INSTITUTIONAL COMPETITION VERSUS CENTRALIZATION - QUO-VADIS EUROPE

In this paper we have analysed how the EC should proceed with its integration. Special emphasis was placed on the strategy of institutional competition as opposed to ex-ante harmonization. With institutional competition, national governments have to compete for internationally mobile resources. Outflowing capital and emigrating labour force them to improve on the quality of their regulations. Based on the theory of market-determined allocation in the tradition of Hayek and Tiebout's ideas on locational competition, we have argued that institutional competition is the superior integration strategy. Since it requires less centralized decision-making it will be the cheaper, more flexible, and less bureaucratic method. Due to its incentives to improve on the quality of regulations, it will be more efficient in the long-run, and by allowing for differences in national preferences, customs, and histories it will be politically more acceptable. Under special circumstances we deem some type of harmonization necessary, particularly in the cases of international externalities and natural monopolies. We finally argued that institutional competition is the best way to keep the EC open for new entrants from the EEA and particularly from the post-socialist reform countries of Eastern Europe.