EUROPEAN EUROPEAN GOVERNANCE GOVERNANCE AND THE AND THE ECONOMIC THEORY OF ECONOMIC THEORY OF PUBLIC GOODS: PUBLIC GOODS: From From the Rome treaty to the the Rome treaty to the

present crisis of the euro present crisis of the euro zonezoneRobert Boyer

Centro de Excelencia Jean Centro de Excelencia Jean Monnet, Buenos Aires 23 de Monnet, Buenos Aires 23 de

Augusto de 2011Augusto de 2011

INTRODUCTIONINTRODUCTION The triple origin of this presentation: The triple origin of this presentation:

An early investigation about the post euro An early investigation about the post euro governance in Europegovernance in EuropeLe gouvernement économique de la zone euro Le gouvernement économique de la zone euro (1999), La documentation Française, Paris.(1999), La documentation Française, Paris.

A normative approach of the distribution of A normative approach of the distribution of competences between Europe and Member-competences between Europe and Member-StatesStatesPolitical Goals, Legal Norms and Public Goods: Political Goals, Legal Norms and Public Goods: The Building Blocks of Europe? (2006), Prisme n° The Building Blocks of Europe? (2006), Prisme n° 8, Centre Cournot, Paris.8, Centre Cournot, Paris.

An interpretation of the emerging Euro An interpretation of the emerging Euro crisiscrisis““Integracion productive y financiera en la Union Integracion productive y financiera en la Union Europea. De la sinergia al conflicto”, Europea. De la sinergia al conflicto”, Puente@EuropaPuente@Europa, , Dinamicas productivas de la integración: comercio, Dinamicas productivas de la integración: comercio, moneda, trabajo e industriamoneda, trabajo e industria, Ano VIII, n° 1, Abril 2010, , Ano VIII, n° 1, Abril 2010, p. 31-47p. 31-47

The approach: the The approach: the interaction between two interaction between two issuesissues According to the theory of public According to the theory of public

goods, ideally how should the goods, ideally how should the distribution of competences be distribution of competences be organized?organized?

What does the sovereign debt What does the sovereign debt crisis tell us about the crisis tell us about the institutional mismatch of institutional mismatch of European governance?European governance?

The synopsis of the presentationThe synopsis of the presentationI.I. According to a public good approach, According to a public good approach,

how should be organized European how should be organized European governance?governance?

II.II. How to interpret the discrepancy How to interpret the discrepancy observed with the actual integration observed with the actual integration pattern?pattern?

III.III.The organization of competition on the The organization of competition on the common market has been the core of common market has been the core of related European public goods.related European public goods.

IV.IV. A forgotten major public good: A forgotten major public good: financial stability within the Euro zone. financial stability within the Euro zone.

I. The normative economic I. The normative economic approachapproach

A strong contrast with the A strong contrast with the legal approach: the legal approach: the performativity of European performativity of European Treaty in the delimitation of Treaty in the delimitation of competences….competences….

……..And the judge is in charge ..And the judge is in charge of overcoming possible of overcoming possible conflicts and contradictionsconflicts and contradictions

The contribution of public choice The contribution of public choice theory: clear and explicit criteriatheory: clear and explicit criteria

II. The economic rationale II. The economic rationale for an European public for an European public good is not a sufficient good is not a sufficient

condition for its creationcondition for its creation Not all the public goods held to Not all the public goods held to be naturally European have given be naturally European have given rise to intervention or supply on rise to intervention or supply on a European levela European levelIntra-European transportIntra-European transport, a , a

Community competences in the Community competences in the treaties as remained rather theoretical. treaties as remained rather theoretical. A rare exception: the European Air A rare exception: the European Air Safety Agency (June 2002)Safety Agency (June 2002)

DefenceDefence, which theorists consider a , which theorists consider a “natural” public good, has not “natural” public good, has not become such due to conflicting become such due to conflicting national conceptions at the political national conceptions at the political level.level.

ScienceScience, should define an emerging , should define an emerging European public good quite European public good quite essential to the future of Europe’s essential to the future of Europe’s competitive position. Despite a few competitive position. Despite a few large European programmes most large European programmes most research policy continues to be research policy continues to be conducted at the national level. conducted at the national level. Hence, large costs of “non Europe” Hence, large costs of “non Europe” in terms of innovation policies.in terms of innovation policies.

In contrast, the European In contrast, the European Union exercises competences Union exercises competences in domains where the in domains where the European character of the European character of the corresponding public goods corresponding public goods has not been establishedhas not been establishedThe The Common Agricultural PolicyCommon Agricultural Policy (CAP) (CAP)

is a striking case. The resolute defence is a striking case. The resolute defence of national farms’ interests by certain of national farms’ interests by certain countries explains this path and past countries explains this path and past dependence, although the percentage of dependence, although the percentage of European community funds to farming European community funds to farming has slowly fallen and the CAP has been has slowly fallen and the CAP has been significantly transformed. significantly transformed.

