INSTITUTIONS AND DECISION MAKING

Main Elements Free trade in goods. Eliminate tariffs, quotas and all other barriers that act like tariffs or quotas. Common trade policy with the rest of the world. Formation of a Customs Union necessary to avoid controls inside EU (Rules of Origin); also forces a degree of supranationality. Ensuring undistorted competition (to avoid other policies offsetting trade barrier removal). Main: State aids prohibited, Anti-competitive behaviour, Approximation of laws (Euro-jargon for harmonisation) necessary to ensure free movement of goods, Taxes (weak restrictions aimed at preventing subsidies via lower tax rates for some firms); no explicit harmonisation or coordination.

Main elements (cont’d) Unrestricted trade in services. ToR established principle of freedom of movement of services, but implementation has been hard. barriers are part of domestic economic regulations that are not explicitly coordinated by ToR (e.g. banking regulation is necessary, not subject to EU decision making and can hinder cross-border banking). Single European Act made some progress, new EU Services Directive (maybe adopted in 2006) should do more. Labour and capital market integration. Free movement of workers in ToR. Free movement of capital was in principle but many loopholes. 1950s economists were sceptical about capital mobility after inter-war problems; most EU nations retained important capital controls until the Single European Act.

Main elements (cont’d) Exchange rate and macroeconomic co-ordination ToR includes mechanisms for coordinations; most macro and exchange rate coordination remained informal or outside EU institutional structure until Maastricht Treaty. See Chapters 13 and 15. Common agriculture policy (CAP). Commitment in ToR but no details; CAP set up in 1962. Used to be a much more important sector than it is today In France about 1/3 of population was involved in agriculture in 1950s; today less than 5%. See Chapter 9.

Omitted elements Social policies. Argument was that ‘general policies’ (i.e. not sector specific) did not distort competition and so did not need to be harmonised (contrast with competition policy). Gains to harmonisation small. France forced exception for one policy into ToR: equal pay for men and women (was aimed at avoiding uneven competition in clothing section in 1950s). Basic idea was that national wage and exchange rates would adjust to offset any unfair advantage. If lower social standards meant lower production costs, long-run result would be higher wages that offset the advantage. Political costs of harmonisation very high. Social policies touch workers lives and EEC6 had very different approaches.

Omitted elements Single currency. EU founders believed fixed exchange rates were important to economic integration and political support for free trade. e.g. inter-war experience of link between ER volatility and protectionist pressures. But, 1950s exchange rates fixed worldwide by well-function IMF system “Bretton Woods” so no need for strong measures in ToR. First plan for single currency came in 1970 (“Werner Report”) as pressure on Bretton Woods began to grow.

Maastricht: 2nd ‘foundation treaty’ The Maastricht Treaty (known as Treaty Establishing the European Union) was: Massive step up in economic integration Monetary union Massive institutional change that delimited extent of future EU integration more clearly (the pillars).

Organisational structure: 3 pillars & a roof Member State concern over “creeping competencies” led to introduction of pillars in Maastricht Treaty and creation of EU. EU’s tendency to expand integration to new areas. ToR goal “ever closer” union + Commission & Court interaction produced progressively deeper & wider integration. EC (old EEC) is now 1st pillar. The EU’s 3-Pillar Structure 1st: Economics 2nd: Security & Foreign 3rd: Justice EU is ‘roof’ over the three pillars. Pillar structure limits the authority of EU Court and Commission to 1st pillar issues. Makes it clear that Member States in charge of 2nd and 3rd pillar issues.

Quantifying European economic integration

EU Law One of the most unusual features of the EU is its legal system. No other regional integration arrangement in the world is even close to extensiveness of supra-national law. Formally ‘EC Law’ is part that has strong supranational elements, while ‘EU Law’ is more intergovenmental. EC Law applies only to first pillar (this would change if the Constitutional Treaty is passed since it eliminates the pillars). Understanding basics of EU law is critical to understanding past & future developments of European economic integration (applies mostly to economic issues).

