2. EUROPEAN GOVERNANCE AND THE ECONOMIC THEORY OF PUBLIC GOODS: From the Rome treaty to the present crisis of the euro zone Robert Boyer Centro de Excelencia Jean Monnet, Buenos Aires 23 de Augusto de 2011

3. INTRODUCTION  The triple origin of this presentation:  An early investigation about the post euro governance in Europe Le gouvernement économique de la zone euro (1999), La documentation Française, Paris.  A normative approach of the distribution of competences between Europe and Member-States Political Goals, Legal Norms and Public Goods: The Building Blocks of Europe? (2006), Prisme n° 8, Centre Cournot, Paris.  An interpretation of the emerging Euro crisis “Integracion productive y financiera en la Union Europea. De la sinergia al conflicto”, Puente@Europa, Dinamicas productivas de la integración: comercio, moneda, trabajo e industria, Ano VIII, n° 1, Abril 2010, p. 31-47

4.  The approach: the interaction between two issues  According to the theory of public goods, ideally how should the distribution of competences be organized?  What does the sovereign debt crisis tell us about the institutional mismatch of European governance?

5.  The synopsis of the presentation I.According to a public good approach, how should be organized European governance? II.How to interpret the discrepancy observed with the actual integration pattern? III.The organization of competition on the common market has been the core of related European public goods. IV.A forgotten major public good: financial stability within the Euro zone.

6. I. The normative economic approach  A strong contrast with the legal approach: the performativity of European Treaty in the delimitation of competences…. …..And the judge is in charge of overcoming possible conflicts and contradictions

8.  The contribution of public choice theory: clear and explicit criteria

9. II. The economic rationale for an European public good is not a sufficient condition for its creation  Not all the public goods held to be naturally European have given rise to intervention or supply on a European level  Intra-European transport, a Community competences in the treaties as remained rather theoretical. A rare exception: the European Air Safety Agency (June 2002)

10.  Defence, which theorists consider a “natural” public good, has not become such due to conflicting national conceptions at the political level.  Science, should define an emerging European public good quite essential to the future of Europe’s competitive position. Despite a few large European programmes most research policy continues to be conducted at the national level. Hence, large costs of “non Europe” in terms of innovation policies.

11.  In contrast, the European Union exercises competences in domains where the European character of the corresponding public goods has not been established  The Common Agricultural Policy (CAP) is a striking case. The resolute defence of national farms’ interests by certain countries explains this path and past dependence, although the percentage of European community funds to farming has slowly fallen and the CAP has been significantly transformed.

12.  The remarkable fact that the big countries resort to often massive aid for their farming sector shows that economists should abandon pure public goods theory and focus on a political economic analysis of State intervention.

13. III. The organization of competition on the common market has been the core of related European public goods.  The primacy, centrality and driving force of competition in the internal market

14. Figure 1 – The spiral of Europeanization: Treaty, directive, jurisprudence…and so on.

15.  Interdependence between public goods can favour their recognition and their institutionalization

16. Figure 2 – The constitution of a European market, guiding theme in the extension of Community competences

17.  Three main failings of public goods economic theory  The historicity of the process of European integration  There is no separability of public goods, they are largely interdependent.  Economics mainly favours non cooperative strategies whereas the Monnet method promotes explicitly cooperative strategies by using deliberation and political discussion to build a convergence of interests.

18. IV. A forgotten major public good: financial stability within the Euro zone 1.A dangerous illusion: monetary stability does not mean neither real convergence nor financial stability  A quick and surprising convergence of nominal interest rate on national public debt  Real convergence is more problematic

19. Graph 1 – A convergence of 10 years Treasury bonds interest rate Source : Patrick Artus (2010), « Quelle perspective à long terme pour la zone euro ?, Flash Economie, n° 158, 12 Avril, p. 4.

20. Graph 2 – GDP per capita (Euro): the convergence has stopped Source: Artus Patrick (2011), “La crise de la zone euro nous apprend beaucoup sur le fonctionnement des Unions Monétaires ; l’euro est-il sauvé?”, Flash Economie, n° 599, 9 août, p. 6.

