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Barcelona GSE Roundtable on the Future of Europe: Politics and Governance

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Giacomo A.M. Ponzetto (CREI, UPF and Barcelona GSE)

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Barcelona GSE Roundtable on the Future of Europe: Politics and Governance

  1. 1. The Future of Europe: Politics and Governance Giacomo A. M. Ponzetto CREI, Universitat Pompeu Fabra, and Barcelona GSE Friday 14th October 2016 Giacomo Ponzetto (CREI) 14th Barcelona GSE Trobada 14 October 2016 1 / 12
  2. 2. The Future of Europe Politics and Governance The Classic Theory of Fiscal Federalism Classic trade o¤ I Bene…ts of policy coordination: the single market I Costs of policy uniformity: intrusive EU regulation How much should you coordinate? I Too much European integration? CAP, EMU I Too little European integration? Fiscal union With whom should you coordinate? I Too much EU expansion? Transition economies I Too little EU expansion? Serbia, Turkey, Ukraine Giacomo Ponzetto (CREI) 14th Barcelona GSE Trobada 14 October 2016 2 / 12
  3. 3. The Future of Europe Politics and Governance A Neoliberal Consensus 1 The Union is too small and homogeneous I The pivotal member isn’t average I Entrants cannot credibly pay up 2 The Union has seized control of too many policies I If any political agent can control a policy it will I But some policies would best be kept o¤ limits 3 The European Union does the wrong things I Too little enforcement of the single market I Too little global public goods: foreign policy, defence, police I Too much redistribution and local public services I Possibly a result of special-interest politics Alesina and Wacziarg 1999; Tabellini 2003; Alesina, Angeloni and Etro 2005; Alesina, Angeloni and Schuknecht 2005; Ruta 2005 Giacomo Ponzetto (CREI) 14th Barcelona GSE Trobada 14 October 2016 3 / 12
  4. 4. The Future of Europe Politics and Governance Globalization and the European Union How will global economic integration shape the future of Europe? 1 Will it weaken and break up the Union? I The single market loses importance with rising global trade I Members no longer need to tolerate diverse income and preferences I Bolton and Roland (1997); Alesina and Wacziarg (1999) 2 Will it strengthen the Union and break up member states? I The single market gains importance with rising trade opportunities I Common economic regulation enables smooth economic integration I Diverse regions no longer need to tolerate large nation states I Gancia, Ponzetto and Ventura (2016); Guiso, Herrera, Morelli (2016) Britain is kindly providing a natural experiment Giacomo Ponzetto (CREI) 14th Barcelona GSE Trobada 14 October 2016 4 / 12
  5. 5. The Future of Europe Politics and Governance Shared Responsibility and Political Accountability The EU has exclusive control over very few policies Bene…cial ‡exibility (Alesina, Angeloni and Etro 2005) I The union does less, individual members can do more I In some cases, Pigovian policy coordination to the …rst best Opacity and loss of accountability (Joanis 2014) I Unclear responsibility for policy outcomes I Politicians avoid accountability by shifting blame No upside to the complexity and opacity of EU institutions I Not for citizens, at least (Alesina and Perotti 2004) Giacomo Ponzetto (CREI) 14th Barcelona GSE Trobada 14 October 2016 5 / 12
  6. 6. The Future of Europe Politics and Governance Accountability Gains and Transfers Delegated monitoring (Bo¤a, Piolatto and Ponzetto 2016) EU institutions held accountable by Germans, not Italians I Policies cater to Germans, not Italians I Institutional quality close to Germany, not Italy Mutually bene…cial bargain I Global public goods redistribute good governance to Italy I Discretionary policies redistribute power to Germany Di¤erences in accountability make the union more desirable Giacomo Ponzetto (CREI) 14th Barcelona GSE Trobada 14 October 2016 6 / 12
  7. 7. The Future of Europe Politics and Governance But Why Are Voters Unhappy? Giacomo Ponzetto (CREI) 14th Barcelona GSE Trobada 14 October 2016 7 / 12
  8. 8. The Future of Europe Politics and Governance Economics and Immigration Giacomo Ponzetto (CREI) 14th Barcelona GSE Trobada 14 October 2016 8 / 12
  9. 9. The Future of Europe Politics and Governance Federal Fiscal Policy Does Europe need a …scal union? I A question for macroeconomists Political economy shows how hard it will be to create one 1 Moral hazard in local policy (Persson and Tabellini 1996a) I Union-wide risk sharing induces local risk taking I Less than full risk-sharing and constraints on local policy 2 Risk sharing entails redistribution (Persson and Tabellini 1996b) I Distinct in theory, but never before in practice I Some countries are more volatile than others I Bargaining favors the better o¤ ) underinsurance I But direct democracy maximizes cross-union con‡icts Giacomo Ponzetto (CREI) 14th Barcelona GSE Trobada 14 October 2016 9 / 12
  10. 10. The Future of Europe Politics and Governance Hostility to Immigration The main driver of Brexit 1 Labor-market competition I Unskilled more opposed to immigration (Scheve and Slaughter 2001) I Unskilled wages may or may not fall: Borjas v. Card I Signi…cant housing-market competition (Saiz 2007) 2 Pressure on the welfare state I Voters and Borjas think it is a valid concern 3 Xenophobia I People don’t want to share a country with very di¤erent regions I Why should they want to share it with people from those regions? Giacomo Ponzetto (CREI) 14th Barcelona GSE Trobada 14 October 2016 10 / 12
  11. 11. The Future of Europe Politics and Governance What Does My Crystal Ball Say? The EU does nothing abrupt and has no appetite for grand reform Old ine¢ ciencies won’t go away I Byzantine institutions, overregulation, wasteful agricultural subsidies + The single market will probably inch forward I Not if Brexit is an unexpected success? Then it shouldn’t matter I Deeper integration of Eurozone …nancial markets + The EU may meddle less with redistribution and social policies I Possibly allow larger populist curbs on bene…ts to migrants I No meaningful …scal union without another large macro shock Emphasis unlikely to switch from austerity to procompetitive reforms I Feasible macro adjustment is regressive (Alesina and Drazen 2001) I But domestic German politics are probably decisive here Giacomo Ponzetto (CREI) 14th Barcelona GSE Trobada 14 October 2016 11 / 12
  12. 12. The Future of Europe Politics and Governance In the Long Run, Euroskeptics Are All Dead All EU countries built national identities …rst and welfare states later Can the EU muddle through long enough? Giacomo Ponzetto (CREI) 14th Barcelona GSE Trobada 14 October 2016 12 / 12

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