The field of regional integration displays a wide range of theories, but few sharply formulated hypotheses to discriminate among them. As a result, scholars often engage in broad meta-theoretical debates emphasizing programmatic statements with selective illustrations designed to show why one approach is superior, rather than comparative theory-testing in light of systematic evidence. Since the data are sufficiently abundant and flexible to illustrate any meta-theoretical position, this approach does not result in the selective winnowing of alternative theories. In this section, we focus on some of the most important theories, inevitably omitting others. We discuss neofunctionalism, realism, liberal intergovernmentalism, constructivism and multi-level governance.

Neofunctionalist Approaches

Functionalism and neofunctionalism were the progenitors of the field of regional integration. These approaches contain two key insights or research foci. The first has to do with the power of transnational society, the role of interest groups, professional associations, producer groups and labor unions, as well as cultural and scientific organizations. Jean Monnet argued that individuals and groups, engaged in practical problem-solving across borders, provided the push (or the demand-side) for regional integration. Without this demand side, regional integration could not succeed. It would have no popular motivation. Rulers and statespersons might bring together governments in international conferences, but without a supporting societal base regional integration would lack a broad appeal. Understood in this way, functionalism represents a type of social pluralism. It points to society as the engine of politics. Just as it would be impossible to understand domestic politics without understanding the strategies and demands of domestic interest groups, it is difficult to comprehend regional politics without taking into account industrialists, workers, consumers and special interests.

The second principle has to do with the role of supranational institutions. Social and economic interests, no matter how intense, may be lacking in organization, knowledge of group predicament, capacity to mobilize interests and access to policy-making influence. A well-developed demand side is necessary for integration, but it is not sufficient. Without political mechanisms to provide leadership, aggregate interests and convert them into policy, even the most intense interests may not lead to policy consequences. Thus, international institutions and political leadership are required. Neo-functionalists in Western Europe placed great faith in the European Commission as the institution most likely to create initiatives, provide leadership and translate social demands into policy with a European scope.

It is best to think of neofunctionalism as a composite theory that has three components: background conditions, process conditions and conditions that are likely to encourage or discourage task expansion (Haas and Schmitter, 1964). With regard to background conditions, neofunctionalism argued that integration was most likely to emerge first among countries with a certain type of domestic environment: liberal democratic countries with advanced capitalist economies, differentiated social structures, and highly pluralistic interest group structures. In these societies, class conflicts were to be muted, ethnic rivalries less intense, and warfare an obsolescent institution (Haas, 1968). Such countries would have much to gain from an expansion of capitalism to the regional level. The process conditions entail dense networks of economic exchange, trade, labor migrations, tourism and free flows of productive factors. The third phase involves spillover. Once integration begins in initial settings (presumably the least controversial ones), there are prospects for expanding cooperative habits into other areas. This process of task expansion is labeled spillover. Spillover could be purely functional, with linkages among different sectors serving as the transmission belts of integration (trade might imply increasing coordination of monetary policy for example), or it could rely on tactical linkages among sectors by agents in a bargaining process (for example, tying together the move to the single market with structural policy) (Caporaso and Keeler, 1995: 31).

Two of the broadest neofunctional treatments of integration are provided by Haas and Schmitter (1964) and Nye (1968). Haas and Schmitter present nine variables–four background conditions (that is, size of units, rate of transactions, pluralism and élite complementarity), two conditions at time of economic union (that is, government purposes and the independence of regional institutions), and three process conditions (that is, decision-making style, rate of transactions and adaptability of governments) that are related to political union (1964: 720). If a group of countries maintains a high degree of economic and social transactions, and at the same time shares pluralist domestic institutions with similar economic size and similar level of development, it will have a good chance of achieving political union.

Is functionalism dead? While few scholars explicitly carry out research under the banner of functionalism, it is best to see it as a proto-theory with continuous (though not one for one) lineage to contemporary theories. Part of the appeal of Moravcsik’s work (1993, 1998) is that he captures the elemental appeal of socioeconomic forces in both domestic and transnational society and transmutes Monnet’s raw materials into a theory of preference formation. In contrast to Monnet, Moravcsik relies on tools from economics, political economy and collective action theory to derive preferences of key actors. Still, the problematic addressed by functionalism (that is, the construction of interests and the role they play in regional integration) is present.

The edited volume by Stone Sweet and Sandholtz, European Integration and Supranational Governance (1998), also develops some of functionalism’s themes. They ask about the conditions under which political institutions emerge at the international level. In answering their question, they rely heavily on preferences in domestic and transnational society to generate the demand for regional integration, including the policies and political institutions needed to overcome the transaction costs associated with different regimes in different countries. A first-cut hypothesis is that as economic exchange goes up, so too will the demand for common rules and rule-adjudication. Since Stone Sweet and Sandholtz locate the main obstacle to regional integration in the differences among the rules and norms at the national level, it follows that political integration implies either eliminating these discrepancies or finding some other principle to coordinate the differences (1998: 11). Movement toward higher levels of institutionalization comes from the constant pressure exerted by the conflicts surrounding economic exchange and the ongoing arbitrage resulting from the attempts to devise rules as well as to escape them. Stone Sweet argues that third-party dispute resolution emerges as a credible way to solve conflicts. One increasingly powerful form of third-party dispute resolution involves judicialization (Stone Sweet, 1999).

In ‘Choosing Union: Monetary Politics and Maastricht’ (1993) and ‘Membership Matters: Limits of the Functionalist Approach to European Institutions’ (1996), Sandholtz continues the functionalist research program while at the same time redirects it to take into account changes in preferences due to membership. He criticizes the inter-governmentalist approach for assuming that preferences are exogenous to institutional membership, formed by some sort of ‘hermetic process’ and then transported to Brussels to be negotiated (1993: 3). He argues that interests of social actors, as well as negotiating positions adopted by states, are affected not only by economic facts but also by the experience of membership in international institutions itself. Sandholtz’s argument, while designed to point out a limitation of functionalism, provides a theoretical bridge between international institutions and domestic preferences.

