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EUROPEAN GOVERNANCE AND THE ECONOMIC THEORY OF PUBLIC GOODS: From the Rome treaty to the present crisis of the euro zone

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Title: EUROPEAN GOVERNANCE AND THE ECONOMIC THEORY OF PUBLIC GOODS: From the Rome treaty to the present crisis of the euro zone


1
EUROPEAN GOVERNANCE AND THE ECONOMIC THEORY OF
PUBLIC GOODS From the Rome treaty to the present
crisis of the euro zone
  • Robert Boyer
  • Centro de Excelencia Jean Monnet, Buenos Aires 23
    de Augusto de 2011

2
INTRODUCTION
  • The triple origin of this presentation
  • An early investigation about the post euro
    governance in Europe
  • Le gouvernement économique de la zone euro
    (1999), La documentation Française, Paris.
  • A normative approach of the distribution of
    competences between Europe and Member-States
  • Political Goals, Legal Norms and Public Goods
    The Building Blocks of Europe? (2006), Prisme n
    8, Centre Cournot, Paris.
  • An interpretation of the emerging Euro crisis
  • Integracion productive y financiera en la Union
    Europea. De la sinergia al conflicto,
    Puente_at_Europa, Dinamicas productivas de la
    integración comercio, moneda, trabajo e
    industria, Ano VIII, n 1, Abril 2010, p. 31-47

3
  • The approach the interaction between two issues
  • According to the theory of public goods, ideally
    how should the distribution of competences be
    organized?
  • What does the sovereign debt crisis tell us about
    the institutional mismatch of European
    governance?

4
  • The synopsis of the presentation
  • According to a public good approach, how should
    be organized European governance?
  • How to interpret the discrepancy observed with
    the actual integration pattern?
  • The organization of competition on the common
    market has been the core of related European
    public goods.
  • A forgotten major public good financial
    stability within the Euro zone.

5
I. The normative economic approach
  • A strong contrast with the legal approach the
    performativity of European Treaty in the
    delimitation of competences.
  • ..And the judge is in charge of overcoming
    possible conflicts and contradictions

6
(No Transcript)
7
  • The contribution of public choice theory clear
    and explicit criteria

8
II. The economic rationale for an European public
good is not a sufficient condition for its
creation
  • Not all the public goods held to be naturally
    European have given rise to intervention or
    supply on a European level
  • Intra-European transport, a Community competences
    in the treaties as remained rather theoretical. A
    rare exception the European Air Safety Agency
    (June 2002)

9
  • Defence, which theorists consider a natural
    public good, has not become such due to
    conflicting national conceptions at the political
    level.
  • Science, should define an emerging European
    public good quite essential to the future of
    Europes competitive position. Despite a few
    large European programmes most research policy
    continues to be conducted at the national level.
    Hence, large costs of non Europe in terms of
    innovation policies.

10
  • In contrast, the European Union exercises
    competences in domains where the European
    character of the corresponding public goods has
    not been established
  • The Common Agricultural Policy (CAP) is a
    striking case. The resolute defence of national
    farms interests by certain countries explains
    this path and past dependence, although the
    percentage of European community funds to farming
    has slowly fallen and the CAP has been
    significantly transformed.

11
  • The remarkable fact that the big countries resort
    to often massive aid for their farming sector
    shows that economists should abandon pure public
    goods theory and focus on a political economic
    analysis of State intervention.

12
III. The organization of competition on the
common market has been the core of related
European public goods.
  • The primacy, centrality and driving force of
    competition in the internal market

13
Figure 1 The spiral of Europeanization Treaty,
directive, jurisprudenceand so on.
14
  • Interdependence between public goods can favour
    their recognition and their institutionalization

15
Figure 2 The constitution of a European market,
guiding theme in the extension of Community
competences
16
  • Three main failings of public goods economic
    theory
  • The historicity of the process of European
    integration
  • There is no separability of public goods, they
    are largely interdependent.
  • Economics mainly favours non cooperative
    strategies whereas the Monnet method promotes
    explicitly cooperative strategies by using
    deliberation and political discussion to build a
    convergence of interests.

