European Integration and Institutional Convergence

The aim of this paper is to assess empirically whether the prospect for European countries to join the EU and the euro area, respectively, dispose them to strengthen their institutions. Certainly, one would expect a positive impact of this prospect. The more challenging question is what happens with the institutional development after the country has become a Member State of the EU/euro area? This paper investigates the speed of institutional convergence induced by European integration. The hypotheses are the following: The prospect for European countries to join the EU disposes them to strengthen their institutions, so that the speed of convergence is high. Also EU Member States preparing for the introduction of the euro have incentives to develop their institutions, but the speed of institutional convergence is much lower. As soon as Member States introduce the euro, institutional convergence grinds to a halt, or is even reversed, as there could be incentives to undo reforms. To test these hypotheses, we estimate a dynamic panel data model, where the institutional convergence is measured as changes in Worldwide Governance Indicators (WGI). The changes in WGI are explained by the “status” of the European countries (i.e. being a Member State of EU, member of euro area, Member State preparing to adopt the euro, acceding country, candidate country, potential candidate country, or none of the above mentioned) and additional controls. To sum up the findings, we can confirm an overall positive effect of prospective EU membership, and a smaller effect of the preparation for the euro. We find no indication for institutional divergence as soon as Member States introduce the euro.