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

III. III. The organization of The organization of competition on the competition on the

common market has been common market has been the core of related the core of related

European public goods.European public goods. The primacy, centrality and The primacy, centrality and

driving force of competition driving force of competition in the internal marketin the internal market

Figure 1 – The spiral of Europeanization: Treaty, directive, jurisprudence…and so on.

Interdependence between Interdependence between public goods can favour their public goods can favour their recognition and their recognition and their institutionalizationinstitutionalization

Figure 2 – The constitution of a European market, guiding theme in the extension of

Community competences

Three main failings of public Three main failings of public goods economic theorygoods economic theoryThe The historicityhistoricity of the process of of the process of

European integrationEuropean integrationThere is There is no separability of public no separability of public

goodsgoods, they are largely , they are largely interdependent.interdependent.

Economics mainly favours Economics mainly favours non non cooperative strategiescooperative strategies whereas the whereas the Monnet method promotes explicitly Monnet method promotes explicitly cooperative strategiescooperative strategies by using by using deliberation and political discussiondeliberation and political discussion to build a convergence of interests.to build a convergence of interests.

IV. IV. A forgotten major A forgotten major public good: financial public good: financial

stability within the Euro stability within the Euro zonezone

1.1. A dangerous illusion: monetary A dangerous illusion: monetary stability does not mean neither stability does not mean neither real convergence nor financial real convergence nor financial stabilitystability A quick and surprising convergence A quick and surprising convergence

of nominal interest rate on national of nominal interest rate on national public debtpublic debt

Real convergence is more Real convergence is more problematicproblematic

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.

2.2. Why are public finance and Why are public finance and financial stability challenged financial stability challenged by the Euro?by the Euro? Each Member-State has lost two Each Member-State has lost two

major economic policy major economic policy instruments: the interest rate instruments: the interest rate and exchange rateand exchange rate

Table 3 – The EURO impacts upon national modes of régulation

Periods« Golden Age »

1945-1971

The painful decades

1972-1999Launching of EURO

1999-…Level of institutional forms

1.Monetary Regime / Credit

National More and more constraints upon

national monetary autonomy

The same European monetary policy for all

members

2.Wage labor nexus

National National, but transformations in reaction to fiercer

competition

Still national but « benchmarking » at the

European level

3.Nature of competition

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

3.3. The Euro fosters an The Euro fosters an unprecedented division of unprecedented division of labour among Member-Statelabour among Member-State Diverging adjustment processes Diverging adjustment processes

for productive capacitiesfor productive capacities

Table 4 – After the Euro, national productive capacities become the adjustment variable

INSTRUMENTS THE GOLDEN AGE

AFTER THE EURO

OBJECTIVES National level European level National level

INFLATION 1. Monetary policy 1. ECB policy

UNEMPLOYMENT 2. Budgetary policy Constrained by the Stability and growth pact

2. Budgetary policy

+ 3. Income policy

3. National pacts

GROWTH 4. Innovation and industrial policy

4. Competition policy +

Lisbon Agenda

Diverging

productive capacities

EXTERNAL EQUILIBRIUM

5. The exchange rate is set by political decisions

5. The Euro / $ / Yen exchange rates are market variables

Vanishing of the external constraints

Graph 3 – A deepening of intra-European specialization: manufacturing in the North,

service in the South

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.

A – Share of manufacturing in total value added

B – Employment in domestic services (100 in 1999.1)

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.

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 .

I. A – THE EVOLUTION OF REAL WAGE PER CAPITA

II. B – THE EVOLUTION OF AGGREGATE DEMAND

III.

IV. V.

VI.

VII.

VIII. C – EVOLUTION OF PUBLIC DEFICIT / GDP

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.

4.4. A fast A fast financial integrationfinancial integration within within the EU appears as a substitute for the EU appears as a substitute for economic policy coordination and economic policy coordination and fiscal solidarity fiscal solidarity A rapid diversification of financial portfolio.A rapid diversification of financial portfolio. An easy financing of public deficits by An easy financing of public deficits by

banks and financial institutions.banks and financial institutions. A false assessment by the international A false assessment by the international

financial community: all public debts have financial community: all public debts have the same (German) high quality.the same (German) high quality.

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.

Table 5 – Which banks own the European treasury bonds?

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

5.5. The Euro is first The Euro is first a shielda shield against the subprime crisis against the subprime crisis and then and then a liabilitya liability A consequence of the diverging A consequence of the diverging

trends in public finance…trends in public finance… ……An thus financial markets brutally An thus financial markets brutally

reassess the relative sustainability reassess the relative sustainability of public finances among European of public finances among European countriescountries

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

Too soft for poorly competitive economies

Slow Growth for the European EU.

