DP11856 EU Membership or Thatcher's Structural Reforms: What Drove the Great British Reversal?

Author(s): Nauro F Campos, Fabrizio Coricelli
Publication Date: February 2017
Keyword(s): European integration, UK relative economic performance
JEL(s): N14, O47
Programme Areas: International Macroeconomics and Finance
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11856

This paper presents a dissonant view on post-war British economic performance. A defining feature is the decline of the UK relative to the six founding members of the European Union after 1945. However, this relative decline stopped. The conventional view is that a turning point occurs in the mid-1980s when Mrs Thatcher implements far-reaching structural reforms. This paper asks whether econometric evidence supports this conventional view and finds it does not. We then examine an alternative hypothesis: this turning point occurs around 1970 when the UK joined the European Community. We find strong econometric support for this view. The intuition we offer is that EU membership signalled the prominence of business groups that chose to compete at the high-tech end of the common European market against those business groups that preferred comparative advantage driven Commonwealth markets (mostly former colonies). Those pro-Europe business groups later become the constituency that provides support for Mrs Thatcher's reforms. Without this vital support, we argue, Mrs Thatcher's structural reforms would not have been nearly as effective, if proposed and implemented at all.