Theorie und Politik der Europäischen Integration Theory and Politics of European Economic Integration Lecture 2 EU Institutions and Decisionmaking Prof. Dr. Herbert Brücker

Last Lecture Course Overview EU History Theory and Politics of European Integration Lecture 2 Institutions Last Lecture Course Overview EU History Why European Integration: Preventing another war in Europe Two competing concepts: federalism vs. intergovernmentalism Links between deeper integration and expansion Europessimism Single Market Programme 1992 Collapse of Communism Eastern enlargement and ‘finalisation’ of Europe German unifcation, Maastricht and EMU EU Treaties and EU Constitution Euro crisis

The “Big 5” Institutions Legislative process Budget Decisionmaking Theory and Politics of European Integration Lecture 2 Institutions Today’s Lecture EU Institutions Key Facts EU Law The “Big 5” Institutions Legislative process Budget Decisionmaking Task Allocation and Fiscal Federalism Evolution of Voting Rules Efficiency of Decision-making Fair Power Distribution and Legitimacy

Theory and Politics of European Integration Lecture 2 Institutions Today's Reading EU History, Institutions, Decision Making and the Budget Baldwin & Wyplosz (2009/2012) “The Economics of European Integration”, McGraw-Hill, Chs 2 + 3

A heterogeneous group: per capita GNP and population, 2010 Theory and Politics of European Integration Lecture 2 Institutions A heterogeneous group: per capita GNP and population, 2010

Theory and Politics of European Integration Lecture 2 Institutions Also in absolute size … B+W Fig. 2.2

Is heterogeneity a problem? Theory and Politics of European Integration Lecture 2 Institutions Is heterogeneity a problem? How to device institutions that ensure the rights of small countries Why then should big countries surrender some powers EU a consensus driven enterprise Mutual benefits … find win-win situations … may stem from trade

Facts: EU15’s Trade Pattern Theory and Politics of European Integration Lecture 2 Institutions Facts: EU15’s Trade Pattern B+W t. 2.2

EU-27 members are all comparatively open economies Theory and Politics of European Integration Lecture 2 Institutions EU trade patterns EU-27 members are all comparatively open economies openness and size figures for Japan and the US are 10 per cent and 8 per cent respectively. EU15 market is very important for all EU-27 share of exports going to the EU15 ranges between 50 per cent to 80 per cent. The EU trades mainly with Europe, especially with itself about two-thirds of EU exports and imports are to or from other Western European nations the EU’s exports to North America amount to only 10 per cent of its exports Asia’s share is only 8 per cent About 80 per cent of EU exports consist of industrial goods ‘intraindustry’ trade

EU organization: three pillars and a roof Theory and Politics of European Integration Lecture 2 Institutions EU organization: three pillars and a roof First pillar Integration issues, Common Market, Competition (4 Freedoms) Supranational Second pillar Common foreign and security policy Intergovernmental, some supranational decisionmaking Third pillar Justice and Home Affairs Intergovermental coordination, no suprantional decisionmaking Roof European Union and their institutions

The EU Court created by the Treaty of Rome: Theory and Politics of European Integration Lecture 2 Institutions Law – sources of The EU Court created by the Treaty of Rome: court then established the Community’s legal system EC law was established on the basis of: the EU institutions ensuring that actions by the EC take account of all members’ interests, i.e. the Community’s interest the transfer of national power to the Community. Constitutional Treaties and Constitution replaces this as the source of EU law. Future Treaties may follow, e.g. on financial sovereigneity

Direct Applicability: Theory and Politics of European Integration Lecture 2 Institutions Law: Key principles Autonomy: system is independent of members’ legal orders. Direct Applicability: has the force of law in member states so that Community law can be fully and uniformly applicable throughout the EU. Primacy of Community law: community law has the final say, e.g. Bundesverfassungsgericht can be overruled on a matters pertaining to intra-EC imports Primary legislation: treaties (including constitution/constitutional treaty). Secondary legislation: collection of decisions made by EU institutions.

Others matter in specific areas or at particular moments. Theory and Politics of European Integration Lecture 2 Institutions Institutions There are dozens of EU institutions – but only five are really important: European Council Council of Ministers Commission Parliament EU Court. Others matter in specific areas or at particular moments.

