The Single Market, welfare and population size – an analysis of EU countries and regions

Much of the current debate on the European Single Market centres around its direct economic value. It mostly focuses on productivity, competition and ultimately welfare effects. In this policy brief, we discuss to what extent these welfare effects may also impact on population size. Specifically, we employ a gravity model of trade to simulate the effect of welfare changes on population sizes across Europe assuming that the Single Market would suddenly cease to exist. These hypothetical changes in population size can be interpreted as a result of citizens’ shifts in location choice based on welfare changes resulting from abolishing the Single Market and thus increased trade costs vis-à-vis countries not part of the common economic area.

It should be noted that the simulated population change resembles a hypothetical choice solely based on changes in welfare. Even if people sought to move locations accordingly, there would be legal and other hurdles impeding them from doing so. Therefore, the estimates reported here should be seen as an upper bound of population declines that a country or region could see as a result of the Single Market ceasing to exist. However, the relative differences in the losses allow us to compare the differential impact across countries and regions.

The simulation shows that a removal of the Single Market agreement would clearly weaken trade integration across Europe vis-à-vis the rest of world. Welfare and population declines are linked: The simulation suggests that all countries and regions currently in the Single Market would lose part of their population if the trade liberalization policies of the Single Market were to be removed. The magnitude of losses differs quite strongly: on one hand, regions that economically benefit the most from the Single Market (e.g., Switzerland, Austria, Ireland, Norway and Germany) would see a significant reduction in population size. On the other, regions in the European periphery (e.g., in the South-East) would see very little change in population size if the Single Market were to be removed. Differences within countries are also noteworthy: Germany would see a strong East-West divide, as would France. Regional disparities within Italy and the UK would largely resemble a north-south divide.

The map shows the heterogeneity in terms of projected population losses across NUTS2 regions. It also reveals other patterns across countries: overall, population losses resemble a core-periphery pattern with strong maximum losses concentrated on rather wealthy countries in the core of Europe; southern, eastern and western regions in the periphery would lose smaller shares of their population. Within countries, there is a strong east-west difference in maximum losses within France – mostly stemming from the east being closer to larger markets like Germany and Italy as well as to particularly open economies like Switzerland, Luxembourg and Belgium. In Spain, projected losses in population size would be higher in wealthier regions like Catalonia and the Basque Country, but much smaller in the south of the country. Italy displays a strong difference between the north and the south (Mezzogiorno) with population losses being much higher in the former region.

The simulations highlight several relevant implications for policy-making. First, in line with growth accounting, population size and the labour force are one of the factors driving growth. Thus, the analysis suggests that the Single Market does not only realize more gains from trade, but could also contribute to medium-run growth as it attracts labour from the rest of the world as compared to the counterfactual of no Single Market. This potential “second round” effect appears to be even more critical in light of the ageing workforce in many member countries. Moreover, skilled labour is meant to be more mobile, suggesting that especially skilled workers would be inclined to leave if the Single Market was to be terminated. Such considerations could be particularly important for members of the Single Market like Norway or Switzerland, with the latter currently re-negotiating their Single Market membership with the EU. Moreover, the evidence suggests that the completion of the Single Market should be a priority for EU policy-makers as it can realize additional gains, both more first order ones (gains from trade) and second round gains (population growth). Hence, the current strategies on the Digital Single Market and the Capital Markets Union should be implemented swiftly. The deepening of the Single Market would realize more gains in productivity and eventually welfare, which would – in turn – attract even more labour leading to a stronger second round growth effect.