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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
Robert Boyer
Invited researcher, Copenhagen Business
School
PhD Workshop: Post-crisis EU Economic and Social
Policy, University of Southern Denmark, 15 September 2011
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@Europa, Dinamicas productivas de
la integración: comercio, moneda, trabajo e industria, Ano VIII, n° 1,
Abril 2010, p. 31-47
 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?
 The synopsis of the presentation
I.
According to a public good approach, how
should be organized European governance?
II. How to interpret the discrepancy observed
with the actual integration pattern?
III. The organization of competition on the
common market has been the core of
related European public goods.
IV. A forgotten major public good: financial
stability within the Euro zone.
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
 The contribution of economic theory to
the question of the allocation of
competences starts with an investigation of
market failures as soon as externalities
appear (positive in the case of knowledge,
for example; negative in the case of
congestion or pollution). Some goods have
the property of being able to benefit
everybody without any additional cost.
 These are public goods: when available
they benefit everyone, without any need for
repeating the action of buying and selling:
security,
defence,
the stability of the legal system,
the resilience of the system of payments
 and the monetary order.
 As the market is incapable of
determining the optimum supply level
of these goods, a process of political
deliberation is required to determine
the volume of resources allocated,
even if this means using cost/benefit
calculations at this level.
 The contribution of public choice
theory: clear and explicit criteria
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)
 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 Europe’s 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.
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.
The remarkable fact that the many 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.
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
Figure 1 – The spiral of Europeanization: Treaty, directive,
jurisprudence…and so on.
 Interdependence between public
goods can favour their recognition and
their institutionalization
Figure 2 – The constitution of a European market, guiding
theme in the extension of Community competences
 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.
IV. A forgotten major public good:
financial stability within the Euro
zone
1. 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
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.
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 ; l’euro est-il sauvé?”, Flash Economie, n° 599, 9
août, p. 6.
2. 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
Table 3 – The EURO impacts upon national modes of régulation
Periods
Level of
institutional forms
« Golden Age »
1945-1971
The painful decades
1972-1999
Launching of EURO
1999-…
More and more constraints
upon national monetary
autonomy
The same European monetary
National
National, but
transformations in reaction
to fiercer competition
Still national but
« benchmarking » at the
European level
Mainly national
Growing impact of
European competition policy
Stricter enforcement of
competition et the European
level
4. 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
5. Link State /
Economy
Large welfare State
Recurring public and welfare
deficits
Diverging evolution of public
deficits
1. Monetary Regime /
Credit
National
2. Wage labor nexus
3. Nature of
competition
policy for all members
3. The Euro fosters an unprecedented
division of labour among MemberState
 Diverging adjustment processes for
productive capacities
Table 4 – After the Euro, national productive capacities become
the adjustment variable
INSTRUMENTS
THE GOLDEN
AGE
National level
OBJECTIVES
INFLATION
1.
Monetary policy
UNEMPLOYMENT 2. Budgetary policy
3.
GROWTH
EXTERNAL
EQUILIBRIUM
4.
5.
AFTER THE EURO
European level
1.
ECB policy
Constrained by the
Stability and growth
pact
+
Income policy
Innovation and
industrial policy
4.
The exchange rate is
set by political
decisions
5.
National level
Competition policy
+
Lisbon Agenda
The Euro / $ /
Yen exchange rates
are market variables
2.
Budgetary policy
3.
National pacts
Diverging
productive capacities
Vanishing of the external
constraints
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 n’a-t-on pas vu, de 1999 à 2007, les problèmes
de l’Espagne, du Portugal, de l’Irlande, de la Grèce? »”, Flash Economie, n° 534, 9
juillet, p. 5.
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.
I. A – THE EVOLUTION OF REALII. B
Graph 5 – The III.
complementarity
among the
various national
growth regimes
in the EU
IV.
V.
VIII.
–
THE EVOLUTION
AGGREGATE DEMAND
WAGE PER CAPITA
OF
VI.
VII.
C – EVOLUTION OF PUBLIC DEFICIT / GDP
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 .
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.
4. 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.
Table 5 – Which banks own the European treasury bonds?
A – Greek 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.
Table 5 – Which banks own the European treasury bonds?
B – Spanish and Italian 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.
Table 5 – Which banks own the European treasury bonds?
C – Share of ownership of Spanish and Italian treasury bonds by non
residents
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.
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 ; l’euro est-il sauvé?”, Flash Economie, n° 599, 9
août, p. 5.
Graph 8 – Two crises: a public finance issue for Greece and Portugal,
an excessive private credit for Ireland and Spain
The evolution of public debt / GDP
The evolution of private credit /
GDP
Artus (2011): “L’ajustement demandé aux pays périphériques de la zone euro est-il réalisable?
Une comparaison avec l’ajustement réalisé en Allemagne, Flash Economie, n° 268, p. 3
et 2.
5. 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
Figure 3 – Financial speculation reveals some of the institutional
unbalances of European governance
Launching of the Euro
The same monetary policy for all
Too restrictive for the
most competitive
economies
Slow Growth for the
European EU.
IMPACT OF
THE
SUBPRISES
CRISIS
Too soft for poorly
competitive economies
Catching up but real estate
bubbles and/or public
deficit
Booming public
deficits
Speculative attack upon
higher public debt countries
Lagging and
uncertain responses
of EU authorities
Again doubts upon the
viability of the Euro without
fiscal federalism
Graph 9 – A clear speculative component in the Greek crisis
Source :
Patrick
Artus
(2010),
Flash,
n° 90,
23 février
6. 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
Figure 4 – Disentangling the various causes of the Euro
zone crisis
Low interest
rate
EURO
No enforcement of
the stability and
growth pact
The Greek
strategy: a
public deficit
led growth
Loss of
competitiveness
Systemic
crisis
Absence of any
institutionalized
bailing out
process
The Greek debt
is not
sustainable
Reveals
Financial
speculation
7. 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.
Table 6 – How to prevent the repetition of the Greek crisis?
Impact
Principle
Nature of reforms
Economic
efficacy/efficiency
Political feasibility
1. 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
2. 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
3. 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
4. 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?
5. 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
6. 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
7. 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
Table 7 – The factors that make contemporary austerity quite
dangerous
1990S
I. World economy
 trade

finance
Very dynamic and relatively
steady
Growth enhancing via credit
II. European Union
 Exchange rate regimes


Large swings and uncertainty
Avoidance of
restrictive credit
risk
and
Soft coordination allowing
adjustments if necessary
Coherence of rules of the In the process of elaboration,
a clear optimism
game
Sense of solidarity
III. Domestic economies
 Growth

AFTER THE SUBPRIME CRISIS
Ability to work
compromises
Present
funds
via
the
The Euro removes any
internal adjustments
An unfinished institutional
construction, pessimism about
the Euro
structural National
interest
first,
minimalist solidarity
Unequal but a facilitation of Problematic, contraction of
taxation
the tax basis
More and more difficult
out Possible even if difficult
Table 8 – European integration: A federalism of third type?
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.
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.
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.
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.
“ Political Goals, Legal Norms and Public
Goods.
The Building Blocks of Europe”
Robert Boyer and Mario Dehove“
http://www.centre-cournot.org/?wpfb_dl=8
Many thanks for your attention
Permanent address
Robert BOYER
CEPREMAP (Paris) – GREDEG (Sophia
Antipolis)
140, rue du Chevaleret 75013 PARIS, France
Tél. : (33-1) 40 77 84 12
e-mail : [email protected]
web site : http://www.jourdan.ens.fr/~boyer/