An Empirical Analysis of Institutional Coevolution in the European Union

ABSTRACT Institutional effectiveness is widely considered an important factor for the success of the European integration process. The article investigates how the coevolution of formal and informal institutions influenced economic performance within the European Union from 1980 to 2019. Results indicate that all countries have achieved strong formal institutional frameworks but still diverge mostly in terms of informal institutional development. Cluster analysis reveals how many Eastern European member countries experienced a fast and asymmetric institutional development to the advantage of political and judicial formal ones with modest economic effects. The opposite happened among many Central and Northern European member countries, which improved mostly their informal institutions through their interaction with robust formal institutional frameworks. Bootstrap panel Granger causality test and panel data analysis suggest that economic performance is positively influenced by informal institutions while the formal ones seem to be a necessary but not sufficient condition for economic progress. As the level of economic development increases, causality tends to reverse in favor of informal institutions. The analysis of institutional development trajectories reveals how better economic performance can be achieved when formal and informal institutions keep pace with one another. These insights are important to design European policies and reforms.