Institutions: European Council Theory and Politics of European Integration Lecture 2 Institutions Institutions: European Council Consists of the leader (prime minister or president) of each EU member plus the President of the European Commission. By far the most influential institution: its members are the leaders of their respective nations. Provides broad guidelines for EU policy.

Institutions: European Council Theory and Politics of European Integration Lecture 2 Institutions Institutions: European Council Thrashes out compromises on sensitive issues: reforms of the major EU policies the EU’s multiyear budget plan Treaty changes final terms of enlargements, etc.

Institutions: European Council Theory and Politics of European Integration Lecture 2 Institutions Institutions: European Council Meets at least twice a year (June and December): meets more frequently when the EU faces major political problems highest profile meetings at the end of each six-month term of the EU Presidency these meetings are important political and media events determine all of the EU’s major moves

Institutions: European Council Theory and Politics of European Integration Lecture 2 Institutions Institutions: European Council most important decisions of each Presidency are contained in a document, known as the ‘Conclusions of the Presidency’, or just the ‘Conclusions. Strangely enough, the European Council has no formal role in EU law-making: its political decisions must be translated into action via Treaty changes or secondary legislation.

Others matter in specific areas or at particular moments. Theory and Politics of European Integration Lecture 2 Institutions Institutions There are dozens of EU institutions – but only five are really important: European Council Council of Ministers Commission Parliament EU Court. Others matter in specific areas or at particular moments.

Institutions: Council of Ministers Theory and Politics of European Integration Lecture 2 Institutions Institutions: Council of Ministers Usually called by old name Council of Ministers (formal name is now ‘Council of the EU’). Consists representatives at ministerial level from each Member State, empowered to commit his/her Government:

Institutions: Council of Ministers Theory and Politics of European Integration Lecture 2 Institutions Institutions: Council of Ministers typically minister for relevant area: e.g finance ministers on budget issues confusingly, Council uses different names according to the issue discussed. Famous ones include EcoFin (for financial and budget issues), the Agriculture Council (for CAP issues), General Affairs Council (foreign policy issues).

Institutions: Council of Ministers Theory and Politics of European Integration Lecture 2 Institutions Institutions: Council of Ministers Is EU’s main decision-making body (almost every EU legislation must be approved by it). Main task to adopt new EU laws: measures necessary to implement the Treaties also measures concerning the EU budget and international agreements involving the EU is also supposed to coordinate the general economic policies of the Member States in the context of the Economic and Monetary Union (EMU), e.g. famous 3 per cent deficit rule.

Council/Council of ministers: Qualified Majority Voting (QMV) Theory and Politics of European Integration Lecture 2 Institutions Council/Council of ministers: Qualified Majority Voting (QMV) QMV is complex and is changing (see Part II). Three sets of rules: Procedure that applies until mid 2004: basic form unchanged since 1958 Treaty of Rome. Procedure post-2004 (from Nice Treaty) unless Constitutional Treaty supersedes them: political agreement in Nice Treaty; implemented by Accession Treaty for 2004 enlargement. Procedure from Constitutional Treaty Effective now since ratification

Others matter in specific areas or at particular moments. Theory and Politics of European Integration Lecture 2 Institutions Institutions There are dozens of EU institutions – but only five are really important: European Council Council of Ministers Commission Parliament EU Court. Others matter in specific areas or at particular moments.

Institutions: The Commission Theory and Politics of European Integration Lecture 2 Institutions Institutions: The Commission Has three main roles: propose legislation to the Council and Parliament to administer and implement EU policies to provide surveillance and enforcement of EU law (‘guardian of the Treaties’) it also represents the EU at some international negotiations.

Commissioners, Commission’s Composition Theory and Politics of European Integration Lecture 2 Institutions Commissioners, Commission’s Composition Before the 2004 enlargement: one Commissioner from each member: extra Commissioner from the Big-Five (Germany, UK, France, Italy and Spain in the EU15) this includes the President, two Vice-Presidents and 17 other Commissioners.

