Daniel Verdier

EUROPEAN INTEGRATION AS A SOLUTION TO WAR

We seek to establish the conditions in which binding international institutions can serve as a solution to preventive war. Scholars of international integration portray institutions as a response to problems of incomplete information, transaction costs and other barriers to welfare improvement for their members. In contrast, we show that international institutions can have binding properties that solve credible commitment problems among member states — even in the case of volatile preventive war dilemmas. Our primary case is post-war Europe. We show that European integration since the early 1950s was conceived as a means of committing a temporarily weakened West Germany not to use its future power to pursue military ends in Europe, thereby obviating a preventive war against it. The various institutions that form part of the European Communities, now the European Union, still bear the mark of this goal. In this article, we establish the game theoretic conditions for the existence of binding international institutions as a solution to preventive war. We also provide evidence that the model is a good approximation of what political elites had in mind in the wake of World War II.

Multilateralism, Bilateralism, and Exclusion in the Nuclear Proliferation Regime

I use the nuclear proliferation regime to show that dyadic diplomacy is not necessarily incompatible with the building of a multilateral regime; bilateralism is not the opposite of multilateralism, but an efficient component thereof. Although this point will not be new to most students of institutions, no general rationale has so far been offered on the complementarity of bilateral and multilateral diplomacy. Starting from a characterization of proliferation as the result of a large number of prisoners dilemmas played out between states engaged in local dyadic rivalries, I demonstrate that it is possible for the superpowers to design an optimal mix of threats and bribes in which states with low compliance costs join the regime on the terms of the multilateral treaty alone; states with intermediate compliance costs need additional customized incentives, delivered through bilateral agreements; and states with high compliance costs are not only left out of the regime but also punished for nonparticipation. I draw a few comparative statics that I systematically test on Nuclear Proliferation Treaty (NPT) membership data. I discuss the applicability of the model to the currency, trade, and aid regimes.

Domestic Responses to Capital Market Internationalization Under the Gold Standard, 1870- 1914

The internationalization of capital markets that occurred during the era of the classical gold standard (1870-1914) was part of a broader set of trends that threatened to drain local markets from capital and channel that capital to the national financial center and, from there, toward other national financial centers. Still, internationalization was neither inevitable, uniform, nor irreversible but was a political choice informed by redistributional considerations between rival domestic interests and decided by politically dominant coalitions. The domestic institutional structure in each country determined the composition of the politically dominant coalition. Decentralized structures allowed potential losers to curb public policies favorable to capital market internationalization, whereas centralized structures allowed expected winners to promote such policies. As a result, economies with centralized states ended up being the most dependent on the international capital market, whereas economies with decentralized states took a less active part in the globalization of finance.

Capital Mobility and the Origins of Stock Markets

I illustrate the accepted, though hardly researched, idea that political institutions play a role in locking in factor specificity across sectors, space, and borders. I use the emergence of modern capital markets in the nineteenth century, a process that threatened to redeploy financial resources away from land and traditional sectors to heavy industry, as a test case to ascertain the degree of domestic financial capital mobility in nine advanced industrialized countries. The main finding is that cross-national variations in financial capital mobility, holding constant the level of economic development, reflect the degree of state centralization.

Why Rewards are Better than Sanctions

Sanctions are said to fail because of the “rally‐round‐the‐flag effect”. This is the main reason why many advocate the use of positive incentives as a viable alternative. Not only do rewards provoke no defensive reaction, but they may elicit a rally in support of compliance – a “fifth‐column effect.” Yet, positive incentives are vulnerable to extortion – doing wrong in the hope of obtaining larger rewards. As a result, many conjecture that sanction threats and promises of reward are most efficient when used simultaneously. We put this conjecture to a test, staging a formal confrontation of the two forms of incentives. Our model pits a sanctioner and a target in a game allowing for the possibility of rally‐round‐the‐flag, fifth‐column, and extortion effects. The game yields unambiguous results: under no circumstances should a sanctioner prefer sanction threats to reward promises. This result holds despite the risk of extortion, a risk that proves to be less of a drawback than the rally round the flag.

The dilemma of informal governance with outside option as solution

The efficiency-oriented part of the literature on informal governance points to institutional costs as a reason for governments to prefer to cooperate with each other through commitments that are not binding. Left unexplained is what I callthe dilemma of informal governance: how informal governance copes with the problem of cheating, to which formal governance has traditionally provided the solution. I show that likemindedness, the current solution to the dilemma, is convincing but underspecified. Working from a model of governance encompassing the three time-honored dimensions of obligation, precision, and delegation, I analytically explore two other solutions, one that fails, information transmission, another that works, outside option, which I borrow from the power-oriented part of the literature on informal governance. A key finding is that informal governance, despite being neither self-enforceable nor informative, is sustainable for mild Prisoner’s Dilemma (PD) types in the presence of outside options. I illustrate the model findings by tracing an historical correlation between power polarization and formalism in the design of security regimes.

Global Regime Divergence: Why the World Trade Regime Has Become More Legalized While the Financial Regime Has Become Less Legalized

The international trade and finance regimes exhibit different levels of legalization. The trade regime is made up of treaties, whereas the financial regime, in contrast, is ruled by agreements that are informal. This difference reflects the different institutional strategies that were successfully pursued by each group of globalists in their respective area over the last fifty years: exporters worked in close relation with their government to build a regime able to contain protectionist opposition at home and provide access to markets abroad; bankers, in contrast, accessed world markets by pressing for the repeal of government regulation at home and intergovernmental regulation abroad. Beyond offering an explanation for the institutional differences between the trade and financial regimes, the study makes three general contributions to the governance literature. First, the formal-informal dimension is shown to be part of a larger list of divergent traits between two broad ideal types of governance, labeled law-based and market-mediated. Second, the factors that account for the divergence between trade and finance also generalize to other regimes in the areas of economics, the environment, human rights, and security. Third, the study offers a typology of informal governance that cuts through the current distinction between trans-governmental networks and private governance.

Introduction: Democratic Institutions for a New Europe

Institutional reforms have up to now always preceded or immediately followed any major enlargement round of the European Union, fueling functionalist hopes that the organization will ultimately become a nation-state. Yet the prolonged failure to redistribute power effectively between member states, the Commission, the Parliament, and the European Court of Justice means that these past successes have also stretched the size and the institutions of the Union to the limit. Despite its minimalist results, the Treaty of Nice was not yet in force in the fall of 2002, causing the European Union to face considerable problems in dealing adequately with the Eastern enlargement, allegedly the greatest challenge it has ever faced. By admitting up to 12 new members during the next decade, not only will the European Union increase in size, but, what is more troubling, heterogeneity among the member states will grow to an unprecedented degree. Excessive divergence could become a problem far beyond Groucho Marx’s famous quip: ‘I sent the club a wire stating: “Please accept my resignation.” I don’t want to belong to any club that will accept me as a member.’1 The theory of collective action suggests that the provision of the collective good, be it a pure public good or a club good, becomes more cumbersome the more actors contribute to it and the more dissimilar they are (Sandler, 1992). Although increased trade between the old and new member states might offset some of these negative aspects (Schneider, 2002), this might not be enough to bind the members of an increasingly heterogeneous club together. Only a proper set of institutions can guarantee that the European Union will provide the collective goods that the member states expect it to deliver. The ratification pains felt over the Treaty of Nice are, however, an indication 01 Schneider (to/d) 1/23/03 4:09 PM Page 5