This entry was originally posted in 2010, before the financial crisis. While the argument still holds for EU member states that are not members of the Euro-Zone, for EZ member states, the discussion ought to be more nuanced because the EZ is fundamentally flawed at an institutional level due to the fact that a supranational monetary policy authority requires an equal-level fiscal authority to work in tandem. The criticisms stemming from this institutional imbalance are considered in the following three posts:
- OCA Theory – Asymmetric shocks in the Euro-Zone, Long Term Structural Problems & the need for EU Fiscal Union
- On International (European) Political Economy Equilibria – Introductory thoughts and some Intuition
- Thank you Mr Bini Smaghi, but Fiscal Federalism is not Centralisation…
The criticisms to European integration can be categorized into 3 accusations: Bureaucratic Inefficiency, Democratic Deficit and Policy Inefficiency. If all else fails, Nationalism tends to be the excuse of choice of one who simply does not like change. Nonetheless, those are plausible claims that should be considered. The truth is that all of these need to be somewhat qualified and that once we take these specific criticisms into account, they become rather trivial, and applicable to most forms of government.
First and foremost though, I believe that it is fundamental to introuce the reader to the following fact. European integration, at all levels is guided by the principles of conferral subsidiarity, and proportionality. These argue that matters can only be handled by the EU if the Member states have allowed it to do so in the treaties, that matters ought to be handled by the smallest, lowest or least centralized competent authority and that “the content and form of Union action shall not exceed what is necessary to achieve the objectives of the Treaties”, respectively. Contrarily to anglo-saxon perceptions, it is constitutionally impossible for the EU to pursue unjustified and illegitimate power grabs, as these are forbidden by Article 5 of the Treaty on European Union.
The next lines argue that Bureaucratic inefficiency is a myth fed by the uninformed. The democratic deficit is real, albeit not as bad as advertised. It is caused by lack of involvement and can be improved if parliamentary groups in the EP advance their candidates and platforms before the elections, and if they campaign for them.
Policy inefficiency is multifaceted. Revenues are never efficient in that they always introduce distortions, be they at local national or extranational level. Therefore the issue is mute. However, its per capita composition seems rather unfair and may warrant the creation of EU taxation, on equity grounds.
The existing structure of EU expenditure is highly redistributive which does not forcefully mean it is inefficient. More importantly if the CAP did not exist it would probably only cause member states to subsidize agriculture nationally creating waste from duplication efforts and subsidy competition. The lack of military expenditure could be seen as an inefficiency, but for as long as the US will provide for us through NATO, its existence would be more relevant for growth through military R&D spillovers to the private sector than for actual defense.
Finally Regulatory policy is briefly considered from three different perspectives. It is claimed that the Single Market is the most efficient policy of the EU, that Competition policy benefits EU consumers but that it hurts EU companies, who are not particularly aided by EU trade policy. No considerations are made about the Euro, which is altogether a different issue, which deserves its own post.
The most commonly used accusation thrown against the EU is that it is a massively inefficient bureaucracy, with EU civil servants earning super inflated salaries. This is both inaccurate and unfair, first because the EU is an extremely lean bureaucracy. As a matter of fact, it costs 1% of the added GDP of all member states to finance all of the institutions of the EU. Compare that with the size of national governments (USA, UK, France, Germany, Ireland, Sweden) and it becomes evident that the EU does not take an enormous amount of resources to be run. More importantly, it is impossible for it to be less efficient than the added efforts of the 27 member states. By definition, there will be duplication efforts, counterproductive competition and fixed costs that’ll always mean that a EU bureaucracy will have higher returns to scale than the sum of its 27 member states (the same logic applies to the argument in favour of a World Government).