In sum, while functionalism is still important today, it exists less as a separate research program and more as an influence on other theories. The functionalist message has been absorbed into theories of institutions as well as theories of preference formation that are based in asset ownership, leading sectors and the distribution of economic capabilities. Insofar as functionalism allows (even urges) a strong autonomous role for international institutions and provides a space for domestic actors to influence regional organizations and policies directly (rather than via national capitals), it provides a rival to realist explanations.

Realist Approaches

A realist theory of regional integration may sound like an oxymoron. Realism presents itself as a triumph of politics over economics, of power and security over economic exchange, of conflict over cooperation, and of the state over transnational economic and social processes. In addition, in stark contrast to functionalism and liberal intergovernmentalism, realist theory argues that the preferences of states (including preferences for integration) are determined by their position in the international system, that is, their position within the international distribution of power. Thus, the nature and composition of societal groups, attributes of states and similarities among countries do not matter so much as placement in the international distribution of power. Yet when states join a regional union, they presumably commit to cooperation with a stable membership over a long period of time. Durable membership with the same partners focused on mutual absolute gains implies the antithesis of realist expectations (frequently changing allies based on shifts of power and preoccupation with relative gains). So, is a realist theory of regional integration a non-starter?

As one of the leading theories of international relations, realism does have something to say about regional integration. Realists start by reasoning that two key elements of systemic structure are anarchy and the international distribution of power. Anarchy produces distrust and makes each country vulnerable to the deceits of others. Since economic exchange can make one’s partners stronger in their military capacity, trade takes place only at severe risk to one’s security, since one country may gain more than another or may deploy its share of gains from trade for security purposes. Yet anarchy by itself is not sufficient in explaining why some countries integrate regionally and others do not. After all, anarchy is a global property of the international system in realist theory, and it is not differentiated by region. Thus anarchy cannot explain variations in cooperative exchange or why some countries are devoured by a fixation on relative gains while others pursue absolute gains.

One approach to reconciling regional integration with realism is provided by Joanne Gowa in ‘Bipolarity, Multipolarity and Free Trade’ (1989). Gowa argues that the Cold War shifted the focus of European countries to the United States and the Soviet Union. Gowa recognizes the security externalities generated by trade, and she approaches this issue by parsing the effects of different kinds of power distributions (chiefly bipolarity and multipolarity) on the incentives for trade. Since bipolar systems are more stable than multipolar systems, Gowa predicts that countries will exploit this longer time horizon by deepening cooperative exchanges among them. Thus, the bipolar distribution of power after the Second World War encouraged deep integration within Europe. The incentives were all the stronger since all the members of the European Economic Community (EEC) were also members of the North Atlantic Treaty Organization (NATO) (Caporaso, 1993: 463–4).

When the Cold War ended in the early 1990s, the question immediately emerged of what effect this would have on integration in Western Europe. Mearsheimer (1990) provided the response most consistent with realist theory. In short, he argued that with the end of the Cold War and collapse of the Soviet Union, the United States was likely to pull back from NATO and tensions increase among European countries. Multipolar power balancing was likely to increase, and the problem of containing Germany was likely to be more pronounced. While the results of the end of the Cold War may not be in, a decade has elapsed and European integration seems even stronger. The Maastricht Treaty (1993), the Treaty of Amsterdam (1997), EMU, increased powers of the European Parliament, and a continuing strong role of the ECJ, all point to a strengthened EU.

The scholar who has most seriously considered the value of realism as an explanation of European integration after the Cold War is Joseph Grieco (1993, 1995, 1996). Focusing on the Treaty of Maastricht (1993) and EMU, Grieco asks how and why governments have committed to these agreements, which severely restrict their autonomy. His argument, in short form, is that countries (particularly the ‘secondary states’ that are weaker but still influential partners) bargain to increase their influence by binding powerful members into international institutions and policies. Grieco calls this the ‘voice opportunity thesis,’ reflecting the political influence that states try to exert to enhance their role in international organizations, and to decrease and manage the burdens coming from being part of an interconnected market with larger countries (Grieco, 1995: 24, 34).

Let us assume that this is an accurate description of secondary states’ behavior within the negotiations over EMU. Then several questions remain. Why did the strongest country (Germany) choose to bind itself? Can an answer be derived based on the logic of anarchy and balance of power? Did weaker states, including Italy, Belgium, the Netherlands and others, choose to join out of power balancing considerations, lack of a viable alternative produced by the altered status quo (Gruber, 2000) or domestic considerations? To take just one example, it appears that in Italy’s case joining EMU was in good part a matter of avoiding the worst faults of its own domestic political processes and providing an external stimulus to the reform of its pension system (Sbragia, 2001).

But the main question is simply this: can the voice opportunity thesis be derived from the systemic logic of realist theory? Grieco’s voice opportunity thesis argues that states, faced with high levels of interdependence, prior thick institutions and policy externalities, will try to cut the best bargain in terms of the rule-based system they adopt for monetary affairs. Some states fear Germany’s market hegemony more than its political power. Thus, for some, it is wise to push into a more rule-based arena an issue-area previously dominated by the market.