Law: “Sources” of EC Law The EU Court created by the Treaty of Rome Court then established the Community’s legal system. two landmark cases in 1963 and 1964. EC law was established on the basis of: The EU institutions ensuring that actions by the EC take account of all members’ interests, i.e. the Community’s interest; The transfer of national power to the Community. Source: Borchardt (1999 p.24) Constitutional Treaty (CT) would replace this as the source of EU law. CT repeals & replaces all other EU Treaties.

Law: Key principles of EC Law 1. Autonomy system is independent of members’ legal orders. 2. Direct Applicability has the force of law in member states so that Community law can be fully and uniformly applicable throughout the EU. 3. Primacy of Community law Community law has the final say; e.g. highest French court can be overruled on a matters pertaining to intra-EC imports. Necessary so Community law cannot be altered by national, regional or local laws in any member state. Source: Borchardt (1999)

Law: Types of EU legislation Primary legislation. Treaties. Secondary legislation. Collection of decisions made by EU institutions “acquis communitaire.” 5 types of secondary law 1. regulation applies to all member states, companies, authorities and citizens. Regulations apply as they are written, i.e., they are not transposed into other laws or provisions. They apply immediately upon coming into force.

Law: Types of EU legislation 2. directive may apply to any number of member states, but they only set out the result to be achieved. member states what needs to be done to comply with the conditions set out in the directive (e.g. new legislation, or change in regulatory practice). 3. decision is a legislative act that applies to a specific member state, company or citizen. 4. & 5. Recommendations and opinions These are not legally binding, but can influence behaviour of, for example, the European Commission, national regulators, etc. Would be simplified if CT is ratified.

Some important facts: Population ‘Big’ nations (>35 million); Larger than largest city in the world. Germany, the UK, France, Italy, Spain and Poland. ‘Medium’ nations (8 to 11 million; like mega-city, e.g. Paris metro region). Greece, Portugal, Belgium, the Czech Republic, Hungary, Sweden and Austria, Bulgaria. ‘Small’ nations (like big city, e.g. Barcelona, or Lyons. Denmark, Slovakia, Finland, Ireland, Lithuania, Latvia, Slovenia, and Estonia. ‘Tiny’ nations (like small city, e.g. Genoa). Cyprus, Luxembourg and Malta. Netherlands & Romania fall in between big and medium.

Facts: income per capita PPS is Commission’s adjustment for cost of living (Purchasing Power Standard 11 high income (above EU25 average) over €21,400 Denmark, Ireland, Austria, Netherlands, Belgium, Finland, Italy, Germany, France, UK, and Sweden. 10 medium income category – from €10,000 to €21,000 Spain, Greece and Portugal, Cyprus, Slovenia, Malta, the Czech Republic, Hungary, Slovakia, and Estonia . 6 low income nations, less than €10,000 Lithuania, Poland, Latvia, Romania, Bulgaria, and Turkey Luxembourg is in the super-high income category by itself. per capita income is almost twice that of France.

Facts: Size of economies Economic size distribution is VERY uneven. 6 nations (Germany, the UK, France, Italy, Spain and the Netherlands) account for more than 80% of EU25’s economy. Other nations are small, tiny or miniscule, ‘Small’ is an economy that accounts for between 1% and 3% of the EU25’s output. Sweden, Belgium, Austria, Denmark, Poland, Finland, Greece, Portugal and Ireland. ‘Tiny’ is one that accounts for less than 1% of the total. Czech Republic, Hungary, Slovak Republic, Luxembourg, Slovenia, Lithuania, and Cyprus. Miniscule as one that accounts for less than one-tenth of one percent. Latvia, Estonia and Malta.

The budget: Expenditure Expenditure is on 3 things: Agriculture (about half). Cohesion (about one third) All else (rest)

Evolution of spending priorities

Evolution of spending, level

Evolution of spending, level

Funding of EU Budget EU’s budget must balance every year Financing sources: four main types Tariff revenue ‘Agricultural levies’ (tariffs on agricultural goods) ‘VAT resource’. Like a 1% value added tax (reality is complex). GNP based. tax paid by members based on their GNP. Miscellaneous relatively unimportant since 1977 taxes paid by eurocrats, fines and earlier surpluses Pre-1970s direct member contributions

Evolution of Funding sources

Contribution vs GDP, 1999, 2000 % of GDP per member is approximately 1% regardless of per-capita income EU contributions are not ‘progressive’ e.g. richest nation, (L) pays less of its GDP than the poorest nation (P)

Net Contribution by Member

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

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 compentencies” Range of task where EU policy matters was expanding. Some Member States wanted to discipline this spead.

