April 22, 2008

Subsidiarity and economic reform in Europe

Economic Reforms: The Member States and Europe have to move

Press release
'Europe' is becoming more relevant than in the past. In the last twenty to thirty years, the European Union has moved towards policy domains which have been exclusively the competence of individual Member States.

Some examples are monetary and budgetary policies (Stability and Growth pact), environment, innovation, immigration and foreign policy. This raises the question to which extent European cooperation is desirable from an economic point of view.

Economic researchers see a role for the EU in the areas higher education, innovation, internal market, corporate taxation, and regional policy towards poorer Member States, but the importance of Europe may differ per policy area.

These are the most important conclusions from the book 'Subsidiarity and Economic Reform in Europe, edited by George Gelauff and Arjan Lejour (CPB) and Isabel Grilo (European Commission). In this book, about twenty-five economists discuss the demarcation between national and European policies using the subsidiarity principle. According to this principle, the desirability of European policy depends on the possible cross-border external effects and/or economies of scale of each policy. This principle says the policies should be assigned to the most efficient level of government. Sometimes this is the European Union, sometimes this is a Member State.

The book is the offspring of a conference on Subsidiarity and Economic Reforms in Brussels, November 8-9, 2006. The conference was organised by the European Commission, the Dutch Ministry of Economic Affairs and CPB Netherlands Bureau for Economic Policy Analysis.

Higher education & innovation
The contributions on higher education and innovation have concentrated on the importance of cross-border external effects. The quality of higher education and thus human capital has to be improved if the EU is to reach its ambitious Lisbon goals. A possible role for the European Union could be to stimulate mobility of students which could lead to more competition and possibly higher quality in education. Moreover, the European Union could act as catalyst for the Member States' reforms in higher education.

The analysis of R&D policies shows that there are clearly defined roles for the Member States and the EU. The EU has a role in funding public R&D and in subsidizing private R&D, because of the externalities involved and the potential benefits of economies of scale. On the other hand, government support for R&D by small and medium sized enterprises should be conducted at the national or even regional level. In general, these layers have better information about local circumstances.

Internal market
National regulation hampers trade in services and the realization of one European market, because foreign service providers have to fulfil the requirements of both the national and the export market. The chapters about the internal market conclude that the markets for network sectors and commercial services can be improved if the hampering cross-border effect of national regulation are eliminated.

Corporate taxation
Member States can compete to lower these taxes in order to attract foreign direct investment and economic activity. Multinationals firms use these differences to minimise their taxes. This book argues for further EU-coordination the benefits of which will probably only materialize if tax rates and tax bases for corporations are coordinated. This is a difficult process, such that a step by step approach seems to be advisable.

Regional policy
The EU also has a clear role in regional policy, as long as it is directed to regions in poorer Member States. These states often lack the financial and institutional capacity to develop the regional economy and the EU can handle competition between regions. Rich Member States should take the lead in developing their own poor economic regions.

Sometimes, European policy exceeds the desirable level according to the subsidiarity principle, sometimes it does not meet this boundary. Of course, in a democracy subsidiarity will ultimately be a political decision. Yet, economic analysis may contribute to it being as informed as possible. This book offers a valuable contribution to this aim.

The Special CPB Publication 'Subsidiarity and Economic Reform in Europe' can be ordered at: uitgeverij Springer.

The contents and the summarizing chapter1 are available (free of charge) as a PDF file.

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Some examples are monetary and budgetary policies (Stability and Growth pact), environment, innovation, immigration and foreign policy. This raises the question to which extent European cooperation is desirable from an economic point of view.

Economic researchers see a role for the EU in the areas higher education, innovation, internal market, corporate taxation, and regional policy towards poorer Member States, but the importance of Europe may differ per policy area.

These are the most important conclusions from the book Subsidiarity and Economic Reform in Europe, edited by George Gelauff and Arjan Lejour (CPB) and Isabel Grilo (European Commission).

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