17
IV. A forgotten major public good financial
stability within the Euro zone
  • A dangerous illusion monetary stability does not
    mean neither real convergence nor financial
    stability
  • A quick and surprising convergence of nominal
    interest rate on national public debt
  • Real convergence is more problematic

18
Graph 1 A convergence of 10 years Treasury
bonds interest rate
Source  Patrick Artus (2010),  Quelle
perspective à long terme pour la zone euro ?,
Flash Economie, n 158, 12 Avril, p. 4.
19
Graph 2 GDP per capita (Euro) the convergence
has stopped
Source Artus Patrick (2011), La crise de la
zone euro nous apprend beaucoup sur le
fonctionnement des Unions Monétaires leuro
est-il sauvé?, Flash Economie, n 599, 9 août,
p. 6.
20
  • Why are public finance and financial stability
    challenged by the Euro?
  • Each Member-State has lost two major economic
    policy instruments the interest rate and
    exchange rate

21
Periods  Golden Age  1945-1971 The painful decades 1972-1999 Launching of EURO 1999-
Level of institutional forms  Golden Age  1945-1971 The painful decades 1972-1999 Launching of EURO 1999-
Monetary Regime / Credit National More and more constraints upon national monetary autonomy The same European monetary policy for all members
Wage labor nexus National National, but transformations in reaction to fiercer competition Still national but  benchmarking  at the European level
Nature of competition Mainly national Growing impact of European competition policy Stricter enforcement of competition et the European level
Insertion into the world economy, exchange rate regime Exchange rate is the outcome of political decisions Financial markets set exchange rates A single common exchange rate set upon financial markets
Link State / Economy Large welfare State Recurring public and welfare deficits Diverging evolution of public deficits
22
  • The Euro fosters an unprecedented division of
    labour among Member-State
  • Diverging adjustment processes for productive
    capacities

23
Table 4 After the Euro, national productive
capacities become the adjustment variable
24
Graph 3 A deepening of intra-European
specialization manufacturing in the North,
service in the South
A Share of manufacturing in total value added
B Employment in domestic services (100 in
1999.1)
Source Patrick Artus (2011) Pourquoi na-t-on
pas vu, de 1999 à 2007, les problèmes de
lEspagne, du Portugal, de lIrlande, de la
Grèce? , Flash Economie, n 534, 9 juillet, p.
5.
25
Graph 4 - The cumulative polarization of trade
surpluses and deficits after the launching of the
Euro( GDP)
Source Patrick Artus (2010) La fin du mythe de
la convergence dans la zone Euro, Flash
Economie, n 695, 22 décembre.
26
Graph 5 The complementarity among the various
national growth regimes in the EU
Source Patrick Artus (2010) La fin du mythe de
la convergence dans la zone Euro, Flash
Economie, n 695, 22 décembre, p. 7-8-10 .
27
  • Graph 6 A very low competitiveness for some
    Southern European countries

Source  Patrick Artus (2010),  Quelle
perspective à long terme pour la zone euro ? ,
Flash Economie, n 158, 12 Avril, p. 3.
28
  • A fast financial integration within the EU
    appears as a substitute for economic policy
    coordination and fiscal solidarity
  • A rapid diversification of financial portfolio.
  • An easy financing of public deficits by banks and
    financial institutions.
  • A false assessment by the international financial
    community all public debts have the same
    (German) high quality.

29
A Greek treasury bonds
Table 5 Which banks own the European treasury
bonds?
Source Artus Patrick (2011), Que faire si des
grands pays de la Zone Euro sont, dans le futur,
en difficulté avec leurs dettes publiques, Flash
Economie, n 584, 28 juillet, p. 5.
30
B Spanish and Italian treasury bonds
Table 5 Which banks own the European treasury
bonds?
Source Artus Patrick (2011), Que faire si des
grands pays de la Zone Euro sont, dans le futur,
en difficulté avec leurs dettes publiques, Flash
Economie, n 584, 28 juillet, p. 8.
31
C Share of ownership of Spanish and Italian
treasury bonds by non residents
Table 5 Which banks own the European treasury
bonds?
Source Artus Patrick (2011), Que faire si des
grands pays de la Zone Euro sont, dans le futur,
en difficulté avec leurs dettes publiques, Flash
Economie, n 584, 28 juillet, p. 8.
32
Graph 7 The interest rate on 10 years of public
bonds a brutal divergence after the subprime
crisis
Source Artus Patrick (2011), La crise de la
zone euro nous apprend beaucoup sur le
fonctionnement des Unions Monétaires leuro
est-il sauvé?, Flash Economie, n 599, 9 août,
p. 5.
33
Graph 8 Two crises a public finance issue for
Greece and Portugal, an excessive private credit
for Ireland and Spain
34
  • The Euro is first a shield against the subprime
    crisis and then a liability
  • A consequence of the diverging trends in public
    finance
  • An thus financial markets brutally reassess the
    relative sustainability of public finances among
    European countries

