted; in particular, (1) to the change of treatment group
from EA12 to EA8, (2) to the change of the control group from UK to EU3 (which
includes UK, Denmark, and Sweden), (3) to the recent global financial crisis, thus,
when dataset is changed from 1980–2017 to 1980–2007, (4) to the change of the
start date of the Eurozone from 1999 to 1992 as to account for anticipatory effects
in anticipation of the formation of the Eurozone and (5) to the change of the model
specification from the MRW (1992) neoclassical growth model to a Barro (1996)
type of endogenous growth specification.

Conclusions

Without a doubt Brexit is an unprecedented event with far-reaching implications.

The current research on Brexit focuses on the economic consequences of Brexit on
the UK and EU. This study evaluates an alternative course of action to Brexit as it
examines the question of whether the UK would have been better off by remaining
in the EU and, in addition, sought further integration with the EU by joining the
Eurozone.
The theoretical foundation of the model specification is based on the neoclassical
theory of growth extended to include human capital accumulation. The statistical
analysis relies on the DiD methodology where the Eurozone serves as a counterfac-
tual for the UK. Thus, Eurozone’s per capita income is used to simulate the effect
of UK’s per capita income had the UK joined the Eurozone in 1999. The empirical
question is to determine the direction and statistical significance of the difference in
per capita income between the Eurozone and the UK from before to after the forma-
tion of the Eurozone. The dataset is a balanced panel of annual observations com-
posed of fifteen countries for the period from 1980 to 2017.
The evidence reveals that UK’s per capita income would have been higher by a
significant 15.48% on the average had UK joined the Eurozone in 1999. If Euro-
zone’s less performing economies of the southern periphery are excluded from the
analysis and only Eurozone’s core economies are considered, the difference would
have been even higher, that is, higher by a significant 24.98%. The latter is a more
accurate estimate as the features of the UK’s economy resemble more those of

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136 P. E. Ioannatos

Eurozone’s core economies than those of Eurozone’s southern periphery. In either

situation, the UK’s per capita income would have been significantly higher had it
been in the Eurozone.
To ensure the robustness of the results to a broad range of alternative situations,
several sensitivity tests were conducted. First, the treatment group was changed
from the Eurozone (EA12) to Eurozone’s core economies (EA8) as the character-
istics of UK’s economy resemble more those of Eurozone’s core economies than
those of Eurozone’s southern periphery. Second, to show that results are not spe-
cific to the UK being the control group, the control group was expanded from UK
to EU3 as to include all three non-Eurozone members of the EU (UK, Denmark,
and Sweden) that did not adopt the euro. Third, to ease concerns about the role of
the resent global financial crisis, the data period past the global financial crisis was
excluded from the analysis. Fourth, to alleviate concerns regarding possible antici-
patory effects, the start date of the Eurozone was changed from 1999 to 1992. Fifth,
to ensure the model specification does not drive the results, the model specifica-
tion was changed from a neoclassical growth specification to an endogenous growth
specification. In all situations, the DiD coefficients are positive and significant. This
implies that, in each case, the treatment group outperforms the control group sig-
nificantly which implies that the average treatment effect holds, showing remarkable
robustness with respect to each and every sensitivity test conducted.
The evidence shows that UK’s per capita income would have been significantly
higher if UK had been in the Eurozone. Thus, the UK not only should have remained
in the EU but also should have sought further integration into the EU by joining the
Eurozone and adopting the Euro. As a result, Brexit is a move toward the wrong
direction for the UK.

Acknowledgements The author wishes to thank Nauro F. Campos and an anonymous referee for com-
ments and suggestions that benefitted this work substantially. The author is responsible for any errors or
omissions.

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