Eliciting Substance from 'Hot Air': Financial Market Responses to EU Summit Decisions on European Defense

40 Pages Posted: 18 Feb 2009 Last revised: 2 Jan 2012

Michael M. Bechtel

Washington University in Saint Louis

Gerald Schneider

University of Konstanz

Date Written: February 16, 2009

Abstract

The results of deliberations in multilateral fora are often considered as ineffective. Decision making in the European Union (EU) and in particular its key intergovernmental body, the European Council, poses no exception. Especially in the domain of EU foreign and security affairs the unanimity requirement governing this institution allegedly allows nationalist governments to torpedo any attempt to build up a credible European defense force and a unified foreign policy stance. In this paper, we take issue with the claim that multilateral summits merely result in "hot air" by looking at whether and how decisions made during EU summit meetings affect the European defense industry. We argue that investors react positively to a successful strengthening of Europe's military component - a vital part of the intensified cooperation within the European Security and Defense Policy (ESDP) - since such decisions increase the demand for military products and raise the expected profits in the European defense industry. Our findings lend empirical support to the view that financial markets indeed evaluate the substance of European Council meetings and only react to those summit decisions which consolidated EU military capabilities and the ESDP. Each of these substantial Council decisions increased the value of the European defense sector by about 4 billion Euros on average. This shows that multilateral decisions can have considerable economic and financial repercussions.

Keywords: European Union, International Institutions, Stock Markets, Defense Sector, European Security and Defense Policy

JEL Classification: P16, N20, G18

Suggested Citation

Bechtel, Michael M. and Schneider, Gerald, Eliciting Substance from 'Hot Air': Financial Market Responses to EU Summit Decisions on European Defense (February 16, 2009). International Organization, Vol. 64, No. 2, pp. 199-223, 2010. Available at SSRN: https://ssrn.com/abstract=1344648

Michael M. Bechtel (Contact Author)

Washington University in Saint Louis ( email )

Campus Box 1063
One Brookings Drive
Saint Louis, MO 63130-4899
United States

Gerald Schneider

University of Konstanz ( email )

Fach D-144
Universit├Ątsstra├če 10
Konstanz, D-78457
Germany

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