Can the EU Anchor Policy Reform in Third Countries? An Analysis of the Euro-Med Partnership

Abstract

The emerging literature on ‘anchoring’ draws attention to non-conventional benefits of regional integration arrangements, which include increased policy credibility. Nevertheless, this literature tends to view the anchoring of policy reform as an exogenously-given option for a reforming country. We demonstrate that anchoring is an endogenously-determined choice, which may guarantee neither optimal levels of policy reform nor effective anchoring unless the relevant contracts are both complete and incentive-compatible. We examine the economic pillar of the Euro-Med Partnership (EMP) to ascertain the extent to which its contractual provisions satisfy these conditions. Our findings suggest that EMP leaves too much room for discretion and does not internalise the positive externalities associated with policy reform. These findings enable us to elaborate on why the EU cannot be expected to function as an effective anchor for policy reform in its trading partners.

Keywords: European Union, Policy reform, External anchors, Commitment credibility