Commissioners, Commission’s Composition Theory and Politics of European Integration Lecture 2 Institutions Commissioners, Commission’s Composition Under Nice Treaty each member in EU25 had one Commissioner Current president: Barroso Draft Constitution, only 15 Commissioners: rotating evenly among all members would have non-voting Commissioners from other nations (IGC likely to change this). Commissioners are chosen by their own national governments: subject to political agreement by other members Commission, the Commission President individually, approved by Parliament after hearing

Commissioners, Commission’s Composition Theory and Politics of European Integration Lecture 2 Institutions Commissioners, Commission’s Composition Each Commissioner in charge of a specific area of EU policy: Directorate-Generals (DGs). Executive powers Commission executive in all of the EU’s endeavours power most obvious in competition policy and trade policy. Manage the EU budget, subject to EU Court of Auditors. Decision making: decides on basis of a simple majority, if vote taken almost all decisions on consensus basis.

Others matter in specific areas or at particular moments. Theory and Politics of European Integration Lecture 2 Institutions Institutions There are dozens of EU institutions – but only five are really important: European Council Council of Ministers Commission Parliament EU Court. Others matter in specific areas or at particular moments.

Institutions: European Parliament Theory and Politics of European Integration Lecture 2 Institutions Institutions: European Parliament Two main tasks: oversees EU institutions, especially Commission has to approve Commission it shares legislative powers, including budgetary power, with the Council and the Commission. traditional problem …: democratic deficit

Others matter in specific areas or at particular moments. Theory and Politics of European Integration Lecture 2 Institutions Institutions There are dozens of EU institutions – but only five are really important: European Council Council of Ministers Commission Parliament EU Court Others matter in specific areas or at particular moments.

Institutions: European Court of Justice Theory and Politics of European Integration Lecture 2 Institutions Institutions: European Court of Justice EU laws and decisions open to interpretation that lead to disputes that cannot be settled by negotiation: Court settles disputes, especially disputes between Member States, between the EU and Member States, between EU institutions, and between individuals and the EU. EU Court’s supranational power highly unusual in international organisations (very influential)

Institutions: European Court of Justice Theory and Politics of European Integration Lecture 2 Institutions Institutions: European Court of Justice As a result of this power, the Court has had a major impact on European integration. 1964 judgment established EC law as an independent legal system that takes precedence over national laws in EC matters 1963 ruling established the principle that EC law was directly applicable in the courts of the members.

The EU Budget The Budget Theory and Politics of European Integration Lecture 2 Institutions The Budget The EU Budget

The Budget: Expenditure Theory and Politics of European Integration Lecture 2 Institutions The Budget: Expenditure

Evolution of Spending Priorities Theory and Politics of European Integration Lecture 2 Institutions Evolution of Spending Priorities

Evolution of Spending, Level Theory and Politics of European Integration Lecture 2 Institutions Evolution of Spending, Level

EU’s budget must balance every year. Theory and Politics of European Integration Lecture 2 Institutions Funding of EU Budget EU’s budget must balance every year. Financing sources: four main types: Tariff revenue – common external tariff ‘Agricultural levies’ (tariffs on agricultural goods) ‘VAT resource’ (like a 1 per cent value added tax – reality is complex) GNP based (tax paid by members based on their GNP).

Evolution of Funding Sources Theory and Politics of European Integration Lecture 2 Institutions Evolution of Funding Sources

Theory and Politics of European Integration Lecture 2 Institutions Contribution vs. GDP, 1999, 2000

Theory and Politics of European Integration Lecture 2 Institutions Contribution vs GDP, 1999, 2000 Percentage of GDP per member is approximately 1 per cent regardless of per-capita income. EU contributions are not ‘progressive’, e.g. richest nation, (L) pays less of its GDP than the poorest nation (P).