21. 2.Why are public finance and financial stability challenged by the Euro?  Each Member-State has lost two major economic policy instruments: the interest rate and exchange rate

22. Periods « Golden Age » 1945-1971 The painful decades 1972-1999Launching of EURO 1999-… Level of institutional forms 1.Monetary Regime / Credit NationalMore and more constraints upon national monetary autonomy The same European monetary policy for all members 2.Wage labor nexusNationalNational, but transformations in reaction to fiercer competition Still national but « benchmarking » at the European level 3.Nature of competition Mainly nationalGrowing impact of European competition policy Stricter enforcement of competition et the European level 4.Insertion into the world economy, exchange rate regime Exchange rate is the outcome of political decisions Financial markets set exchange rates A single common exchange rate set upon financial markets 5.Link State / Economy Large welfare StateRecurring public and welfare deficits Diverging evolution of public deficits

23. 3.The Euro fosters an unprecedented division of labour among Member- State  Diverging adjustment processes for productive capacities

24. Table 4 – After the Euro, national productive capacities become the adjustment variable

25. Graph 3 – A deepening of intra-European specialization: manufacturing in the North, service in the South Source: Patrick Artus (2011) “Pourquoi n’a-t-on pas vu, de 1999 à 2007, les problèmes de l’Espagne, du Portugal, de l’Irlande, de la Grèce? »”, Flash Economie, n° 534, 9 juillet, p. 5. A – Share of manufacturing in total value added B – Employment in domestic services (100 in 1999.1)

26. Graph 4 - The cumulative polarization of trade surpluses and deficits after the launching of the Euro (% GDP) Source: Patrick Artus (2010) “La fin du mythe de la convergence dans la zone Euro”, Flash Economie, n° 695, 22 décembre.

27. Graph 5 – The complementarity among the various national growth regimes in the EU Source: Patrick Artus (2010) “La fin du mythe de la convergence dans la zone Euro”, Flash Economie, n° 695, 22 décembre, p. 7-8-10.

28. Graph 6 – A very low competitiveness for some Southern European countries Source : Patrick Artus (2010), « Quelle perspective à long terme pour la zone euro ? », Flash Economie, n° 158, 12 Avril, p. 3.

29. 4.A fast financial integration within the EU appears as a substitute for economic policy coordination and fiscal solidarity  A rapid diversification of financial portfolio.  An easy financing of public deficits by banks and financial institutions.  A false assessment by the international financial community: all public debts have the same (German) high quality.

30. A – Greek treasury bonds Source: Artus Patrick (2011), “Que faire si des grands pays de la Zone Euro sont, dans le futur, en difficulté avec leurs dettes publiques”, Flash Economie, n° 584, 28 juillet, p. 5. Table 5 – Which banks own the European treasury bonds?

31. B – Spanish and Italian treasury bonds Source: Artus Patrick (2011), “Que faire si des grands pays de la Zone Euro sont, dans le futur, en difficulté avec leurs dettes publiques”, Flash Economie, n° 584, 28 juillet, p. 8. Table 5 – Which banks own the European treasury bonds?

32. C – Share of ownership of Spanish and Italian treasury bonds by non residents Source: Artus Patrick (2011), “Que faire si des grands pays de la Zone Euro sont, dans le futur, en difficulté avec leurs dettes publiques”, Flash Economie, n° 584, 28 juillet, p. 8. Table 5 – Which banks own the European treasury bonds?

33. Graph 7 – The interest rate on 10 years of public bonds: a brutal divergence after the subprime crisis Source: Artus Patrick (2011), “La crise de la zone euro nous apprend beaucoup sur le fonctionnement des Unions Monétaires ; l’euro est-il sauvé?”, Flash Economie, n° 599, 9 août, p. 5.

