The institutional accomodation of an enlarged Europe

'This paper examines the impact that the process of enlargement may have on European Union institutions in the light of both current democratic theory and the literature on the political economy of trade. The paper assumes that any set of countries will only establish a continent-wide economic and political union if they all benefit in net terms from jointly pooling together their economic assets and political authority. On the one hand, the gross benefits of integration increase with trade and peace gains. On the other hand, integration comes at the cost of losing political sovereign. With complete political integration, the most populous countries can establish regulatory mechanisms on the smaller nations. Thus, the more divergent the standards of living and the distribution of interests and preferences across countries, the more burdensome a political union will be for would-be minority territories and integration will be harder to achieve. If the costs of taxation and regulation exceed trade and peace gains to the point of deterring one or more countries from joining a union, a partial solution to achieve some form of integration would consist in limiting the extent to which all countries pool their assets and authority together. More generally, holding trade and peace gains constant, the depth of political integration would be correlated with the homogeneity in income and interests of the potential members of the union. These insights can be applied to the evolution of the EU. Employing recent data on income distribution, the paper shows, in the first place, that the relatively low level of inter-state inequality in Western Europe explains why this is the only region at the world level where there has been a sustained process of political integration in the last four decades. The paper investigates, in the second place, how this relatively homogeneous distribution of income may change as the EU expands. The paper estimates that the level of inequality has increased from low levels (a Gini index of 32 percent for EU-9 and 34 percent for EU-15, similar to Canada and Australia respectively) to much higher levels (a Gini of 38 percent for EU-25, close to the United States' Gini index). If the EU proceeded to include the Western Balkans and Turkey, the Gini would shoot upwards to about 43 percent. Based on these results, the paper concludes that, unless the trade and security gains of any new enlargement are very substantial, the EU will not achieve any tighter institutional integration and, in fact, may have to accept more decentralization in the future. The paper ends by exploring possible strategies to reduce income heterogeneity and increase political integration in the medium run.' (author's abstract)

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