This criticism is generally expressed by comparing the EU to a monstrous Behemoth, a Leviathan of sorts that sucks the blood out of the EU economies. Whatever way you look at this, it is not true(see the EU’s staff regulations, EU salary scales, all EU Staff Figures, and ckan). It is not true of its size and it is not true of its wages. First of all, even excluding US military personnel, the EU civil service is considerably lower than its US’ federal governmen homonym (EU= 25,079 employees, US= 1.909 million employees). Moreover, and as this comparative study shows, EU average wages are lower than those of the private sector. Finally, because the functions of the European Commission are considerably more limited than that of the US executive branch, the EU is leaner to run. As a bureaucracy, it dedicates 51% of its staff to administrative functions, for a USA equivalent of about 80.4% (excluding the military).
The only criticism that one can point at the EU is that it hires too many translators. However, for an organization of its responsibilities and that has 23 official languages, this is not surprising. It is a legal and practical pre-requisite for its functioning. I’m sure Germans, Dutch and Swedish voters would not criticize this state of affairs if the EU adopted as its only official language, Portuguese, Hungarian or French.
The expression “Democratic Deficit” was coined by the British conservative (now liberal democratic) MEP, Bill Newton Dunn and was defined as the following logical sequence of problems of the institutions of European integration
Since then this criticism has evolved quite a lot. In the image below, I’ve summarized the arguments that have been brought to the fore supporting the view that the EU suffers from a democratic deficit. The part that is crossed is so because it is an argument that has been disproved through argument or recent reform (Lisbon Treaty).
Regarding the scope of codecision, please check this official link for a list. It is quite extensive and gives an idea of the decision making power and influence of the European Parliament.
The other democratic deficit attack, that electoral turn out is too low two points should be made. As the following figures show, this cannot be true. Otherwise by extension, one would have to argue that the US House of Representatives suffers from the same problem.
This being said, a lot can still be done to improve EU democratic institutions. The first of them is to disclose the minutes of the meetings of the council, both at the head of state level and at the ministerial level. This lack of transparency is a stain in the institutional framework of the EU. Finally, given the Hix and Follesdal framework presented above, there are still some unresolved issues, such as the fact that EP elections are perceived as second order elections and that people consider the European institutions to be too distant. To actually deal with this issue, which should be the last hurdle, the different groups of the EP should propose comprehensive agendas and advance leadership candidates who would then campaign. The legitimacy that these candidates would have would more or less force the European Council to the leader of whatever parliamentary group that wins as its candidate for the presidency of the Commission. This is the idea Hix fantasizes about at the end of his book, an idea which was picked up by some members of the PES.
If this were to happen, it would transparently bring public debate on the EU to the public forum and it would create actual competition between the parties. If Schattschneider and Hix and Follesdal are indeed right and salience is endogenously formed, then this public process of competition should indeed lead to the mobilization and emergence of the conflicting biases necessary to get the public interested and involved in the process. This mobilisation process assumes that people get involved, that they invest their time and may be even their resources, thus taking a stake in the success of the party of their choice and in the successful implementation of at least some aspects of its electoral programme. This is an important and logical assumption. However, because of its abstract nature, it is one which is probably impossible to prove or disprove. Nonetheless if it is true, than it is one which matters a great deal. If the heart of the democratic process is that the electoral losers accept to be in the opposition at least until the next election is called, the brains of democracy is that those who appointed the government remember (more or less) the promises that were made during the campaign and hold them accountable for fulfilling those promises, within the limits of the electoral majority acquired.
Criticisms of policy inefficiency are very difficult to evaluate. There are three types of any government’s policy: revenues, expenditures and regulation, so to address this criticism requires looking at all these.
Revenues are the simplest part. As we can see in the figure below, more than 50% of EU revenues come from GNI based transfers from the member states which are more or less automatic. The rest is mostly VAT and custom duties. In this graph you should notice the fact that EU Revenues have never exceeded 1.2% of total EU GDP. That’s quite a feat.
Personally I would like the budget to be bigger, but mostly, as the section below describes, because the EU should be doing more things. I also think that the EU ought to levy taxes, so as to guarantee its solvency, and that it is not exposed to the whiffs and humors of any given member state. This is because arguments always arise where it is claimed that “my country” pays a disproportionate amount of EU contributions. Let’s turn to the graph below and see if that actually happens.