This argument affirms the importance of states, their varying national interests and the importance they attach to negotiations. If anyone believes that membership in the EU homogenizes interests or leads to the erosion of bargaining in favor of a Brussels consensus, Grieco’s argument is a healthy corrective. However, it does little to affirm the realist (or neorealist) core. There is next to nothing in Grieco’s argument about structure-induced preferences, about preoccupation with relative gains, and about shifting allies. What it does affirm is the importance of domestic politics, the weight of past institutions (the European Monetary System, Single European Market, the institutional acquis), and the continued relevance of power bargaining. But continued bargaining in the EU cannot be taken as evidence (let alone distinctive evidence) for realism. Bargaining is characteristic of nearly all theories of politics, from pluralism to varieties of institutionalism, so the presence of bargains can hardly be used to provide leverage in favor of one or another theory.

Liberal Intergovernmentalism

While neofunctionalism starts with transnational society and supranational institutions, liberal intergovernmentalism places states (central governments, usually executives) at the center of analysis. This is not to say that interest groups are unimportant. However, the force of these groups is felt as part of a causal chain in which economic and social interests are funneled through the domestic political process and are affected by domestic institutions. Crucial to this approach to integration are the processes of interest aggregation, intergovernmental bargaining and enforcement of decisions. The most important exponent, indeed founder, of the liberal intergovernmental view of regional integration is Andrew Moravcsik. In ‘Preferences and Power in the European Community: A Liberal Intergovernmental Approach’ (1993), Moravcsik lays out a two-step process of preference formation and bargaining which he extends (1998) to a three-step process: preference-formation, intergovernmental bargaining and institutional lock-in of bargains.

The basic idea is that economic and social interests provide the raw material of politics but that these interests have to be recognized and mobilized before they become active in politics. Pluralist interest group theory, as well as the logic of collective action, helps to explain the formation of groups pursuing their interests. Some of these interests lie in the domestic arena and some in the transnational arena. At this level, the intergovernmental model is not state-centric. After interests are formed, they must pass through the political process. One of the telling lessons of modern institutional theory is that identical constellations of interests can produce very different results in terms of political outcomes. The political system is not simply an adding machine that translates economic demands into political results. Procedures for aggregating interests vary considerably from country to country. Leaders of countries must then take societal interests (as well as their own) into the international negotiating forum and bargain to achieve favorable results, that is, results that are acceptable to both foreign counterparts and domestic constituencies in all affected countries. Once agreement and ratification take place, institutions are devised to lock-in, monitor and enforce the agreements.

The liberal intergovernmental approach provides a more sophisticated theory of preference formation than neofunctionalism. This theory is based in part on the logic of collective action and the new institutionalism. Without institutions present as part of the theoretical specification of preferences, neofunctionalism risks providing an inaccurate account of the role of social and economic forces. In addition, there is now a central role for power in the process of international negotiation. The introduction of states, representing both their own institutional interests as well as the interests of their constituents, provides a more accurate picture of regional integration than one exclusively based on social forces and supranational entrepreneurs.

The intergovernmental approach is vulnerable on several grounds. Moravcsik limits his focus to celebrated intergovernmental bargains or ‘grand bargains.’ There is, of course, nothing wrong with this focus per se. However, we want to ask how robust the theory of regional integration is, that is, how sensitive it is to departures from its own initial assumptions. As we look at less central issues or the not-so-grand bargains, does the same theory hold or do we need to devise a new one? Good case selection implies that we look at the full continuum or attempt to sample cases from different locations along the continuum. The main reason for such sampling is not to achieve representativeness but simply to build in the required variation for hypothesis-testing. If concern for sovereignty, minimum common denominator bargaining, and use of state power are factors that vary with the importance of the issue, then we would only know this if we have some variation on the underlying issues dealt with by governments.

A second problem, best stated in the form of a question, is more theoretical than methodological. What is the relationship between grand bargains and day-to-day politics in regional organizations? Intergovernmental theory implies that political agreements, with their accompanying institutions, provide a kind of equilibrium, until acted upon by outside forces. New economic demands will occur, as they are continuously generated in the domestic and transnational economy. However, the stimulus to these demands seems exogenous to the three-step process. Governments can monitor, enforce and rein in agents who go astray, and they can do so either directly or through delegating power to agents. However, as Pierson (1996) shows, this assumption is questionable. Agents often have considerable slack and access to resources, as well as enough asymmetric information about context to implement policy considerably at odds with the wishes of government principals. Also, as Joseph Jupille (2000) has demonstrated, day-to-day politics in regional organizations is about procedural manipulation or the choice of rules, rather than bargaining over grand constitutional structures. There is considerable discretion for international or supranational agents to engage in decision-making at odds with the outlines conceived by chiefs of governments.

The core of neofunctional theory rests on the power of unintended consequences, that is, unintended from the standpoint of the goals of the principal. If EU actors, particularly the Commission, develop independent goals, have access to inside information, and have considerable slack to influence policies, they may well both go beyond what states mandate and are capable of monitoring. The short- and long-term consequences of the interplay between state and regional actors have not been adequately explored.

Constructivist Approaches

A newer approach to regional integration, but again limited mostly to Western Europe, is constructivism. The core of the constructivist research program concerns the role of ideas, norms and identities, as opposed to material factors, in the integration process. Ruggie has argued that ‘… at bottom, constructivism concerns the issue of human consciousness’ (1998: 33). Onuf, who has offered the most comprehensive statement of constructivism in World of Our Making (1989), sees human thought, ideas and agency as crucial to the explanation of the international order. Insofar as this is the core, the theoretical foundations for constructivism lie in social psychology and sociology. Berger and Luckmann’s The Social Construction of Reality (1966) may be taken as a classic statement, if not the one from which many constructivists depart. And Wendt’s Social Theory of International Politics (1999) explores the ontological assumptions of constructivism and develops its philosophical underpinnings. Finally, the research done by Deutsch and his collaborators (1957), which focused on community, on the development of ‘we-feelings,’ and on the frequency and meaning of symbols in the development of national identities, certainly qualifies as constructivist. A valuable updating and interpretation of Deutsch’s work, focusing on security communities and the values that undergird them, is provided by Adler and Barnett (1998).