Net Contribution by Member Theory and Politics of European Integration Lecture 2 Institutions Net Contribution by Member

Part II: Decisionmaking Theory and Politics of European Integration Lecture 3 Decisionmaking Part II: Decisionmaking

Which level of government is responsible for which task? Theory and Politics of European Integration Lecture 3 Decisionmaking What are the questions? Which level of government is responsible for which task? Why centralize, why decentralize? What are the trade-offs? Which task at which levels? How efficient and fair are the EU’s decision rules? Ability to act Distribution of power

Task allocation (“compentencies” in EU jargon) Theory and Politics of European Integration Lecture 3 Decisionmaking Task allocation Typical policy areas: foreign policy school curriculum speed limit trade policy Typical levels local regional national EU / supranational Task allocation (“compentencies” in EU jargon)

The subsidarity principle Theory and Politics of European Integration Lecture 3 Decisionmaking The subsidarity principle Before looking at the theory, what is the practice in EU? Task allocation in EU guided by “subsidarity” principle (Maastricht Treaty) Decisions should be made as close to the people as possible EU should not take action unless doing so is more effective than action taken at national, regional or local level Background: “creeping competencies” Range of task where EU policy matters was expanding. Some Member States wanted to discipline this spread.

Recall: three pillars and task allocation (lecture 2) Theory and Politics of European Integration Lecture 3 Decisionmaking Recall: three pillars and task allocation (lecture 2) 3 Pillar structure delimits range of: Community competencies (tasks allocated to EU). Shared competencies (areas were task are split between EU and member states). National competencies. 1st pillar is EU competency. 2nd and 3rd are generally national competencies details complex, but basically members pursue cooperation but do not transfer sovereignty to EU.

Theory: Fiscal federalism Theory and Politics of European Integration Lecture 3 Decisionmaking Theory: Fiscal federalism What is optimal allocation of tasks? Basic theoretical approach is called “Fiscal Federalism”. Name comes from the study a taxation, especially which taxes should be set at the national vs. sub-national level.

Fiscal federalism: The basic trade-offs Theory and Politics of European Integration Lecture 3 Decisionmaking Fiscal federalism: The basic trade-offs What is the optimal allocation of tasks? There is no clear answer from theory, just list of trade-offs to be considered. Diversity and local informational advantages Diversity of preference and local conditions argues for setting policy at low level (i.e. close to people). Scale economies Tends to favour centralisation and one-size-fits-all to lower costs. Spillovers Negative and positive spillovers argue for centralisation. Local governments tend to underappreciated the impact (positive or negative) on other jurisdictions. Examples: defense (positive), VAT (negative)

Fiscal federalism: The basic trade-offs (cont.) Theory and Politics of European Integration Lecture 3 Decisionmaking Fiscal federalism: The basic trade-offs (cont.) Democracy as a control mechanism Favours decentralisation so voters have finer choices. Jurisdictional competition Favours decentralisation to allow voters a choice.

Closer look at the trade-offs Theory and Politics of European Integration Lecture 3 Decisionmaking Closer look at the trade-offs

Diversity and local information Theory and Politics of European Integration Lecture 3 Decisionmaking Diversity and local information One-size-fits-all policies tend to be inefficient since too much for some and too little for others. Central government could set different local policies but local Government likely to have an information advantage.

This ends to favour centralisation. Theory and Politics of European Integration Lecture 3 Decisionmaking Scale By producing public good at higher scale, or applying to more people may lower average cost. This ends to favour centralisation. Hard to think of examples of this in the EU. Defense?

Spillovers Example of positive spillovers. Theory and Politics of European Integration Lecture 3 Decisionmaking Spillovers Example of positive spillovers. If decentralised, each region chooses level of public good that is too low. e.g. Qd2 for region 2. Two-region gain from centralisation is area A. Similar conclusion if negative spillovers. Q too high with decentralised.

Democracy as a control mechanism Theory and Politics of European Integration Lecture 3 Decisionmaking Democracy as a control mechanism If policy is in hands of local officials and these are elected, then citizens’ votes have more precise control over what politicians do. High level elections are take-it-over-leave-it for many issues since only a handful of choices between ‘promise packages’ (parties/candidates) and many, many issues. Example of such packages: Foreign policy & Economic policy. Centre-right’s package vs Centre-left’s package. At national level, can’t choose Centre-right’s economics and Centre-left’s foreign policy.

Jurisdictional competition Theory and Politics of European Integration Lecture 3 Decisionmaking Jurisdictional competition Voters influence government they live under via: ‘voice’ Voting, lobbying, etc. ‘exit’. Change jurisdictions (e.g. move between cities). While exit is not a option for most voters at the national level, it usually is at the sub-national level. And more so for firms. Since people/firms can move, politicians must pay closer attention to the wishes of the people. With centralised policy making, this pressure evaporates.

