Professor Stefan Collignon

 Democratic Surveillance or

Bureaucratic Suppression of National Sovereignty in the

European Union? 

Ideas on the Multilateral Surveillance Regulation

European Parliament15. September 2010

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  I. It’s democracy, stupid! II. Debating competitiveness III. A democratic framework for budget surveillance 

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I. It’s democracy, stupid!

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• Europe has been built by “enlightened despotism” and present reform proposals for economic governance are more of the same

• But the legitimacy of policy-making behind closed doors is increasingly questionable– Compliance with rules and policy agreements is

fading: Greece, Germany, Slovakia– Legitimacy by policy-output vanishes, as the

Union does not produce the output people want

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Recent Eurobarometer• Between spring and autumn 2010, approval

of the EU has fallen by 10 points in Germany and 17 points in Greece.

• At the same time national governments or parliaments inspire even less trust than European institutions

• Legitimacy matters– Good governance creates legitimacy– Legitimacy creates good governance

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What’s wrong with economic governance?• COM: the recent crisis “showed gaps and

weaknesses in the current system, underlining the need for stronger and earlier policy co-ordination, additional prevention and correction mechanisms and a crisis resolution facility for euro-area Member States.”

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What’s wrong with economic governance?• ECB: “The disappointing performance of

fiscal policies under the EU framework was due to the weak governance of the Stability and Growth Pact (SGP), notably (i) a lack of enforcement of fiscal discipline at the EU level and (ii) insufficient national incentives to comply with the EU rules.”

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• Policy proposals aim at raising the efficiency of policy making, – i.e. improving the system’s output,

• but none talks about the legitimacy of a political system, where policy compromises are negotiated between governments, and

• the democratic representatives of citizens, namely the European Parliament, have very little to say.

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The fundamental questions• Why was the governance so weak?• What kind of incentives are needed to

improve the situation?• Who is legitimizing European policy

decisions? • How is it possible that governments tell

each other what to do, when each has been democratically elected to something else?

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• Most reformers fail to see that democratic member states are responsive to national constituencies, and that this often leads them to ignore the European collective good as long as there is no European authority that can legitimately overrule and stop their uncooperative behaviour.

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The answer• A democratically legitimate Economic

Government• Representation of and deliberation by all

citizens, not a in the faction of nation states• Lisbon Treaty: “ordinary legislative

process” (art. 294) sets a procedure for the interaction of Commission, Council and European Parliament.

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II. Debating competitiveness

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• Economic competitiveness is a confused

notion. • Paul Krugman (1994) has famously argued:

“Competitiveness is a seductive idea, promising easy answers to complex problems. But the result of this obsession is misallocated resources, trade frictions and bad domestic economic policies.”

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• What criteria?– Current account balances?

• What is good, what is bad?• Engendered by fast or slow growth?

– Structural positions intra & extra EU tradeintra EU trade extra EU trade

Germany s+ s+NL s+ d-IT s+ d-FIN d- s0IRL s- s0FR d- s-dGR d- d-PORT d- d0SPA d- d-

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• Two concepts– Improve efficiency and productivity

• Lisbon strategy, 2020?– Be price-competitive and take market share

• ULC diverge

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• Wage negotiations are too nation based and

secretive– Need to open Macroeconomic Dialogue– Open debate at EP before meeting with ECB

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III. A democratic framework for budget surveillance

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The need for more fiscal policy coordination: Defining the aggregate fiscal stance and control implementation

• Voluntary by sovereign MS?– Failure due to collective action problems– No taxation without representation

• Bureaucratic centralisation?– COM: European semester– ECB: independent expert panels

• Ordinary legislation process?– EP as citizens’ representation

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A proposal: Borrowing permits1. The Economic Guidelines become a Union

legal act – that defines the general policy orientations and

decides/authorises the optimal borrowing requirement for the Euro Area,

– i.e. the aggregate budget deficit which is considered consistent with

• the economic environment (business cycle) and • the structural requirements of the European

economy (public investment, aging etc.).

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2. The European Parliament will have an active role in the formulation of the desirable aggregate policy stance. – Council must decide: political will

3. Each member state is allocated a share of the total borrowing authorization.

• Share of GDP• possibility of horizontal transfers of the borrowing

permits– Pollution permits

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%-Shares in: DifferenceBorrowing GDP % of GDP € bn

Germany 14.0 27.3 -13.3 -76.6Italy 13.9 17.0 -3.1 -17.6Netherlands 4.7 6.3 -1.6 -9.1Finland 0.9 2.0 -1.1 -6.4Austria 2.1 3.0 -0.9 -5.3Belgium 3.5 3.8 -0.3 -1.9Cyprus 0.2 0.2 0.0 -0.2Slovakia 0.7 0.7 0.0 0.0Slovenia 0.4 0.4 0.0 0.1Portugal 2.2 1.8 0.5 2.8Ireland 3.6 1.5 2.0 11.8Greece 5.3 2.6 2.7 15.8France 28.0 22.0 6.0 34.6Spain 20.5 11.5 9.0 52.0Euro Area (13) 100.0 100.0 0.0 0.0Total EA €bn 574.7 8908.5 6.5%

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4. Implementation.• A European law (directive) could oblige

financial institutions to lend only to public entities if they can present borrowing permits for the required amount. – Markets as police, not bureaucracy

• Ensures that no government can violate the budget position, which was considered optimal by the democratic institutions of the European Union.

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• Thus, contrary to the bureaucratic surveillance proposed by European authorities, the system of borrowing permits would give democratic legitimacy to defining the desirable aggregate budget position for the Euro Area, and decentralize the policy implementation

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Crisis management• Providing liquidity to MS governments at

reasonable conditions– Not solvency issue which is concern of SGP

• Problem: distortion by market intervention• Solution: Union Bond to generate portfolio

effect of euro-liquidity risk.

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Conclusion• Europe has many common goods that

affect all citizens• They must be represented in governance • Only the EP can provide this legitimacy

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Thank you!

Vive la République européenne!