Germany, France, the UK, Italy, Spain and the Netherlands are the EU’s largest contributors, but per capita it is actually smaller countries’ citizens who support most of the burden. As such if anyone should complain it should be the Luxembourgers, the Belgians, the Danes, the Dutch, the Irish or the Swedes. The French are in 10th place and the Germans in 11th, followed by the Italians in 12th, the Brits in 13th and the Spaniards in 14th. Thus the present arrangement does not seem to hurt the Brits too much. In my opinion what this reveals is that indeed the EU should be financed with an income tax, where it would tax different income levels progressively and in a similar manner accross the EU. This way rich people in Germany should pay the same as rich people in Sweden. Nonetheless, for what it is it does now adays, the EU is well funded and I am not going to be more pedantic than this.
Expenditure is more complicated. The graph below shows the evolution of EU expenditure over time.
This graphs is telling by what dominates it as much as by what is absent. The CAP and the Strutural funds account for more than 75% of all EU expenditure. They are very inefficient. More interestingly for the debates to follow, the distribution ( in total and per capita) is also somewhat revealing of the stakes each EU country has in each EU policy.
Curiously we see that the UK receives more in farming subsidies than Portugal, Ireland Sweden, the Netherlands, Poland or Sweden, all countries with either more rural populations or with more rural land than the UK. The issue is probably relevant because it is framed as being against the French rather than in terms of everyone else… These graphs are interesting because they also help us understand who has a stake in each expenditure. Belgium and Luxembourg benefit most from being EU headquarter hubs. Ireland, Spain, Denmark, Finland and France have a stake in the CAP, while Portugal, Estonia, Latvia and Greece have a bigger stake in the cohesion funds.
The CAP has a very long history, and is one of the first policy areas to be delegated to the EU. The sector was very important after WWII, when food shortages were still serious concerns in the minds of Europeans. Moreover, agriculture was also one of the first markets to have led to the discussion of monetary policy at the European level, as countries saw each others monetary policy as an unfair form of competition. These days however, it allocates resources to a rather unproductive sector and has become the poster for all Eurosceptic claims. As the table below shows, it is a sector that represents an extremely small part of the economy and a similarly small percentage of the population.
Over the years however there have been several efforts at improving this wasteful policy. The pressures are both internal (from member staes and other sectors of the economy) and external (developing world and WTO) and intensified after the 1980s. Finally, in 1992, the MacSharry Reforms were able to decouple the subsidies from production. The Commission argues that “under the new system farmers still receive direct income payments to maintain income stability, but the link to production has been severed. In addition, farmers have to respect environmental, food safety, phytosanitary and animal welfare standards. Farmers who fail to do this will face reductions in their direct payments”. This is obviously much brighter a picture than the real one, and there are still many provisions for direct production aid.
Of course it can be argued that its concern is not with efficiency, but rather with equity, and thus that this exercise is pointless. The sad truth however is that it has been captured and that for all the talk about supporting small farmers, the main beneficiaries are large farming and agri-business conglomerates.
The point should also be made that everyone subsidizes agriculture. This means that in the absence of the EU, the UK, France and Sweden would still subsidize farming. At least by having it centralized at the EU level there are savings from avoiding duplication efforts. Moreover there is an argument to be made in regards to the need to help this fraction of the population to transit into the new economy.
Anyway, much more could be said, but the CAP has already taken long. The fact is that, notwithstanding all these facts, the CAP is still the single most inefficient and disreputable policy of the EU. It is a testament to collective action problems and the power of interest groups and is probably one of the few points on which I can agree with the UKIP. And that’s not something I enjoy… For more information on the CAP, please check Wikipedia’s very thorough entry, the market share matrix project for a commodities market concentration matrix, the EU’s source for beneficiaries of the CAP subsidies and Dublin’s Trinity College Policy coherence center for the study of the CAP and external EU trade and development.
