The Issues of EU Decentralization – Fiscal Policy or Institutional Errors?
The recent international soul-searching on the causes of the near financial meltdown has not escaped the EU. Suddenly, the notion of multiple politically semi-independent countries sharing a common currency is being called into question both inside and outside of the Europe. Rather than rehash the various arguments that have dominated these discussions, I will focus on one area of concern. Looking at the EU as a model of decentralization, is the essence of the problem rooted in the fiscal policy parameters of its decentralization policy – deficit limits, revenue-expenditure reporting, excessive borrowing and risk-taking? Or are the fiscal parameters essentially sound, and are the institutional framework of reporting, review and monitoring overly lax? If the latter (which is difficult to dispute), is this a consequence of poor design or a result of underestimating the institutional influences that were built into these arrangements? Or both? I will outline the misjudgments that seem to support the latter interpretation.
The EU was/is first and foremost a political exercise, designed to both build a more viable power bloc to peacefully confront a changing world and to ensure, in that context, the economic strength of Europe in this new world order. As a political enterprise compromises are inevitable, however, some of the compromises inevitably lead to institutional weaknesses. To illustrate this point, examine the effects and implications of two major issues that are current in the EU: immigrants and labor markets and the Greek (and other) threat(s) to the Euro.
Major EU member economies typified by Germany, depend on exports for growth. Competitiveness, in turn, depends on relatively low labour costs. Adequately skilled workers from lower income countries are integral to this growth strategy. However, while their economic contributions are welcome their full integration in to the larger society has not been. Note the willingness of Germany to extend expensive options to reintegrate former East Germans into the reunified Germany, versus attitudes towards Turkish immigrants. The purpose of this analogy is not to make moral arguments – there are other fora for that – but to make the institutional weakness argument. In this case the argument is simple: if the objective is to have skilled labor at competitive costs then the rules of the game should consistent with, and sufficiently robust to assure that outcome. To the extent that they are not, the results will be expensive disruptions that jeopardize the overall objectives. Decentralized developing countries face similar conditions, often at the local government level. In these cases, the question is often: should local governments have the right to select its staff without involvement of a national personnel management body? When national unity is a paramount concern, the answer is frequently, “no”. In other words, the predominant objective determines the institutional design.
With regard to the Greek case, political considerations at the country level led to “misleading” – to choose a polite term – the EU about its adherence to the agreed parameters for borrowing. The institutional question is, was the honour system adequate for ensuring compliance? In traditional decentralized countries, the question of central government oversight of borrowing and debt levels at the sub-national level has always been a vexing one. Usually, in those cases, the minimum level of strict oversight has been external borrowing. Clearly, the systemic risks to the entire national enterprise have usually been considered sufficiently compelling to override local or regional interests. The EU is not without the technical capacity to design and implement such an oversight system. Further, the EU was fully aware of the risks to the currency of uncontrolled imbalances. It is difficult to avoid the conclusion that institutional systems fell victim to political sensitivities.
The question for the future of the EU is similar to that of many decentralized governmental systems: to what extent will its composite jurisdictions agree to institutional designs and interventions that limit the room for risky political maneuvering?