34. Graph 8 – Two crises: a public finance issue for Greece and Portugal, an excessive private credit for Ireland and Spain

35. 5.The Euro is first a shield against the subprime crisis and then a liability  A consequence of the diverging trends in public finance…  …An thus financial markets brutally reassess the relative sustainability of public finances among European countries

36. Figure 3 – Financial speculation reveals some of the institutional unbalances of European governance

37. Graph 9 – A clear speculative component in the Greek crisis Source : Patrick Artus (2010), Flash, n° 90, 23 février

38. 6.The failure of a prudential approach to European integration  A consequence of the diverging trends in public finance…  …An thus financial markets brutally reassess the relative sustainability of public finances among European countries

39. Figure 4 – Disentangling the various causes of the Euro zone crisis EURO Systemic crisis Absence of any institutionalized bailing out process The Greek debt is not sustainable Low interest rate No enforcement of the stability and growth pact The Greek strategy: a public deficit led growth Loss of competitiveness Financial speculation Reveals

40. 7.The need for a significant institutional readjustment of the European governance  A multiplicity of options….  …But difficult to implement in the eye of hurricane….  …The danger of confusing the way out of the present sovereign debt crisis with the restructuring of European governance that would prevent its repetition.

41. Table 6 – How to prevent the repetition of the Greek crisis? Impact Principle Economic efficacy/efficiency Political feasibility Nature of reforms 1.Short selling is forbiddenReduce the gap between fundamental value and market price Possible but no impact on European governance. Unequal according industrial or financial specialization 2.European public rating agency Fight against the three private agencies bias Moderate but not central for the EU Possible for governments, problematic for private players 3.European agency in charge of public finance assessment and control Name and shame failing governments Problematic because still less coercive power than that of SGP Poor because lack of legitimacy by citizens 4.Creation of a European financial fund Equivalent to the IMF for the EU in charge of rescuing failed states To be built by experience, need for clarification of relations with the IMF What relationship with the European Treaties? 5.Strengthening in the enforcement of the stability growth pact, with stronger sanctions Learning from the past: combine incentives and sanctions for the sustainability of national public finances Possible during stable periods, problematic during a sistemic crisis Risk of fracture in the Euro zone, deflation and stagnation if hasty application 6.From loose governance to an explicit economic governance of the EU Complete overhaul of the European policy mix and construction of a viable one Better than in the current Treaties, provided that the coordination costs are not too high Problematic when we leave the rhetoric to the reality of practice 7.Emission of Euro bonds as the starting point for fiscal federalism Converge to a typical federalism, with a real capacity to govern the EU economy If legal issuing of Euro bonds and a sufficient size of the EU budget Growing reluctance of public opinion to any further loss of national sovereignty

42. Table 7 – The factors that make contemporary austerity quite dangerous

43. Table 8 – European integration: A federalism of third type?

44. CONCLUSION: A COMPLEX SYSTEMIC CRISIS OF EUROPEAN INTEGRATION C1 – The economic theory of public goods delivers an interesting diagnosis about the relevance of the present distribution of competences: it is far from ideal. C2 – The European governance is the outcome of a quite pragmatic approach to transnational institution building. It is not surprising to exhibit structural weaknesses. They are revealed by the present sovereign debt crisis.

45. C3 – The Euro has been introduced as a necessary complement to the deepening of the internal market, in order to foster competition led growth regimes, but the new unbalances and causes of structural crisis typical to the Euro zone have not been clearly perceived. C4 – This was a response to exchange rate instability associated to financial globalization. Paradoxically, financialization has transitorily allowed the diverging trends in productive capacities between North and Southern Europe.

46. C5 – The current doubts about various national sovereign debts are not only the expression of unwise public finance policies and of the speculative patterns typical of unregulated financial markets. They are also an evidence for a major institutional mismatch in European integration. C6 – Financial stability appears as the missing European public good, both for overcoming the present turmoil and designing a more coherent and resilient European Union.

47. C7 – The July 2011 European plan  Neither solves the bailing out of the most challenged countries, since it promotes a competition led beggar my neighbour austerity strategy…  …Nor is it designing a credible reconfiguration of European governance: a prudential approach of governance is a poor substitute for an explicit fiscal and political solidarity.

48. Many thanks for your attention Robert BOYER CEPREMAP (Paris) – GREDEG (Sophia Antipolis) 140, rue du Chevaleret 75013 PARIS, France Tél. : (33-1) 40 77 84 12 e-mail : robert.boyer@ens.fr web site : http://www.jourdan.ens.fr/~boyer/