5 February 2009

The Economic Rationale for EU Action: What are European Public Goods?

Fabian ZuleegEuropean Policy Centre

EU Budget Review 2008/09 - BEPA Workshop The political economy of EU public finances: designing

governance for change

Introduction• Fabian Zuleeg, Senior Policy Analyst, European Policy Centre –

Contact: F.Zuleeg@epc.eu • Writing/presenting here in a personal capacity• Previous work with Sara Hagemann (EPC) on the budget has

focused on governance• Key issue identified is the status quo bias in current and future

(Lisbon) governance• Reform of how the budget is negotiated and implemented is

necessary to achieve objectives of the budget review

[See for example ‘A bigger bang for our euros: how to reform the EU budget’, Fabian Zuleeg and Sara Hagemann, EPC Policy Brief, January 2008]

Focus of this presentation• Budget review stipulates that the EU budget should be policy-driven• Requires identification of future challenges, policy priorities and

objectives, tools and instruments – and finally the budget required• Not what happens at the moment: ‘red lines’, dividing a fixed pot,

status quo bias and inertia, juste retour, poor link between policy priorities and budget allocation etc.

• The paper argues that we should examine underlying rationale for action to determine policy objectives and spending

• Based on an approach which emphasises outcomes/delivery rather than processes/structures

• Outcome-focused, evidence-based policy• Focus on the potential economic rationale for EU spending

Rationales for EU policy-making

• Common Interest: member states delegate tasks to EU – but this is of little use when analysing policy priorities

• Rationales and motivations for EU action– Values and principles– Political interests– ‘State’ interests– Social– Environmental– Economic

• Often a mixture of motivations and objectives

European public goods

• EPG term commonly used as a justification for EU action

• Various reference in budget review submissions and literature

• Lack of definition and clarity

• Wide range of EU policies claimed to be public goods – CAP, Single Market, Climate Change etc.

• EPG used interchangeably with ‘inverse’ subsidiarity, EU added value, common interest, benefits at European level

• This matters – need to determine for what policies there is genuinely

an economic rationale for action • Economic definition of the term is much narrower

• Generally, economic rationale for intervention relies on market failure

Public goods/market failures

• Economic literature sets out market failures:– Public goods: non-divisible and non-excludable– Merit goods/free riders– Externalities/tragedy of the commons– Coordination failures/prisoners’ dilemma– Market power and structure/natural monopolies– Information failures/moral hazard

Public goods/market failures at EU level

• EU special features:– Coordination between governments– Transnational/cross-border market failures

• European public goods?• European action on market failures:

– Single Market – information/market power– Climate change/environment (negative externalities)– Coordination failures – e.g. infrastructure, macroeconomic policy– Merit goods, e.g. innovation/research– Added value: Sharing good practice, OMC (cooperation between

governments, commitment mechanisms)

Policy implications and recommendations

• Recognise need to examine the underlying rationale for EU policy• If economic, need to determine what market failures (evidence)• Need to appraise EU policies (strategic level)

– Challenge– Objectives– Tools/instruments (might include budget)

• Needs guidance on economic rationales• Benefits:

– Clarity on how, why and in which areas EU institutions should act– Highlight what is needed to deliver EU policy objectives– Highlight where current policies do not add value

How realistic?• Not necessarily possible to be implemented comprehensively in the

near future• But a start could be made

– Economic analysis of policy areas (current and future spending) to determine policy objectives

– Guidance– Examination of potential public goods/market failures

• Who will/should take the lead?• Is there really an acceptance that this is how the EU should

determine policy priorities? Some would argue it is down to member states to simply delegate tasks to the EU

• Brings us back to the governance of the EU budget process