Economical view of decision making Theory and Politics of European Integration Lecture 3 Decisionmaking Economical view of decision making Using theory to think about EU institutional reforms. e.g., institutional changes in Constitutional Treaty, Nice Treaty, etc. Take enlargement-related EU institutional reform as example.

EU enlargement challenges Theory and Politics of European Integration Lecture 3 Decisionmaking EU enlargement challenges Since 1994 Eastern enlargement was inevitable & EU institutional reform required. 3 C’s: CAP, Cohesion & Control. CAP: budget problem due to large agricultural sectors in NMS Cohoesion: budget problem due to low income levels in NMS Here the focus is on Control, i.e. decision making. Endpoint: EU leaders accepted the Constitutional Treaty June 2004. Last country ratified November 2009! Look Nice Treaty and Constitutional Treaty. Constitutional Treaty is after several postponements in force now Focus on Council of Ministers voting rules. See Chapter 2; these are the key part of EU decision making.

Voting rules in the Constitutional Treaty Theory and Politics of European Integration Lecture 3 Decisionmaking Voting rules in the Constitutional Treaty Three sets of rules

Pre-Nice Treaty Voting Rules Theory and Politics of European Integration Lecture 3 Decisionmaking Pre-Nice Treaty Voting Rules No longer used since 1 November 2004, but important as a basis of comparison. “Qualified Majority Voting” (QMV): ‘weighted voting’ in place since 1958, Each member has certain number of votes, Populous members more votes, but far less than population-proportional. e.g. Germany 10, Luxembourg 2 Majority threshold about 71% of votes to win.

Nice Treaty Voting Rules Theory and Politics of European Integration Lecture 3 Decisionmaking Nice Treaty Voting Rules 3 main changes for Council of Ministers: Maintained ‘weighted voting’. Majority threshold raised to 71-72% Votes re-weighted. Big & ‘near-big’ members gain a lot of weight. Added 2 new majority criteria: Population (62%) and members (50%). ERGO, triple majority system. Hybrid of ‘Double Majority’ & Standard QMV.

QMV: Nice/Accession Treaty Reforms Theory and Politics of European Integration Lecture 2 Institutions QMV: Nice/Accession Treaty Reforms Consider percentage increase by member: members ranked by population. Who win? Who lose?

Theory and Politics of European Integration Lecture 3 Decisionmaking Voting rules Voting rules can be complex, especially as number of voters rises. Number of yes-no coalitions is 2n. Example: All combinations of yes & no votes with 3 voters Mr A, Mrs B, and Dr C; Example: EU9 when Giscard d’Estaing was President of France. 512 possible coalitions. When Giscard considered Constitutional Treaty rules, it was for at least 27 members: 134 million coalitions. Yes No A, B, C A, B C A B, C B,C A,B A, C B A,C

Theory and Politics of European Integration Lecture 3 Decisionmaking 2 Formal Measures 1. “Passage Probability” measures ‘Decision making efficiency’. Ability to act 2. Less formal: Number of „blocking coalitions“ 3. Normalise Banzhaf Index measure Power distribution among members. Many others are possible

Passage probability explained Theory and Politics of European Integration Lecture 3 Decisionmaking Passage probability explained Passage probability is ratio of two numbers: Numerator is total number of winning coalitions. Denominator is total number of coalitions. Passage probability equals probability of win if all coalitions are equally likely. Idea is that for a ‘random’ proposal, all coalitions equally likely. Nations don’t know in advance whether they will ‘yes’ or ‘no.’ Caveats: This is a very imperfect measure. Not random proposals, But, still useful as measure of change in decision-making efficiency.

Nice reforms: 1 step forward, 2 steps backward Theory and Politics of European Integration Lecture 3 Decisionmaking Nice reforms: 1 step forward, 2 steps backward Step Forward: Re-weighting improves decision-making efficiency. 2 Steps Backwards: 2 new majority criteria worsens efficiency raising vote threshold worsens efficiency. The ways to block in Council massively increased. EU decision-making extremely difficult. Main point is Vote Threshold raised. Pop & member criteria almost never matter . About 20 times out of 2.7 million winning coalitions. Even small increases in threshold around 70% lowers passage probability a lot The number of blocking coalitions expands rapidly compared to the number of winning coalitions.