Constructivism’s debts to earlier work and its links to areas of basic research such as social identity theory are not meant as criticism–far from it. It is valuable to have a foundation in basic theory and, without arguing that there is never anything new under the sun, we would be suspicious if constructivism emerged de novo. Also, there has been much new work informed by constructivist principles relating to European integration. Most of this work has concentrated in Western Europe, the EU, the Council of Europe and broader social processes such as changing conceptions of citizenship.

Perhaps the leading constructivist scholar of European integration is Jeffrey Checkel (1998, 1999, 2001). Checkel argues that ideas, norms and identities are important but not just as external constraints. Rational choice theory also argues that these phenomena are important but simply incorporates them into the cost (benefit) function of agents. Norms, then, are simply constraints that agents run up against when they make choices. For Checkel, norms can become constitutive of agents, part of who they are, and deeply internalized. When this occurs, the overall interpretation changes from one based on conscious adjustment to changing costs to one based on enactment of values (a scripted model based on logics of appropriateness rather than a utilitarian one).

Beyond these interpretive differences, Checkel looks for testable implications of the constructivist approach. First, the effects of changing costs and benefits at the margins should be less than is generally assumed in utilitarian theories. If norms have independent explanatory weight, they must have some incremental (additional) advantage over changing costs and benefits. Second, compliance with European rules should be less responsive to changing sanctions and benefits of going alone and more to deep institutional factors, such as the conception of a country of itself as a rule-of-law country, one that lives according to rules regardless of whether they agree with them. The UK, for example, has a very good record of implementing EU laws, even when they are vigorously opposed in legislative and judicial decision-making. Institutional capacity, as well as strong normative presumptions in favor of obeying the law, surely works in favor of compliance. Third, constructivism implies endogenous preferences, not just to the economy, but also to political institutions and social interaction that take place in international contexts. Checkel offers numerous hypotheses about preference changes and identities in ‘Social Construction and Integration’ (1999).

Much other work has been done by scholars, mostly European, relating to the importance of ideas, values and norms, and identities. Amy Verdun’s work (1999) on EMU focuses on the Delors Committee as an evolving epistemic community. Jo Shaw (1999) has elaborated a changing conception of ‘postnational constitutionalism’ in which citizens rights are not fixed, nor limited to the territorial containers of the state, but responsive to transborder movements and demands that are not easily dealt with by the nation-states. Marcussen et al. (1999), Risse (2001) and Risse et al. (1999) have researched the issue of state identities. Not only is there important variation from one state to the next (France, Germany and Great Britain have different European identities), but these identities may change over time. France’s puissance, independence and grandeur, and her conception of herself as a middle-sized country with great clout and autonomy, had to undergo considerable change from the 1960s to the 1990s. The authors argue that for European identity to take root, it must have a fertile soil. It must resonate with existing core elements of national identity. The methodology and data sources used match the theoretical interests of the researchers. Discourse analyses among party élites (including the process of argument, justification, persuasion and possibly value change) were relied upon.

Constructivism has made numerous contributions. At the purely descriptive level, constructivists have provided a missing link between objective material factors and outcomes. While much theoretical work remains to be done, there is nevertheless a bridge between ideational, material and institutional realms. Second, work has begun on endogenizing preferences. Third, the often detailed process-tracing of this approach allows us to better understand the ‘how’ part of the integration process (for example, how EMU got adopted) as well as the ‘what’ and ‘why’ dimensions. Fourth, it provides a point of convergence with rational choice analysis. By probing deeper into the content of shared ideas and norms, there is a stronger foundation for focal point analysis which figures prominently in rational choice theory (Garrett and Weingast, 1993).

Constructivist approaches are mostly in the meta-theoretical stage, and have not yet made the transition to shared theoretical principles, recognized puzzles and common research strategies. In a sense there is no common epistemic community for constructivism in the same way that there is for realism and liberal intergovernmentalism. Making this transition is no small matter and will require the advancement of important hypotheses that are both falsifiable and distinctively supportive of constructivist views. Second, and related, variables central to constructivism, such as norms and institutions, will be judged increasingly in terms of their value-added to other explanations, most prominently those that are based on self-interest. While this may be to some extent unfair, in the sense that it privileges rationalist explanations, the tables can be turned. We can (and should) ask how well rationalist explanations perform over and above constructivist explanations. Indeed, when one actually engages in good empirical tests of theories, this is almost always done, since empirical testing requires the evaluation of a variety of specifications, some of which will inevitably privilege one or another viewpoint.

A third challenge concerns the need to better identify exactly what a logic of appropriateness is. It is often posited as a stark alternative to a logic of consequences (based on the calculation of costs and benefits), but this is too simple a dichotomy. Rarely are people acting in one or another capacity, and it must surely be the case that ‘appropriate contexts’ are not driven purely by norms and institutional factors. While it may be possible to bridge the gap between strategic exchange and socialization (for example, there are strategic repertoires, frames and identities) to maintain its coherence, constructivism must argue that normative frames and skills are not so malleable as to be costlessly downloaded to meet the strategic situation. If ‘European,’ ‘Italian,’ ‘Tuscan’ and ‘Florentine’ are simply frames fluidly adjustable to changing circumstance, there is no need to talk about identities at all. Some hard conceptual spadework, informed by downstream theoretical usage, needs to be undertaken if constructivism is to fulfill its promise.

Multi-Level Governance

An increasing number of scholars are shifting the focus from the study of regional integration in favor of considering the EU as a polity or a complex system of multi-level governance. In effect, they are announcing that Lindberg and Scheingold’s Europe’s Would-Be Polity (1970) has arrived as a political entity worthy of consideration in its present dimensions, quite apart from its future evolution. Just as extant nation-states such as the US and Germany are subject to federalizing and decentralizing pressures, so too may the EU change. As the EU makes the transition from a decentralized system of states to a vertically and horizontally integrated system characterized by thick institutions, this shift in focus becomes more understandable.

