Can Markets Save the Rule of Law?: Insights from the EU

Does decline in the rule of law bear an economic cost? In a CDDRL seminar series talk, the Center’s Gerhard Casper Fellow in Rule of Law Janka Deli addressed this question. Using European Union (EU) trade data, she challenges the conventional wisdom that deterioration in the rule of law generates decline in economic vitality, on the belief that markets tend to punish states whose conduct violates liberal rule of law norms.

In the past decade, the rule of law has declined among EU member states, with Poland and Hungry embodying this trend. While conventional wisdom assumes that rule of law and economic growth move hand in hand, Deli presented findings betraying this expectation. With the EU as a case study, Deli examines how deteriorations in the rule of law, measured in terms of breaches in international investment agreements, affect bilateral trade.

What happens to the economy when rule of law declines? Deli finds that, on average, rule-of-law-related breaches of investment agreement are associated with a decline in exports due to trade losses suffered by Spain and Italy. In contrast, among newer EU member states, that trend was in the reverse. Decline in the rule of law, evidenced by repeated breaches of investment agreements, was accompanied by an increase in exports.

In making sense of this counterintuitive trend, Deli hypothesizes that norms and expectations surrounding investment agreement breaches vary across “old” and “new” EU states. Put simply; trading partners may be employing higher standards in dealing with investment breaches involving old member states while showing more tolerance to similar violations by new member states.

Deli’s findings challenge the belief that markets’ “invisible hand” will always punish illiberal economic practices and behavior, thereby steering countries toward liberal values and commitments. In the realm of EU trade, the empirical realities suggest otherwise.