1. Decision Making Jan Fidrmuc Brunel University

2. Introduction Which decisions-making powers should be transferred to the EU and which should remain in the hands of national governments? How much influence do national governments have in the EU? Can the EU make decisions effectively?

3. Outline 1. Distribution of Power and Subsidiarity 2. Theory of Fiscal Federalism 3. Qualified Majority Voting 4. Efficiency of Decision Making 5. Power Indices

4. Distribution of Power and Subsidiarity Key question: “Which level of government should be responsible for each task or policy decisions?”  Setting foreign policy  Speed limits  School curricula  Trade policy Different levels of policy making:  Local, regional, national, EU Task allocation = ‘competencies’ in EU jargon

5. Subsidiarity and Proportionality Principles Subsidiarity:  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. Proportionality:  EU should undertake only minimum action necessary Motivation: to limit “creeping competencies”, i.e. growing role of EU in policy making

6. 3 Pillars and task allocation 3 Pillar structure delimits the allocation of power. 1 st pillar: Community (EU) jurisdiction.  Single market issues, competition, trade policies, monetary integration.  EU has final say, member states cannot opt out. 2 nd and 3 rd pillar: national jurisdiction.  Foreign/security policy, justice/home affairs.  Members may pursue cooperation but are not bound by EU decisions they disagree with.  Example: Schengen Accord.

7. Theory of Fiscal federalism Theoretical analysis can help determine whether centralization or decentralization is optimal Origins of the theory: Power to tax  Which taxes should be set at the national vs sub- national level?

8. Theory of Fiscal federalism Basic trade-offs: 1. Diversity and local informational advantage 2. Scale economies 3. Spillovers (externalities) 4. Jurisdictional competition 5. Democracy

9. Diversity and Local Information Consider provision of a public good when regions have different preferences (demand functions): Region 1 values the public good less than Region 2. Optimal quantity equates marginal cost and marginal value of the public good Under decentralization, local governments have an information advantage and can implement optimal allocations: Q d1 and Q d2. MC=marginal cost; MV=marginal value

10. Diversity and Local Information Centralization (one-size-fits- all policy) is inefficient because it provides too much public good for R1 and too little for R2. Welfare loss of R 1 and 2 is area A and B, respectively. Examples:  Public transport,  Schools,  Language regime in a multi-lingual country.

11. Economies of Scale Costs of providing public good may fall with scale  E.g. single national rail or bus network may be more efficient than many regional ones. Different marginal costs apply in centralized and decentralized case. Region 1: welfare gain C vs loss D  centralization may be preferred.  National defense and foreign policy

12. Spillovers Prisoners’ dilemma situations. Examples:  Environmental policies.  Tax/VAT competition. If decentralised, each region chooses a level of public good that is too low.  e.g. Q d2 for Region 2. Two-region gain from centralisation is area A. Similar conclusion with negative spillovers: Q too high under decentralization.

13. Jurisdictional Competition Voters influence policies through:  Voice: voting, party activism, protest, etc.  Exit: by moving to another region/country (voting with your feet, Tiebout, JPE 1956) Voting with one’s feet common, especially at sub-national level Firms are particularly mobile and responsive to local/national policies Decentralization: governments must deliver good policies or risk losing tax payers Centralization: little possibility for exit

14. Democracy as a Control Mechanism Politicians offer voters a ‘package’ of policies Local government can offer package that better reflects local needs Decentralization gives voters better control over policies  The same voter can support different parties in national and local elections

15. Summary Decentralization: advantages  Policies reflect local conditions and needs  Voters have better democratic control over policies Centralization optimal when economies of scale and/or spillovers are important. 1 st pillar (economy): large spillovers 2 nd pillar (foreign/security policies): important economies of scale but also large differences in preferences across countries 3 rd pillar (justice/home affairs) – intermediate case: moderate economies of scale and moderate diversity in preferences

16. Efficiency of decision making Fiscal federalism theory: which decisions should be made at the EU level Focus now: How does the EU make its decisions? How likely is a decision-making gridlock? What was the impact of enlargement?  e.g., Institutional changes in Constitutional/Lisbon Treaty, Nice Treaty  Qualified majority voting (QMV)  Enlargement-related institutional reform.

17. Qualified Majority Voting Most EU decisions made by co-decision procedure  Proposal adopted in the Council of Ministers by QMV and in the EP by majority voting Voting in the Council reflects States’ national interests QMV requires more than a simple majority to approve a decision This makes it easier for small Member States to block decisions

18. QMV History Before November 2004: Basic form unchanged since the 1958 Treaty of Rome. Post-2004: Nice Treaty QMV rules, unless replaced by Lisbon Treaty rules. Constitutional Treaty rules supposed to be effective from 2009 but rejected in referenda in France and the Netherlands. Lisbon Treaty rules effective from 2014, or 2017 if delay requested by member states; rejected in referendum in Ireland

19. Pre-2004 QMV Number of votes not perfectly proportional to population: Total number of votes in the EU15: 87 Threshold for winning majority: 62 votes  ‘qualified majority’: about 71% of votes required to adopt proposal. Relatively large coalition required to win a vote. Relatively small coalition of countries can block a vote.