With this parametric shift also comes a change in the main research problematic from explaining coordination, collaboration and integration to explaining policy-making, implementation, and pressure group activities in much the same way as in domestic politics (Boerzel, 2001; Jachtenfuchs and Kohler-Koch, 1996; Scharpf, 1988, 1994). Numerous scholars have contributed within this framework, including Hix (1998), Hooghe (1995), Marks et al. (1996), Scharpf (1988) and Tarrow (1998). Our comments are most closely addressed to the work of Marks and his collaborators.

The main idea of the multi-level governance model is that neither the EU nor the member states, nor some other political entity, enjoys a monopoly of power and decision-making competence in the EU. The EU along with the states and subnational regions are best seen as part of a complex system of multi-level governance interacting in numerous ways with one another and with private actors. Marks et al. (1996) posit that to understand EU politics, one has to understand these interactions and to take seriously into account levels below and above the state. This is especially true with regard to issues such as regional policies, but it is also the case for regulatory and distributive issue areas. Regional integration is a process that may involve growing centralization of competence ‘in Brussels’ (an ambiguous phrase in itself), growth in the power of member states (or specific institutional parts such as executives and courts), and expanded influence for subnational actors. Further, in contrast to a state-centric model that sees social influences as funneled through the state, interest groups may outflank the state and go directly to Brussels.

Multi-level governance approaches have expanded our sense of the range of relevant actors. While pointing to different actors is not the same as theorizing about them, it is a prerequisite to it. It is difficult to theorize about multiple levels of decision-making before one admits that multiple levels matter. Second, Marks et al. argue that political arenas and economic actors are interconnected but not necessarily nested (1996: 346). This makes it possible to imagine channels of influence that do not run from subnational units through the state. Finally, the multi-level governance model strongly suggests theories built around multiple levels of decision-making (Scharpf, 1988) and veto point analysis (Heritier, 2001).

The major challenges to multi-level governance theory are two. First, there is a need to come up with a conception of causality that is not dependent on ‘where’ some activity takes place. Some scholars seem to think that if something happens ‘in Brussels’ or ‘in Munich’ it is ipso facto proof of the causal importance of these locations and the institutions headquartered there. The geographical site of activity is taken to be direct evidence for causality. Second, there is a need to move from a specification of actors to core research problematics. Will multilevel governance organize its theoretical energies around decision-making, veto analysis, federal models of territorial politics, or some other crucial problematic? An answer to the first question may help to fill in the blanks about the second one.

Key Issues in the Study of Regional Integration

Regionalism and Globalism

From the standpoint of the global economy, regionalism poses an interesting issue. Economically speaking, a world of distinct regions is preferable to a world of commercially separate states, each with its own tariff barriers and restrictions. But it is not necessarily preferable to a globally integrated world of free trade. So distinct groups of countries, organized on a regional basis with zero tariffs, are not as economically efficient as a world of free trade. Given our imperfect world and the low probability of complete global integration, the prudent response might be to take half a loaf. After all, to oppose regional integration on grounds that it falls short of the global optimum is to allow the best to become the enemy of the good.

However, from the standpoint of those outside flourishing regional unions things may look different. Member states of the region may appear to be turning inward, preoccupied with improving conditions inside all the while caring less for those outside. Regional members may increase their own rate of growth, shift the terms of trade in their favor against the interests of non-members, and exploit the differences between external tariffs and zero regional tariffs to shift trade from non-members to members (trade diversion). These events are not just hypothetical. Most of them have already been realized (Petith, 1977).

Ever since the inception of the EEC in 1958, fears of exclusion, discriminatory treatment, and regional insularity have been prevalent. There are two distinct facets to the dark side of regionalism. One concern is that non-membership in regional associations may imply discriminatory economic treatment. Even a relatively moderate design, such as a free trade area, causes shifts in economic incentives between insiders and outsiders. Consequently, trade diversion may occur from lower-cost non-member states to higher-cost member states. The other anxiety is that regionalism will repel more comprehensive, global efforts to cooperate, that is, regionalism versus globalism. This fear is fueled by remembrance of things past, by the connection between regionalism and autarky during the 1930s and between regionalism and the phenomena of import-substitution and collective self-reliance in the 1950s to 1970s, especially among the less developed countries. The modern expression of this concern comes in the form of realist predictions that the collapse of bipolarity and the end of the Cold War will accentuate regional differences, fuel rivalries and stimulate a return to beggar-thy-neighbor policies (Gilpin, 1987: 394–405).

Granting that a degree of trade diversion exists in regional trading arrangements, these regions are not likely to obstruct global trade liberalization and other efforts to cooperate. A strong deterrent is the possibility of inter-bloc rivalry and trade wars, which are likely to be triggered by any attempt by a regional bloc to take advantage of its market power (Krugman, 1991: 16). In addition, the dividing lines drawn between regional blocs are getting fuzzier as many countries have overlapping membership in a number of regional groups (Bhalla and Bhalla, 1997: 20–2). The number of North–South regional integration attempts, infrequently heard of before the mid-1980s, has also increased in recent years. Moreover, inter-regional preferential trading arrangements, with EU as a common node, have proliferated.

What can we say about the relation between regionalism and globalism? There are a number of ways to respond to regional organizations in general and the EU in particular. First of all, both the GATT and the United Nations (UN) have conditionally accepted regional organizations. The UN has rather elaborate rules for governing the relationship between regional and collective security. The GATT/WTO recognizes the legitimacy of regional organizations if such organizations conform to the requirements about average tariffs (they cannot be higher than before the union is formed) and trade-creation versus trade-diversion.