Historical Passage Probabilities Theory and Politics of European Integration Lecture 3 Decisionmaking Historical Passage Probabilities

Easier to think about & probably what most EU leaders used. Theory and Politics of European Integration Lecture 3 Decisionmaking Less formal analysis Blocking coalitions. Easier to think about & probably what most EU leaders used. Try to project likely coalitions and their power to block. For example, coalition of “Newcomers” & coalition of “Poor”.

Examples: 2 blocking coalitions, Nice rules Theory and Politics of European Integration Lecture 3 Decisionmaking Examples: 2 blocking coalitions, Nice rules 14 91 183 16 166 170 12 108 106 200 Members Votes Population Poor coalition votes East coalition votes

Constitutional Treaty rules increase ability to act Theory and Politics of European Integration Lecture 3 Decisionmaking Constitutional Treaty rules increase ability to act

Formal power measures: Theory and Politics of European Integration Lecture 3 Decisionmaking Power measures Formal power measures: Power = probability of making or breaking a winning coalition. SSI = power to make. NBI = power to break. Focus on the NBI. In words, NBI is a Member’s share of swing votes.

Why use fancy, formal power measures? Why not use vote shares? Theory and Politics of European Integration Lecture 3 Decisionmaking ASIDE: Power measures Why use fancy, formal power measures? Why not use vote shares? Simple counter example: 3 voters, A, B & C A = 40 votes, B=40 votes, C=20 votes Need 50% of votes to win. All equally powerful! Next, suppose majority threshold rises to 80 votes. C loses all power.

Distribution of power among EU members Theory and Politics of European Integration Lecture 3 Decisionmaking Distribution of power among EU members For EU15, NBI is very similar to share of Council votes, so the distinction is not so important as in 3 country example.

Do power measures matter? The budget measure Theory and Politics of European Integration Lecture 3 Decisionmaking Do power measures matter? The budget measure

Do power measures matter? The budget measure Theory and Politics of European Integration Lecture 3 Decisionmaking Do power measures matter? The budget measure

Theory and Politics of European Integration Lecture 3 Decisionmaking Impact of Constitutional Rules: Change in power in EU-25 compared to Nice rules, %-points

Theory and Politics of European Integration Lecture 3 Decisionmaking Impact of Constitutional Rules (cont.): Power change Const. Treaty and Nice rules in EU-29, %-points

Enlargement impact on EU power, Nice rules (%-points) Theory and Politics of European Integration Lecture 3 Decisionmaking Enlargement impact on EU power, Nice rules (%-points)

Enlargement impact on EU-25 power, CT rules (%-points) Theory and Politics of European Integration Lecture 3 Decisionmaking Enlargement impact on EU-25 power, CT rules (%-points)

Legitimacy in EU decision making Theory and Politics of European Integration Lecture 3 Decisionmaking Legitimacy in EU decision making Legitimacy is slippery concept. Approach: equal power per citizen is legitimate ‘fair’. Fairness & square-ness. Subtle maths shows that equal power per EU citizen requires Council votes to be proportional to square root of national populations. Intuition for this: EU is a two-step procedure Citizens elect national governments, These vote in the Council. Typical Frenchwoman is less likely to be influential in national election than a Dane. So French minister needs more votes in Council to equalise likelihood of any single French voter being influential (power). How much more? Maths of voting says it should be the square root of national population.

Legitimacy in EU decision making Theory and Politics of European Integration Lecture 3 Decisionmaking Legitimacy in EU decision making Legitimacy is slippery concept Approach: equal power per citizen is legitimate ‘fair’. Fairness & squareness Subtle maths shows that equal power per EU citizen requires Council votes to be proportional to square root of national populations.

NEXT LECTURE November 13, 15:00 hours Theory and Politics of European Integration Lecture 3 Decisionmaking NEXT LECTURE November 13, 15:00 hours The Microeconomics of Trade and Tariffs and Preferential Trade Liberalisation Baldwin & Wyplosz (2009/2012) “The Economics of European Integration”, McGraw-Hill, Ch 4-5.