When Talks Aren’t Cheap: The Impact of Advancing Stages of EU Negotiation on Investor Risk

When institutions that decrease uncertainty are thin on the ground at home, can countries import them from abroad, through membership in stable and prosperous organizations such as the European Union? I show that EU accession has effects that cut both ways: investor risk decreases for candidate countries, where uncertainty is high, and increases for existing, more secure members. I investigate how three rounds of EU expansion over the past 25 years have impacted yields on German treasury bills as well as on sovereign spreads in candidate countries. I compare those with the expansion of signatories to the Exchange Rate Mechanism and later the Euro. I find that investor risk all stages of accession past application, while the number of entrants to EU institutions — particularly at the negotiations and membership stages — is associated with increases in Germany’s perceived default risk. This study has implications for institutional design: as rich-country clubs become more inclusive and adjust to the demands of newer and less-developed members, their own credibility weakens in important ways. NB: This is a combination of two papers/chapters that I’m working on, with probably too much footnoting on other work that I’m doing at the same time. Apologies for the rough nature, and please do not cite without checking for the most recent version. Comments greatly appreciated.