Second, what is the evidence of trade patterns between members and non-members? Various economists have observed that trade is geographically concentrated, and intra-regional trade has increased faster than trade across regions, for most regions (Frankel, 1997: 19–33). This can be observed in Table 25.2. Regional export concentration, as measured by the share of intra-regional exports to all exports, has gone up in major regions, particularly where intra-regional trade barriers are substantially reduced.7 For example, the figure for NAFTA increased from 41.4 per cent in 1990 to 51.7 per cent in 1998. MERCOSUR’s figure is more remarkable, recording a sharp increase from 8.9 per cent in 1990 (it was formed in 1991) to 25.1 per cent in 1998. However, the explanations for the high intra-regional trade concentration ratios differ between those who see geographical proximity as important (Krugman, 1991) and those who argue that discriminatory policies are critical (Bhagwati, 1992).

Determining the impact of regional unions on the rest of the world is difficult because it involves assumptions about different theoretical baselines. One way of approaching the issue would simply be to compare trade patterns between members and non-members before and after formation of regional unions. While this approach has some attractions, the inferences we can draw are likely to be obscured by the presence of dynamic effects of the regional union itself. If the regional union increases growth inside the area (which it is supposed to do) and if external trade is some function of size of the economy (which it almost surely is), then trade between members and non-members should increase in absolute terms, even if the share of trade between members and non-members declines. So the empirical results may depend on which standard is adopted. If we ask ‘has the share of trade between the region and outsiders declined?,’ the answer may well be ‘yes.’ But if we ask ‘has the absolute volume of trade between the region and non-members increased in comparison to our expectation based on the absence of a regional union?,’ the answer may be ‘yes’ also. In other words, non-members may do better than they would without regional union, though not as well as they might if they were included as members.

Finally, it is well to ask what the dynamic effects of regionalism are with respect to further globalization. That is, should we expect regional arrangements to freeze the status quo, dividing up the world into a series of privileged clubs providing more or less excludable goods? Or might the opposite be the case, namely, that regionalism becomes the vehicle for further (global) liberalization?

While it is hard to answer this question on theoretical grounds, the Uruguay Round of trade negotiations provides some evidence that the latter pattern is dominating the former. It is well known that the EU, preoccupied with its internal problems and agenda, delayed the beginning and the conclusion of the Uruguay Round. However, as Kahler has argued, regionalism has been used as a bargaining tool as well (1995: 16–17). In particular, Clinton used the APEC (Asia Pacific Economic Cooperation) as a bargaining chip in the final stages of these negotiations, largely as a way of getting some leverage over the EU to reduce agricultural subsidies. Clinton elevated the APEC process just at the time when global negotiations were stalled and suggested that the United States would play the Asian hand if progress were not forthcoming in Europe (Bergsten, 1994). It is hard to tell how general this pattern of regional-global liberalization will be. The results may be very peculiar to the Uruguay Round in which the United States as a powerful country had a material interest in lowering agricultural subsidies in the EU and had an ‘Asian hand’ to play. It is also possible that preferential trade areas (PTAs), due to their high visibility, can mobilize and unify various protectionist lobbies, which may pose effective challenges to multilateral liberalization. Furthermore, PTAs may divert scarce negotiating resources and attention of individual states away from multilateral trade liberalization.

Political Institutionalization

As Stone Sweet and Sandholtz (1998) have argued, the construction of rules of governance is an elementary component of international transactions. Rules seem to be necessary for exchange to take place, and the existence of externalities may bring a speedy response to those who want to see them controlled. Yet, one of the most glaring empirical differences among East Asia, Western Europe and North America lies in their different degrees of institutionalization.

Western Europe describes a region of dense institutions, with an impressive macro-institutional architecture (the Council of Ministers, Commission, European Court of Justice), elaborate provisions for the making and administration of laws, and the taking of many decisions by qualified majority vote. In terms of comprehensiveness of scope, institutional detail, depth of application, extension of rights to citizens and authoritative backing, the EU far exceeds institutionalization in North America and East Asia.

Why? Economic integration is high in all three areas, so we cannot say that institutionalization necessarily follows from high levels of economic exchange, nor by the externalities created by such exchange. Also, each area has a hegemonic core (Germany or Germany–France in the case of the EU, Japan in the case of East Asia, and the United States in the case of North America). If institutionalization is the result of leadership in the pursuit of public goods, then North America and East Asia should also have high levels of institutionalization.

Working with just three cases, it is difficult to evaluate testable hypotheses. Perhaps the variable institutional patterns have to do with the taming of sovereignty in Western Europe, as well as the waning of nationalism. It is striking to note that Germany, a leader in the process of European integration, thoroughly renounced nationalism after the Second World War and saw European integration as the only viable path toward reincorporation into the international system. This was not the case in North America and East Asia, where the United States and Japan held on to a much more nationalistic conception of their place in the world. In Europe, integration was seen as a solution to the ‘German problem’ rather than something that aggravated it (though some believed this too). That institutionalization was seen as a way of taming both dominance and hypernationalism certainly worked in favor of institutional as well as economic integration. In fact, economic integration without political integration would have posed problems, for it would have enhanced the position of the German economy without institutional checks on Germany’s civilian (market) power (Anderson, 1999; Katzenstein, 1997b).