The Structural funds are redistributive in nature and not forcefully inefficient, according to the second law of Welfare economics. The problem however is 2-fold. First of all governments don’t know very well what their citizens want and even if they do, officials may prioritise their own gain or that of its interest groups clients. The second problem is that the net contributing countries cannot monitors perfectly the net receivers. The result is that you end up with a sort of “fly paper effect”, where the receivers will spend the money less well because their electorate did not pay for it. In practice, Portugal ends up as the country with most high ways in the EU. The alternative here would be to eliminate the monitoring cost altogether. How? By cutting the middle man and having the EU spend the money directly, after consultation with the relevant member states. As a recent study shows the middle man creates a lot of problems, even in the US. In the EU however they are the cause for accusations of corruption each year the European Court of Auditors fails to sign the EU’s accounts. The FT is publishing this week a series of investigative pieces on this topic, and has made public a very thorough data base on who gets how much and where. There is some embarrassment as to whom the recipients are and some extent of reform may be coming our way.
Missing Expenditure – The true policy inefficiency
The expenditure that is missing however is, I believe, the most important. In terms of efficiency, there is no doubt that public investment, rather than consumption is the best. In that context the literature highlights the role of military expenditure on R&D and it’s positive spill overs to the private sector.
Moreover, if as Alesina, Angeloni and Schuknecht argue delegation to the EU should occur where gains from scale effects are significant conjugated with the need to credibly and imparcially manage and reduce negative externalities, a European army would be the best bet. However it is not. Why? Because of NATO. In that sense the lack of European military integration is actually efficient, so long as the USA will continue to happily foot the bill. The only contribution a European Army could give would be the positive spillovers into the private sector from Military research R&D (see here, here and here).
Regulatory concerns will focus on how EU legislation creates more red tape. The reader should note that all regulatory criticisms against the EU also apply to national governments and are thus trivial. The first version will proclaim that the EU adds another layer of red tape. This is actually more true of the US federal government as there is no EU law, only treaties and directives that directly or indirectly apply to all member states through national legislation.
The criticism then adapts and moves on to argue that it is simply too abundant. Although I don’t have any point of reference, I do believe that the reader would benefit from accessing the tables below from Alesina, Angeloni and Schuknecht’s 2002 article. As we can see, EU legal and Judicial activity seems to be mainly dedicated to Citizens and social protection, the Common Market, International Relations and Foreign aid, Agriculture and Fisheries and Monetary and Financial matters.
Although only superficial, I believe that a quick look at some policy areas is warranted. The single market is by far Europe’s biggest achievement. By eliminating all nominal and technical barriers to trade, the EU has created the worlds biggest market. Baldwin and Wyplosz, in Chapters 5 and 6, go through the benefits of the single market, and lets just say that it is a fact that it really does work and makes everyone better off. More can be done, particularly when it comes to creating an energy single market, but these things take time.
At the same time, competition policy has ensured EU citizens that they will not be taken advantaged of by businesses. As it keeps a check on companies operating inside the single market, the EU ensures that big domestic and foreign companies are not able to collude or abuse their dominant positions to impose monopolistic prices on EU citizens.
The impact of this on EU companies’ position in the global market is difficult to know for sure. On the one side, as we possess the world’s biggest market, whatever standards we adopt, become those of the world. Thus, by demanding more from our firms we ensure not only that they provide us more, but also that they provide higher quality-price ratios abroad, thus making them more competitive. However, as we restrict our companies from imposing higher mark-ups, they won’t be able to provide as high returns to their shareholders as say American firms, and as such it could be argued that was a result they may have more difficulty financing themselves. Fortunately, this effect seems rather mild (note that the present economic crisis in Europe has nothing to do with the stringency of our competition rules). Not withstanding this, a little bit of EU support could go a long way to helping European companies be more competitive. So may be there is an argument for the internal and the external market Commissioners to coordinate more.
What this post shows is that many things could be done differently, but efficiency improvements mostly lies with more delegation to the EU, not less. On the other hand, democratic as well as managerial concerns can only be addressed by increasing the transparency of EU institutions to facilitate their monitoring by citizens and interest groups.