Free Market Road Show 2013 MORE EUROPE OR BETTER EUROPE? THE DEMOCRATIC DEFICIT IN THE EUROPEAN UNION Francisco Cabrillo Madrid, June 17, 2013

1. Introduction The central thesis The European Treaties create a gulf between citizens and decision-makers with power over matters that affect their lives. Efforts aimed at reducing the democratic deficit via furthering the role of the European Parliament or theCommission and increasing the role of majoritarian preferences are misplaced. The European Union is becoming increasingly centralist and its allocation of competencies often violate both economic principles and the democratically expressed volition of the citizens of Europe.

2. The Rise of European Integration There can be little doubt that Europe’s greatest achievement has been the establishment of a single European market, which was achieved as a confederation of national states. European institutions have increasingly acquired responsibilities that have heretofore been considered the domain of national governments.   This runs often counter to economic theory. The economic literature on federalism provides us with a clear guideline on the allocation of responsibilities between the EU and national governments - Heterogeneity of preferences - Economies of scale - Externalities

3. Europe loves you. Do you love Europe? A question that neither politicians nor Brussels bureaucrats answer: Why criticism of specific aspects of the integration process is considered un-European? Another question: Do you want to be the bad guy of the movie? If not…VOTE FOR MORE EUROPE

4. Real problems, wrong solutions I The European Parliament The problem of legitimacy is real. European citizens do not trust the Union Economic governance in Europe is based on two non-democratic institutions – the Commission and the European Central Bank. Some efforts to improve legitimacy have focused on increasing the powers of the European Parliament But this has failed! There is a negative correlation between the constant decrease in voter turnout in European elections and the expanding of powers of the European Parliament. Citizens of member States clearly do not see members of the European Parliament (754) as their representatives (A modest proposal: increase the number of members of the EP to 7500…and see what happens)  

5. Real problems, wrong solutions II A democratic European Central Bank Should the Parliament or the Commission control de European Central Bank? Independence has been awarded to the European Central Bank by the European Treaties This has led some to decry a democratic deficit in the role of the ECB. To overcome this perceived democratic deficit, it is argued, that other European Institutions should have the option of overriding the ECB’s decisions in certain matters. There is no governance structure within the EU that could effectively and credibly assume this role, and it is difficult to see how one could be established in practice. Heterogenous preferences and poor governance structures suggest that granting the ECB this indepen dence is a necessary condition for stable long-term economic policy. 

6. An alternative solution: Regulatory and Fiscal Competition Opponents suggest Regulatory and Fiscal Competition ties the hands of national governments The “Race to the bottom” theory It is argued that real efforts towards harmonization and coordination in these areas are needed to assist national governments in meeting (democratic) demands placed on them by citizens.   However, fiscal and regulatory decentralization reinforces democracy, as governments are better able to respond to citizens’ preferences. In Europe, where preferences are highly heterogenous, coordination comes at serious democratic costs. Moreover, in addition to the democratic gains to decentralizing fiscal and regulatory competition, there are also substantial economic gains to be enjoyed. As Gary Becker put it: “Competition among nations tends to produce a race to the top rather than a race to the bottom by limiting the ability of powerful and voracious groups and politicians in each nation to impose their will at the vast expense of the interests of the vast majority of their populations.”

7. Conclusion   Movements towards even greater centralization of the European integration process are in many activities unwarranted and inefficient, and they are further distancing citizens from decisions that affect their lives. Bridging the gulf between citizens and decision-makers does not involve awarding greater responsibilities to the Commission or the European Parliament, but rather preserving freedom of choice over issues which national States are best able to decide. The European Union could best mitigate its legitimacy problems by concentrating on achieving better results in core areas in which its institutions are best able to serve, i.e. by respecting the principle of subsidiarity that should be the basis of European integration.