International Organization as a Seal of Approval: European Union Accession and Investor Risk

Much of the literature on international institutions argues that membership regularizes expectations about members' future behavior. Using the accession of the postcommunist countries as a test case, this article argues that the EU can send strong signals to financial markets about the trajectory of a particular country. Examining spreads on sovereign debt from 1990 to 2006, this article shows that closing negotiation chapters on domestic economic policy—in other words, receiving a seal of approval from Brussels that previously existing policy reform is acceptable to the wider EU—substantially decreases perceptions of default risk in those countries. That decrease operates independently from policy reform that the country has taken and is also distinct from selection processes (modeled here with new variables, including UNESCO World Heritage sites and domestic movie production, that proxy for cultural factors). Thus, this particular international organization has played an important role in coordinating market sentiment on members, conferring confidence that policy reform alone could not accomplish.