35
Figure 3 Financial speculation reveals some of
the institutional unbalances of European
governance
36
Graph 9  A clear speculative component in the
Greek crisis
Source Patrick Artus (2010), Flash, n 90, 23
février
37
  • The failure of a prudential approach to European
    integration
  • A consequence of the diverging trends in public
    finance
  • An thus financial markets brutally reassess the
    relative sustainability of public finances among
    European countries

38
Figure 4 Disentangling the various causes of
the Euro zone crisis
Low interest rate
The Greek strategy a public deficit led growth
EURO
No enforcement of the stability and growth pact
Loss of competitiveness
The Greek debt is not sustainable
Absence of any institutionalized bailing out
process
Systemic crisis
Reveals
Financial speculation
39
  • The need for a significant institutional
    readjustment of the European governance
  • A multiplicity of options.
  • But difficult to implement in the eye of
    hurricane.
  • The danger of confusing the way out of the
    present sovereign debt crisis with the
    restructuring of European governance that would
    prevent its repetition.

40
Table 6 How to prevent the repetition of the
Greek crisis?
Impact Principle Economic efficacy/efficiency Political feasibility
Nature of reforms Principle Economic efficacy/efficiency Political feasibility
Short selling is forbidden Reduce the gap between fundamental value and market price Possible but no impact on European governance. Unequal according industrial or financial specialization
European public rating agency Fight against the three private agencies bias Moderate but not central for the EU Possible for governments,problematic for private players
European agency in charge of public finance assessment and control Name and shame failing governments Problematic because still less coercive power than that of SGP Poor because lack of legitimacy by citizens
Creation of a European financial fund Equivalent to the IMF for the EU in charge of rescuing failed states To be built by experience, need for clarification of relations with the IMF What relationship with the European Treaties?
Strengthening in the enforcement of the stability growth pact, with stronger sanctions Learning from the past combine incentives and sanctions for the sustainability of national public finances Possible during stable periods, problematic during a sistemic crisis Risk of fracture in the Euro zone, deflation and stagnation if hasty application
From loose governance to an explicit economic governance of the EU Complete overhaul of the European policy mix and construction of a viable one Better than in the current Treaties, provided that the coordination costs are not too high Problematic when we leave the rhetoric to the reality of practice
Emission of Euro bonds as the starting point for fiscal federalism Converge to a typical federalism, with a real capacity to govern the EU economy If legal issuing of Euro bonds and a sufficient size of the EU budget Growing reluctance of public opinion to any further loss of national sovereignty
41
Table 7 The factors that make contemporary
austerity quite dangerous
42
Table 8 European integration A federalism of
third type?
43
CONCLUSION A COMPLEX SYSTEMIC CRISIS OF EUROPEAN
INTEGRATION
  • C1 The economic theory of public goods delivers
    an interesting diagnosis about the relevance of
    the present distribution of competences it is
    far from ideal.
  • C2 The European governance is the outcome of a
    quite pragmatic approach to transnational
    institution building. It is not surprising to
    exhibit structural weaknesses. They are revealed
    by the present sovereign debt crisis.

44
  • C3 The Euro has been introduced as a necessary
    complement to the deepening of the internal
    market, in order to foster competition led growth
    regimes, but the new unbalances and causes of
    structural crisis typical to the Euro zone have
    not been clearly perceived.
  • C4 This was a response to exchange rate
    instability associated to financial
    globalization. Paradoxically, financialization
    has transitorily allowed the diverging trends in
    productive capacities between North and Southern
    Europe.

45
  • C5 The current doubts about various national
    sovereign debts are not only the expression of
    unwise public finance policies and of the
    speculative patterns typical of unregulated
    financial markets. They are also an evidence for
    a major institutional mismatch in European
    integration.
  • C6 Financial stability appears as the missing
    European public good, both for overcoming the
    present turmoil and designing a more coherent and
    resilient European Union.

46
  • C7 The July 2011 European plan
  • Neither solves the bailing out of the most
    challenged countries, since it promotes a
    competition led beggar my neighbour austerity
    strategy
  • Nor is it designing a credible reconfiguration
    of European governance a prudential approach of
    governance is a poor substitute for an explicit
    fiscal and political solidarity.

47
Many thanks for your attention
  • Robert BOYERCEPREMAP (Paris) GREDEG (Sophia
    Antipolis)140, rue du Chevaleret 75013 PARIS,
    FranceTél.  (33-1) 40 77 84 12
  • e-mail  robert.boyer_at_ens.fr
  • web site http//www.jourdan.ens.fr/boyer/
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