3. Decision Making in the EU. Baldwin&Wyplosz The Economics of European Integration

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1 3. Decision Making in the EU 1

2 Task allocation and subsidiarity Key question: Which level of government is responsible for each task? Setting foreign policy Speed limits School curriculum Trade policy, etc Typical levels: local regional national EU Task allocation = competencies in EU jargon 2

3 Subsidiarity principle Before looking at the theory, what is the practice in EU? Task allocation in EU guided by subsidiarity principle (Maastricht Treaty) Decisions should be made as close to the people as possible, EU should not take action unless doing so is more effective than action taken at national, regional or local level. Background: creeping competencies Range of task where EU policy matters was expanding. Some Member States wanted to discipline this spread. 3

4 3 Pillars and task allocation 3 Pillar structure delimits range of: Community competencies (tasks allocated to EU). Shared competencies (areas were task are split between EU and member states). National competencies. 1 st pillar is EU competency. 2 nd and 3 rd are generally national competencies Basically members pursue cooperation but do not transfer sovereignty to EU. 4

5 Theory: Fiscal federalism What is optimal allocation of tasks? Basic theoretical approach is called Fiscal Federalism. Name comes from the study of taxation, especially which taxes should be set at the national vs sub-national level. What is optimal allocation of tasks: there is no clear answer from theory, just of list of trade-offs to be considered. 5

6 Fiscal federalism: The basic trade-offs Arguments in favour of centralization: Scale economies: Tends to favour centralisation and one-size-fitsall to lower costs. Producing public goods at higher scale, and/or spreading the costs across more people may lower the per capita cost of financing it. This tends to favour centralisation. Defense Policy in the EU? Spillovers (externalities) Negative and positive spillovers argue for centralisation. Local actors tend to underappreciated the impact of their activities (positive or negative) on other jurisdictions. (pollution). 6

7 Fiscal federalism: The basic trade-offs Arguments in favour of decentralization: Diversity and local informational advantage: Diversity of preference and local conditions argues for setting policy at low level (i.e. close to people). One-size-fits-all policies tend to be inefficient since too much for some and too little for others. Central government could set different local policies but local government likely to have an information advantage. Democracy as a control mechanism: Voters may be better informed about local issues (or are they?) High level elections are take-it-over-leave-it for many issues since only a handful of choices between packages (parties/candidates) and many, many issues. Example of such packages: Foreign policy & Economic policy. At national level, can t choose Centre-right s economics and Centre-left s foreign policy. 7

8 Fiscal federalism: The basic trade-offs Jurisdictional competition: favours decentralisation to allow voters a choice. Voters influence government they live under via: voice» Voting, lobbying, etc. exit.» Change jurisdictions (e.g. move between cities). While exit is not a option for most voters at the national level, it usually is at the sub-national level. And more so for firms. Since people/firms can move, politicians must pay closer attention to the wishes of the people. With centralised policy making, this pressure evaporates. Hirschman (1970). Exit, Voice and Loyalty. Responses to the Decline of Firms, Organizations and States. Harvard University Press. Voice direct, exit indirect. More exit, less voice. Loyalty reduces exit and may give voice a chance. School vouchers. 8

9 The allocation of policies to the EU Alesina and Spolaore (2005). See table 12. In a previous book A&S (2003) The Size of Nations. MIT Press, also examine the optimal size of nations from this perspective. Trade-off between diversity and economies of scale (larger market, public good provision). Implications: More nations the wider and more secure free trade and the more peaceful the international environment. Non-democracies favor size over diversity: empires. 9

10 The allocation of policies to the EU and Decision Rules Alesina and Spolaore talk about the trade-off between economies of scale and diversity but not about the decision rules used to decide policies at the EU level. In actual fact there is a relationship between the two. To see this consider first two concepts at a micro or individual level analysis which we will then translate to a country and supranational level: External costs: cost the individual expects from decisions of others over which he has no control. Decision making costs: the cost of collective decisions where two or more individuals are necessary to decide. Both costs depend on the decision rule in place. 10

11 The allocation of policies to the EU and Decision Rules 11

12 The allocation of policies to the EU 12

13 The allocation of policies to the EU and Decision Rules 13

14 The allocation of policies to the EU and Decision Rules 14

15 The allocation of policies to the EU and Decision Rules 15

16 The allocation of policies to the EU and Decision Rules Before, graph 2 related to decision to enter or not the EU. Now lets consider the same graph but now relating to the decision of EU members to centralize or not. Again depends on cost of not assigning policies to EU, the degree of heterogeneity and the decision rule in place. Lets come back to Alesina and Spolaore (2005). International trade and common market: high economies of scale and low diversity so assigned to EU level. But also expect less inclusive decision rules there. Yes, use QMV. Foreign policy. Expect high economies of scale but low diversity. But rule is Unanimity suggesting that diversity may be higher than indicated. Competition policy, state aid, monetary and fiscal policy: High economies of scale but unsure about diversity. Rules range from absolute majority to QMV indicating a low degree of diversity. 16