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We present a theory of European legal integration that relies on three causal factors: transnational exchange, triadic dispute resolution, and the production of legal norms. After stating the theory in abstract terms, we explain the construction of the legal system and test the relationship among our three variables over the life of the European Community. We then examine the effect of the EC legal system on policy outcomes at both the national and supranational levels in two policy domains: the free movement of goods and gender equality. Our theory outperforms its leading rival, intergovernmentalism. The evidence shows that European integration has generally been driven by transnational activity and the efforts of EC institutions to reduce transaction costs, behavior which governments react to but do not control.
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