Catching up but real estate bubbles and/ or public

deficit

IMPACT OF THE

SUBPRISES CRISIS

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

6.6. The failure of a The failure of a prudential prudential approachapproach to European to European integrationintegration A consequence of the diverging A consequence of the diverging

trends in public finance…trends in public finance… ……An thus financial markets brutally An thus financial markets brutally

reassess the relative sustainability reassess the relative sustainability of public finances among European of public finances among European countriescountries

Figure 4 – Disentangling the various causes Figure 4 – Disentangling the various causes of the Euro zone crisisof the Euro zone crisis

EURO

Systemic crisis

Absence of any institutionalized

bailing out process

The Greek debt is not

sustainable

Low interest

rate

No enforcement of

the stability and growth

pact

The Greek strategy: a

public deficit led growth

Loss of competitiveness

Financial speculation

Reveals

7.7. The need for a significant The need for a significant institutional readjustmentinstitutional readjustment of the of the European governanceEuropean governance A multiplicity of options….A multiplicity of options…. ……But difficult to implement in the eye of But difficult to implement in the eye of

hurricane….hurricane…. ……The danger of confusing the way out of The danger of confusing the way out of

the present sovereign debt crisis with the the present sovereign debt crisis with the restructuring of European governance restructuring of European governance that would prevent its repetition.that would prevent its repetition.

Table 6 – How to prevent the repetition of the Greek crisis?

ImpactPrinciple Economic

efficacy/efficiencyPolitical feasibility

Nature of reforms

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 AFTER THE SUBPRIME CRISIS

I. World economy trade Very dynamic and relatively

steady Large swings and uncertainty

finance Growth enhancing via credit Avoidance of risk and restrictive credit

II. European Union

Exchange rate regimes Soft coordination allowing adjustments if necessary

The Euro removes any internal adjustments

Coherence of rules of the game

In the process of elaboration, a clear optimism

An unfinished institutional construction, pessimism about the Euro

Sense of solidarity Present via the structural funds

National interest first, minimalist solidarity

III. Domestic economies

Growth Unequal but a facilitation of taxation

Problematic, contraction of the tax basis

Ability to work out compromises

Possible even if difficult More and more difficult

Table 8 – European integration: A federalism

of third type?

CONCLUSION: A CONCLUSION: A COMPLEX SYSTEMIC COMPLEX SYSTEMIC CRISIS OF EUROPEAN CRISIS OF EUROPEAN

INTEGRATIONINTEGRATIONC1 – The economic C1 – The economic theory of public goodstheory of public goods

delivers an interesting diagnosis about delivers an interesting diagnosis about the relevance of the present the relevance of the present distribution of competences: it is distribution of competences: it is far far from idealfrom ideal. .

C2 – The C2 – The European governanceEuropean governance is the is the outcome of a quite pragmatic outcome of a quite pragmatic approach to transnational institution approach to transnational institution building. It is not surprising to exhibit building. It is not surprising to exhibit structural weaknesses. structural weaknesses. They areThey are revealed by the present sovereign debt revealed by the present sovereign debt crisis.crisis.

C3 – The C3 – The EuroEuro has been introduced as has been introduced as a necessary a necessary complementcomplement to the to the deepening of the deepening of the internal marketinternal market, , in order to foster competition led in order to foster competition led growth regimes, but the growth regimes, but the new new unbalancesunbalances and causes of structural and causes of structural crisis typical to the Euro zone have crisis typical to the Euro zone have not been clearly perceived.not been clearly perceived.

C4 – This was a response to exchange C4 – This was a response to exchange

rate instability associated to rate instability associated to financial globalizationfinancial globalization. . Paradoxically, financialization has Paradoxically, financialization has transitorily allowed the transitorily allowed the diverging diverging trends in productive capacitiestrends in productive capacities between North and Southern between North and Southern Europe.Europe.

C5 – C5 – The current doubts about The current doubts about various national sovereign debts various national sovereign debts are not only the expression of are not only the expression of unwise public financeunwise public finance policies and policies and of the speculative patterns typical of the speculative patterns typical of of unregulated financial marketsunregulated financial markets. . They are also an evidence for a They are also an evidence for a major institutional mismatchmajor institutional mismatch in in European integration.European integration.

C6 – C6 – Financial stabilityFinancial stability appears as the appears as the missing European public good, missing European public good, both for overcoming the present both for overcoming the present turmoil and designing a more turmoil and designing a more coherent and resilient European coherent and resilient European UnionUnion..

C7 – The C7 – The July 2011 European planJuly 2011 European plan Neither solves the bailing out of the Neither solves the bailing out of the most challenged countries, since it most challenged countries, since it promotes a promotes a competition ledcompetition led beggar beggar my neighbourmy neighbour austerity strategy… austerity strategy…

……Nor is it designing a credible Nor is it designing a credible reconfiguration of European reconfiguration of European governance: a governance: a prudential approachprudential approach of governance is a poor substitute of governance is a poor substitute for anfor an explicit explicit fiscal and political fiscal and political solidaritysolidarity..

Many thanks for your Many thanks for your attentionattention

Robert BOYERCEPREMAP (Paris) – GREDEG (Sophia

Antipolis)140, rue du Chevaleret 75013 PARIS,

FranceTél. : (33-1) 40 77 84 12

e-mail : robert.boyer@ens.fr

web site : http://www.jourdan.ens.fr/~boyer/