1. 5 February 2009 The Economic Rationale for EU Action: What are European Public Goods? Fabian Zuleeg European Policy Centre EU Budget Review 2008/09 - BEPA Workshop The political economy of EU public finances: designing governance for change

2. Introduction Fabian Zuleeg, Senior Policy Analyst, European Policy Centre – Contact: F.Zuleeg@epc.euF.Zuleeg@epc.eu Writing/presenting here in a personal capacity Previous work with Sara Hagemann (EPC) on the budget has focused on governance Key issue identified is the status quo bias in current and future (Lisbon) governance Reform of how the budget is negotiated and implemented is necessary to achieve objectives of the budget review [See for example A bigger bang for our euros: how to reform the EU budget, Fabian Zuleeg and Sara Hagemann, EPC Policy Brief, January 2008]

3. Focus of this presentation Budget review stipulates that the EU budget should be policy-driven Requires identification of future challenges, policy priorities and objectives, tools and instruments – and finally the budget required Not what happens at the moment: red lines, dividing a fixed pot, status quo bias and inertia, juste retour, poor link between policy priorities and budget allocation etc. The paper argues that we should examine underlying rationale for action to determine policy objectives and spending Based on an approach which emphasises outcomes/delivery rather than processes/structures Outcome-focused, evidence-based policy Focus on the potential economic rationale for EU spending

4. Rationales for EU policy-making Common Interest: member states delegate tasks to EU – but this is of little use when analysing policy priorities Rationales and motivations for EU action –Values and principles –Political interests –State interests –Social –Environmental –Economic Often a mixture of motivations and objectives

5. European public goods EPG term commonly used as a justification for EU action Various reference in budget review submissions and literature Lack of definition and clarity Wide range of EU policies claimed to be public goods – CAP, Single Market, Climate Change etc. EPG used interchangeably with inverse subsidiarity, EU added value, common interest, benefits at European level This matters – need to determine for what policies there is genuinely an economic rationale for action Economic definition of the term is much narrower Generally, economic rationale for intervention relies on market failure

6. Public goods/market failures Economic literature sets out market failures: –Public goods: non-divisible and non-excludable –Merit goods/free riders –Externalities/tragedy of the commons –Coordination failures/prisoners dilemma –Market power and structure/natural monopolies –Information failures/moral hazard

7. Public goods/market failures at EU level EU special features: –Coordination between governments –Transnational/cross-border market failures European public goods? European action on market failures: –Single Market – information/market power –Climate change/environment (negative externalities) –Coordination failures – e.g. infrastructure, macroeconomic policy –Merit goods, e.g. innovation/research –Added value: Sharing good practice, OMC (cooperation between governments, commitment mechanisms)

8. Policy implications and recommendations Recognise need to examine the underlying rationale for EU policy If economic, need to determine what market failures (evidence) Need to appraise EU policies (strategic level) –Challenge –Objectives –Tools/instruments (might include budget) Needs guidance on economic rationales Benefits: –Clarity on how, why and in which areas EU institutions should act –Highlight what is needed to deliver EU policy objectives –Highlight where current policies do not add value

9. How realistic? Not necessarily possible to be implemented comprehensively in the near future But a start could be made –Economic analysis of policy areas (current and future spending) to determine policy objectives –Guidance –Examination of potential public goods/market failures Who will/should take the lead? Is there really an acceptance that this is how the EU should determine policy priorities? Some would argue it is down to member states to simply delegate tasks to the EU Brings us back to the governance of the EU budget process