The analogous situation in East Asia is provided by Japan, the most economically powerful country in the region, and the country that would profit most (in the absolute sense) by economic integration. Yet Japan has had no strong incentive to initiate formal, institutional integration. Germany’s position within Europe may be unique and offer little insight into Japan’s position within Asia. Germany is the strongest country in Europe, yet allows itself to be bound within institutions that, purely on economic grounds, do not seem to offer net advantages over either the status quo or what it could achieve on a ‘go-it-alone’ basis (Gruber, 2000). The puzzle as to why Germany accepted EMU (when it was de facto the leader of European monetary policy) is usually resolved by pointing out that Chancellor Kohl wanted to pacify his European neighbors, to soothe their fears that a reunified Germany (a Grossdeutschland) would pose no threat to Europe. A similar downplaying of national sovereignty cannot be expected in East Asia.

Japan’s nationalistic disposition, along with the importance attached to national sovereignty among the newly independent East Asian countries, has proven to be a strong impediment to institutional integration. The absence of working regional security arrangements, hot wars waged in Korea and Vietnam and the continuation of the Cold War divide, the fears of domination by Japan and China, and the existence of territorial disputes must have aggravated the concerns about national sovereignty and relative gains from cooperation (Grieco, 1997: 176–8; Krasner, 1995). These realist explanations for the weakness or absence of overarching institutions in East Asia, however, are troubled by the fact that economic integration, in spite of its negative security externalities, has continued to deepen among East Asian countries.

Low levels of institutionalization along with high levels of economic exchange suggest a theoretical foundation for the liberals to claim that East Asian economic cooperation is a ‘prisoner’s delight,’ rather than prisoners’ dilemma game. In such a situation, actors have no incentive to defect, nor is there a need for binding institutions (Drysdale and Garnaut, 1993: 187–8). This rosy depiction of harmonious economic relations among East Asian countries has to deal with mercantilist economic policies and the visible hand of government in the management of respective economies, as well as the continued existence of political and military conflicts in the region (Choi, 1998: 32–4).

Given the limitations of both realist and liberal explanations in explaining the absence or weakness of institutional integration in East Asia, it may be useful to explore if the question is wrongly posed. Institutional integration in East Asia may be different in form from that which exists in Europe and North America rather than non-existent. Many scholars claim that regional institutions in East Asia are informal, soft (less binding) and open (non-discriminatory), unlike those in Europe and North America. The avoidance of legalization in East Asia (and the Pacific) is largely ascribed to the unique Asian culture based on harmony and consensus, the past experience of colonialism and the fear of superpower domination, or domestic politics and institutions of East Asian countries (Choi, 1998; Kahler, 2000: 559–63; Katzenstein, 1997a). Furthermore, it has been in Japan’s interest, considering the widespread fear of Japanese domination, to control East Asia quietly through informal measures; Japan has been quite successful in this regard (Lincoln, 1993; Pyle, 1995).

Another justification for informal institutions comes from the literature on the new institutionalism. Institutions, whose major function is to reduce transaction costs, do not have to be formal to be effective (Keohane, 1989: 4; North, 1990: 36–45). The new institutionalism could argue that East Asia, especially Japan, has maintained an intricate web of intra-regional economic networks. Business networks can reduce the demand for formal/legal protection by internalizing economic relations into various forms of relational contracting, different from arm’s length deals in the market, based on long-term commitment and mutual trust (Doner, 1997; Hatch and Yamamura, 1997; Katzenstein, 1997a).

From the perspectives of private businesses, formal regional institutions are a mixed blessing. On the one hand, they can remove barriers to economic exchanges, reduce transaction costs and protect property rights. On the other hand, these institutions can be predatory by formally subjecting the market to the whims of political interests. This is more likely to be the case if member countries have vast economic differences in levels of development, especially between Japan and the rest of the region. Such a fear has been real both to Japanese business leaders, as well as to policy-makers in the government, particularly in its relationship with the ASEAN (Choi, 1998: 270–97). Indeed, Japanese businesses have largely remained silent at both domestic and regional levels over liberalization through formal institutions in East Asia. It is only in recent years that Japanese businesses began to show serious interest in FTAs with selected countries in East Asia as well as the whole region (Keidanren, 2000).

Japanese companies have so far been quite successful in mobilizing private institutional arrangements to cope with risks involved in regional trade and investment. The active support of Japan’s economic bureaucracy–by providing supportive laws, investment insurance, market information and tax breaks–was instrumental for the private firms to build production and marketing networks (Hatch and Yamamura, 1996: 115–29). Japan’s unique business institutions (for example, practices of relational contracting, keiretsu, and the general trading companies) spread throughout East Asia along with the dramatic increase in Japanese FDI from the late 1980s (Aoki, 1995; Doner, 1997; Hatch and Yamamura, 1996).

The rejection of formal, supranational institutions or the utility of informal institutions, however, is not likely to persist in East Asia. Given the closed nature of informal, network relations, the benefits of formal institutions are likely to increase with growing economic interdependence or integration. There is little theoretical reason to assume that culture, history and domestic institutions will continue to resist institutionalization. In fact, East Asian countries have become more receptive to legalistic resolution of trade disputes under the WTO dispute settlement procedures, and ASEAN has developed a more sophisticated institutional structure in recent years (Kahler, 2000: 563–7). A similar change has occurred in Japan’s preference concerning trade disputes with trading partners, especially the United States (Choi, 1998: 167–72). At present, Japan (both government and business) is seriously considering the option to establish a FTA with Singapore, South Korea and other selected countries in the Asia Pacific region.

When compared with East Asia where the demand for political institutions has been either low or informally satisfied, the Americas have achieved higher levels of political institutionalization. For example, NAFTA, living up to its name as a free trade area, has established a sophisticated system of supranational governance for intra-regional trade and investment. The Free Trade Commission is in charge of dismantling trade barriers though it is not seeking explicit harmonization of national standards, and an overarching mechanism for the settlement of intra-regional trade and investment disputes is also put in place. MERCOSUR is much closer in institutional design and intent to the EU, although its level of interdependence is substantially lower than those of NAFTA and East Asia. MERCOSUR implemented common external tariffs (CER) in 1995 and looks ahead to completing a common market with an institutional structure comparable to that of the EU (Pereira, 1999: 14–19). Quite contrary to East Asia, MERCOSUR appears to push economic integration through political institutionalization. The absence of informal institutions could have increased the demand for formal institutions. Considering the insufficiency of conditions favorable to political institutionalization (for example, economic interdependence, dedicated regional leadership, and stable security arrangement), however, it is unlikely that MERCOSUR will establish a workable supranational governance system in the near future.