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. 1st pillar is EU competency. 2nd and 3rd are generally national competencies details complex, but basically members pursue cooperation but do not transfer sovereignty to EU.

Theory: Fiscal federalism What is optimal allocation of tasks? Basic theoretical approach is called Fiscal Federalism. Name comes from the study a taxation, especially which taxes should be set at the national vs sub-national level.

Fiscal federalism: The basic trade-offs What is optimal allocation of tasks NB: there is no clear answer from theory, just of list of trade-offs to be considered. Diversity and local informational advantages Diversity of preference and local conditions argues for setting policy at low level (i.e. close to people). Scale economies Tends to favour centralisation and one-size-fits-all to lower costs. Spillovers Negative and positive spillovers argue for centralisation. Local governments tend to underappreciated the impact (positive or negative) on other jurisdictions. (Passing Parade parable). Democracy as a control mechanism Favours decentralisation so voters have finer choices. Jurisdictional competition Favours decentralisation to allow voters a choice.

Closer look at the trade-offs

Diversity and local information 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.

Scale By producing public good at higher scale, or applying to more people may lower average cost. This ends to favour centralisation. Hard to think of examples of this in the EU.

Spillovers Example of a positive spillovers. If decentralised, each region chooses level of public good that is too low. e.g. Qd2 for region 2. Two-region gain from centralisation is area A. Similar conclusion if negative spillovers. Q too high with decentralised.

Democracy as a control mechanism If policy is in hands of local officials and these are elected, then citizens’ votes have more precise control over what politicians do. High level elections are take-it-over-leave-it for many issues since only a handful of choices between ‘promise packages’ (parties/candidates) and many, many issues. Example of such packages: Foreign policy & Economic policy. Centre-right’s package vs Centre-left’s package. At national level, can’t choose Centre-right’s economics and Centre-left’s foreign policy.

Jurisdictional competition 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.

Economical view of decision making Using theory to think about EU institutional reforms. e.g., Institutional changes in Constitutional Treaty, Nice Treaty, etc. Take enlargement-related EU institutional reform as example.

EU enlargement challenges Since 1994 Eastern enlargement was inevitable & EU institutional reform required. 3 C’s: CAP, Cohesion & Control. Here the focus is on Control, i.e. decision making. Endpoint: EU leaders accepted the Constitutional Treaty June 2004. Look Nice Treaty and Constitutional Treaty. Nice Treaty is in force now and will remain in force until new Treaty is ratified. Focus on Council of Ministers voting rules. See Chapter 2; these are the key part of EU decision making.

Distribution of power among EU members For EU15, NBI is very similar to share of Council votes, so the distinction is not so important as in 3 country example.

Do power measures matter?

Do power measures matter?

Legitimacy in EU decision making Legitimacy is slippery concept. Approach: equal power per citizen is legitimate ‘fair’. Fairness & square-ness. Subtle maths shows that equal power per EU citizen requires Council votes to be proportional to square root of national populations. Intuition for this: EU is a two-step procedure Citizens elect national governments, These vote in the Council. Typical Frenchwoman is less likely to be influential in national election than a Dane. So French minister needs more votes in Council to equalise likelihood of any single French voter being influential (power). How much more? Maths of voting says it should be the square root of national population.

Nice Treaty Voting Rules 3 main changes for Council of Ministers: Maintained ‘weighted voting’. Majority threshold raised. Votes re-weighted. Big & ‘near-big’ members gain a lot of weight. Added 2 new majority criteria: Population (62%) and members (50%). ERGO, triple majority system. Hybrid of ‘Double Majority’ & Standard QMV.

Post Nov 2009 rules If the Constitution is ratified, then New system after November 2009: Double Majority. Approve requires ‘yes’ votes of a coalition of members that represent at least: 55% of members, 65% of EU population. Aside: Last minute change introduced a minimum of 15 members to approve, but this is irrelevant. By 2009, EU will be 27 and 0.55*27=14.85 i.e. 15 members to win anyway.