20. Nice Treaty Reforms Two main changes: 1. QMV rules more complex: two new criteria in addition to votes  votes: 255 votes out of 345 Council votes in EU27 (74%)  number of members: half of the member states, i.e. 14 out of 27  population: 62% of EU population. 2. Votes reallocated in favour of big nations

22. Nice-Treaty QMV Votes CountryVotesPopulationCountryVotesPopulation Austria108.1Latvia42.4 Belgium1210.2Lithuania73.7 Bulgaria108.2Luxembourg40.4 Cyprus40.8Malta30.4 Czech Rep.1210.3Netherlands1315.8 Denmark75.3Poland2738.7 Estonia41.4Portugal1210 Finland75.2Romania1422.5 France2959Slovakia75.4 Germany2982Slovenia42 Greece1210.5Spain2739.4 Hungary1210.1Sweden108.9 Ireland73.7UK2959.2 Italy2957.6

23. Constitutional Treaty Nice Treaty QMV rules: relatively small coalition can block important decisions.  Risk that Council’s becomes deadlocked CT QMV rules: proposal wins if backed by member states with  At least 65% of EU population  At least 55% of member states.  At least 15 member states (irrelevant if the EU has 27 or more members: 15/27=56%) Reallocation of vote shares: large nations gain (except Spain and Poland)

24. Lisbon Treaty Lisbon QMV rules replicate CT rules Proposal wins if backed by member states with  At least 65% of EU population  At least 55% of member states. Unless replaced by Lisbon Treaty or another new treaty, Nice Treaty rules remain in effect

25. QMV: Shadow Voting QMV is rarely actually used by the Council Most decision made by ‘consensus’ Shadow voting:  If country knows it would be outvoted, it usually joins the consensus  Otherwise, the vote does not take place to avoid failure  QMV rules matter because they help countries determine the likely outcome if vote were held

26. EU Decision-making Efficiency Efficiency in decision making: ability to reach decisions Voting rules and thresholds required to accept a proposal are crucial Formal Measures: 1. Passage Probability. 2. Blocking coalition analysis 3. Normalised Banzhaf Index. Many others are possible

27. Passage Probability The number of all possible winning coalitions divided by the number of all possible coalitions.  E.g.: almost 33 ths possible coalitions in EU15;  Over 33 million possible coalitions in EU25. Passage probability equals probability of winning if all coalitions are equally likely.  i.e. if countries’ voting behavior is random Caveat: very imperfect measure.  Proposals and countries’ positions not random But useful to measure decision-making efficiency.

28. Historical Passage Probabilities Source: Baldwin & Widgren (2005)

29. Blocking-coalition analysis Ability of ‘likely’ coalitions to block EU decisions. Less formal and easier to think about. Probably close to what EU leaders had in mind. Example: “Newcomers” and “Poor” in EU27  Newcomers: 12 new member states  Poor: Newcomers+4 ‘cohesion’ members (ES, PT, GR & IE) ‘Poor’ exceed the Nice Treaty blocking thresholds of votes and member states ‘Newcomers’ exceed the votes threshold only

30. Example: 2 blocking coalitions, Nice rules 14 91 183 16 166 170 12 108 106 0 200 MembersVotesPopulation Poor coalition votes Newcomers coalition votes Number-of-Members threshold Council-votes threshold EU27-population threshold (millions of citizens)

31. Normalized Banzhaf Index (NBI) Power to break a winning coalition NBI is Member’s share of swing votes Caveat: NBI disregards issues such as agenda-setting power, and again assumes voting behavior is ‘random’

32. Normalized Banzhaf Index Consider all possible ‘random’ coalitions n voters: number of possible coalitions is 2 n.  Example with 3 voters: ABC  Possible coalitions: ABC, AB, AC, BC, A, B, C, [none] Compute the number of winning coalition in which the voter/nation is pivotal, i.e. the coalition would fail if the voter defects BNI is the ratio of the number of coalitions in which the voter/nation is pivotal over all possible coalitions  BNI measures the probability that the voter is a ‘deal breaker’

33. Power measures: Example Why use complicated formal power measures instead of vote shares? Simple example: 3 voters, A, B & C A = 40 votes, B=40 votes, C=20 votes Need 50% of votes to win. All equally powerful! Suppose now the threshold rises to 80 votes. C loses all power.

34. Distribution of power in the EU For EU15, NBI is very similar to share of Council votes, so the distinction is not so important

35. Do power measures matter?