Regional Institutions and Democracy

Democracy, a complex concept, has both procedural and substantive dimensions. At the procedural level, a democratic system implies participation, elementary rights, institutions to prevent the concentration of power and minimal access to information about how political institutions work (transparency). On the substantive or output side as some put it (Zürn, 2000), democratic policies are those that respond to people’s demands, policies that are close to the median voter. There is no necessary reason why these two aspects of democracy go together, indeed an economic institution such as the European Central Bank (ECB) may be quite exclusive in the sense of participation (finance ministers, executives and central bankers) but produce policies that are closer to the median voter than monetary policy made by democratically elected legislatures.

What may seem odd is that the democratic (or non-democratic) nature of regional organizations has not been challenged much earlier. Even for the EU, the most institutionally advanced of the regional organizations, most of the intense dialogue about the democratic deficit has been conducted in the past ten to twelve years, perhaps prodded by the referenda of 1992 and 1993, especially the Danish ‘no’ to the Treaty on European Union. While the issue of democracy is a lively one in Europe today, it is important to recall that the original construction of the European Economic Community did not facilitate democracy. The European Parliament was not directly elected and in any case did not make laws, the Council of Ministers was composed of national ministers appointed by national executives, and both the Commission and the judges on the ECJ were appointed by national executives. Finally, as Mancini and Keeling (1994: 175) point out, the word ‘democracy’ did not appear in the preamble and the first part of the Rome Treaty. Instead, the word ‘liberty,’ especially economic liberty, seemed to provide the chief philosophical justification for the EEC.

Two reasons may help us understand this early inattention. First, regional organizations, including the EU in its early stages, are often seen as relatively uncontroversial. The functional approach was to attack the easiest (least controversial) issues first. The first fifteen or so years of European integration focused on achieving a free trade area, customs union and common agricultural policy. Integration in Asia and North America is even more modest in its goals. Without the changes that we have subsequently seen in the development of the EU, it was not clear that this organization was going to alter substantially the way decisions were made with regard to foreign policy, the welfare state and macroeconomic policies. Second, and more important, most of the decisions within international organizations are (or in the case of the EU were) taken by unanimity, thus providing a safeguard to important national interests. Until the mid-1980s, decisions within the EU were subject to a laborious process of universal consent. Efforts to go beyond this by intensifying the use of qualified majority voting in the mid-1960s provoked a major crisis.

As damaging as unanimity was in terms of making decisions difficult, this procedure did have a beneficial effect. It tended to deflect criticism that the EU was an undemocratic body. So long as their own national representatives could hold out in Brussels against unfavorable changes in the status quo, citizens could reason that they had some protection. Perhaps the efficiency of decision-making might suffer, but no important departure from the status quo would take place without the agreement of all.

By the mid-1980s, both of these conditions had changed. The EU, it was clear, was a growing and powerful organization that had increasing competencies in numerous areas, including trade, environment, transportation, social policies such as gender equality, and even monetary policy. While little substantive progress was made in the area of common foreign and security policy, there were even efforts to move ahead in this area. Also, along with the Single European Act of 1987 came an increasing reliance on qualified majority voting as a way of making decisions. In short, as the EU made its ‘remarkable transformation from an interstate bargain into a multi-dimensional quasi-federal polity’ (Stone Sweet and Sandholtz, 1998: 1), scholars and practitioners were invited to ask ‘What about the people?’

The problem of democratic accountability in the EU raises general questions for all international organizations. As they become increasingly important in people’s lives, people are bound to ask how they are controlled and to whom they are accountable. Regional organizations affect the distribution of jobs, the transparency with which decisions are made, the distribution of wealth, the environment, national social policies and the relative weight of domestic institutions such as parliaments and executives (Moravcsik, 1994). The focus on the democratization of regionalism is not a ‘problem’ but rather a sign that regional organizations have moved, at least in some parts of the world, into a new stage of development. These organizations are not simply extensions of their component member states whose national political institutions monitor and control them in the same democratic fashion as issues within the domestic arena. They create new arenas and pose new problems for democratic governance that will challenge the ingenuity of these organizations in the years ahead.

Conclusion

Regionalism is a strong force in the world today. It represents a dynamic compromise between a comprehensive if not homogenous globalization and the more restricted forces of nationalism. If the nation-state is too small to solve the economic problems, and too large to solve (by itself) identity questions, regional integration both expands the economic orbit of the nation-state and adds another potentially important focus of loyalty. Regional movements have proliferated during the past two decades and seem to be more durable than interwar and immediate postwar arrangements. The links between regional organizations and ascendant liberal constituencies seem to account for this durability. Never before have domestic reforms been so closely linked to cooperation to form regional unions.

Since this chapter represents a survey of approaches, it is not our intention to draw conclusions about which approach is the best for explaining integration. Regions and regional integration occur in every area of the world. We do not know if regional integration represents a halfway house on the way to a globalized world or a permanent resting place, but we do know that the regional process is very much alive. We can also say with some confidence that regional organizations, for all their inward orientation in terms of trade shares (see Table 25.2), are very much engaged in more comprehensive global negotiations. Indeed, negotiations within the World Trade Organization (WTO) are often thought of as multilateral negotiations among the EU, the United States (for NAFTA), and Japan and China (representing Asia).