The core problem of the EU

_ Jürgen Stehn, Dr. Sc., Head of Economic Policy Coordination, Kiel Institute for the World Economy (IfW Kiel). Kiel, March 2017. Translated into English by Yuri Kofner.

Using the economic subsidiarity principle based on the Tiebout model of economic federalism (Tiebout 1956) as a benchmark for defining European core competencies is not a new idea. Klodt, Stehn et al. (1992) designed an efficient division of labor in structural policy between the EU and the member states on this basis. Stehn (2002) used this approach to outline guidelines for an economic constitution for Europe. The Expert Council for the Assessment of Macroeconomic Development revived the tiebout model in its last main expert opinion (Expert Council 2016) in order to deduce the consequences of Brexit for the distribution of tasks in the EU.

Efficiency gains from the centralization of public tasks at the EU level can primarily be realized when public services cause cross-border external effects. This applies in particular to the extreme case of supranational public goods. A decentralized distribution of competencies is suboptimal due to the possibility of free rider behavior and the resulting undersupply of supranational public goods. Returns to scale from the joint production of public goods and services also promise efficiency gains in the case of centralization of public tasks. Because as the number of independent, decentralized decision-making units increases, the costs of public service provision usually rise.

Eight core competencies of the EU can be defined on the basis of the efficiency criteria of the economic subsidiarity principle: freedom of trade, capital and freedom of establishment, merger and state aid supervision as well as asylum, security and environmental policy. The common monetary policy is a special case. A future thematic orientation of European integration along these core competencies promises considerable welfare gains for the participating countries. The more countries are willing to place these core competencies in the hands of the EU, the greater the gains. Therefore, the aim of European politics should be to win over all of the currently (still) 28 member states for this core project. However, solving the core problem also allows the formation of concentric rings around the thematic core. With the core in view, individual scenarios of the EU White Paper can also play a role here. For example, the outermost ring in an EU of concentric rings could be formed by a freedom of trade, capital and freedom of establishment supplemented by merger and state aid controls. With increasing proximity to the core, asylum, security and environmental policy could gradually be added as European core competencies. However, the member states that are further away from the core would forego possible efficiency gains. If concentric rings are formed, the EU as a whole will also lose efficiency compared to a Europe in which all members are prepared to leave the eight core competencies to the EU.

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