The Political Economy of European Borders

This paper discusses the process of European integration in light of the political-economy literature on the formation of political borders and polities. Why did Europeans create an economic and monetary union in the absence of the institutions that are historically associated with a successful common currency? Why isn’t Europe a fully integrated federation? The formation of a large multinational polity, like the EU, across heterogeneous populations sharing diverse social and economic structures and cultures, comes with several benefits but also with high costs. The trade-offs between such costs and benefits are at the center of the historical process of European integration, its successes and its failures. First, we discuss the early attempts to form a European federation. Second, we explore the origins, goals, and limitations of the alternative approach of partially integrating policy functions in a few areas, with the expectation that more integration will follow in other areas, in a chain reaction towards an “ever-closer union.” On balance, the gradualist strategy was successful when applied to areas with large economies of scale and relatively low costs from heterogeneity of preferences and traits across different populations. However, that approach, based on the unwarranted expectation that more integration could solve the issues created by the previous steps, is also at the roots of the euro’s institutional shortcomings and the current crisis. A more effective strategy would require that each step towards European integration should be taken only if it is economically beneficial and politically stable on its own merits.