A Sequential Approach to Regional Integration: The European Union and Central and Eastern Europe

This paper develops a theory of optimal sequencing of regional integration and applies it to the specific question of Central and East European countries (CEECs) and the EU. We show that the timing of transition and integration has implications for the long-term trade structure of Europe. In this model the motivation to integrate the CEECs comes from harmonization of policies to attract industries. Without integration, European countries will try inefficiently to protect their industries. Because of the transfers implied by the CAP and the Structural Policies, the EU will delay enlargement until the CEECs have sufficiently converged. CEECs might then prefer to stay outside the EU and attract industries by offering them more generous protection than the EU. Such timing may be inefficient ex ante for all countries because it may prevent full European integration in the long run, inducing firms to relocate outside of the EU and governments in the EU and the CEECs to protect industry. During the transition, all countries benefit from regional integration among the CEECs.