Decision Making

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					Decision Making


   Jan Fidrmuc
   Brunel University
Introduction

   Which decisions-making powers should be
    transferred to the EU and which should
    remain in the hands of national
    governments?
   How much influence do national governments
    have in the EU?
   Can the EU make decisions effectively?
Outline

1.   Distribution of Power and Subsidiarity
2.   Theory of Fiscal Federalism
3.   Qualified Majority Voting
4.   Efficiency of Decision Making
5.   Power Indices
Distribution of Power and Subsidiarity
   Key question: “Which level of government
    should be responsible for each task or policy
    decisions?”
       Setting foreign policy
       Speed limits
       School curricula
       Trade policy
   Different levels of policy making:
       Local, regional, national, EU
   Task allocation = „competencies‟ in EU jargon
Subsidiarity and Proportionality
Principles
   Subsidiarity:
       Decisions should be made as close to the people as
        possible
       EU should not take action unless doing so is more
        effective than action taken at national, regional or
        local level.
   Proportionality:
       EU should undertake only minimum action
        necessary
   Motivation: to limit “creeping competencies”, i.e.
    growing role of EU in policy making
3 Pillars and task allocation
   3 Pillar structure delimits the allocation of
    power.
   1st pillar: Community (EU) jurisdiction.
       Single market issues, competition, trade policies,
        monetary integration.
       EU has final say, member states cannot opt out.
   2nd and 3rd pillar: national jurisdiction.
       Foreign/security policy, justice/home affairs.
       Members may pursue cooperation but are not
        bound by EU decisions they disagree with.
       Example: Schengen Accord.
Theory of Fiscal federalism
   Theoretical analysis can help determine whether
    centralization or decentralization is optimal
   Origins of the theory: Power to tax
       Which taxes should be set at the national vs sub-
        national level?
Theory of Fiscal federalism
    Basic trade-offs:
1.   Diversity and local informational advantage
2.   Scale economies
3.   Spillovers (externalities)
4.   Jurisdictional competition
5.   Democracy
Diversity and Local Information
                                             euros


   Consider provision of a public
    good when regions have
    different preferences (demand MV
    functions): Region 1 values the           c,2


                                                             B
    public good less than Region MC per
                                    person
    2.                                                A                          D2

   Optimal quantity equates
    marginal cost and marginal                                                Davg
                                     MV
    value of the public good                 c,2

                                                               D
   Under decentralization, local                                   1

                                                 Q      Q               Qd2     Quantity
    governments have an                               d1    c,1&2


    information advantage and can          MC=marginal cost;
    implement optimal allocations:         MV=marginal value
    Qd1 and Qd2.
Diversity and Local Information
   Centralization (one-size-fits-      euros
    all policy) is inefficient
    because it provides too
    much public good for R1 and
    too little for R2.                MVc,2

                                                              B
   Welfare loss of R 1 and 2 is     MC per
                                     person
    area A and B, respectively.                       A                         D2

   Examples:
                                                                             Davg
     Public transport,              MVc,2

     Schools,                                                    D1

     Language regime in a                      Qd1       Qc,1&2       Qd2     Quantity

       multi-lingual country.
Economies of Scale
   Costs of providing public good
    may fall with scale               euros

     E.g. single national rail or bus
      network may be more efficient
      than many regional ones.
                                                           MC p.p.
   Different marginal costs apply in                      (decentralised)

    centralized and decentralized
    case.                                     C
                                                                 MC p.p.
   Region 1: welfare gain C vs loss                D
                                                                 (centralised)

    D  centralization may be
    preferred.                                                   Davg
                                                                 D1
     National defense and foreign
                                                  Qd1   Qc,1&2    Quantity
      policy
Spillovers
   Prisoners‟ dilemma situations.
   Examples:
                                      euros
     Environmental policies.
                                               Private and
     Tax/VAT competition.                     Social Marginal
                                               Cost
   If decentralised, each region
    chooses a level of public good    MCc
                                                A
    that is too low.                                              Combined
                                                                  region 1 & 2
                                      MCd
     e.g. Qd2 for Region 2.                                      Marginal
                                                                  Benefit Curve
   Two-region gain from
                                                             Region 2’s Marginal
    centralisation is area A.                                Benefit Curve
                                                             (demand curve)
   Similar conclusion with                   Qd2   Qc,1&2       Quantity
    negative spillovers: Q too high
    under decentralization.
Jurisdictional Competition
   Voters influence policies through:
       Voice: voting, party activism, protest, etc.
       Exit: by moving to another region/country (voting
        with your feet, Tiebout, JPE 1956)
   Voting with one‟s feet common, especially at
    sub-national level
   Firms are particularly mobile and responsive
    to local/national policies
   Decentralization: governments must deliver
    good policies or risk losing tax payers
   Centralization: little possibility for exit
Democracy as a Control Mechanism
   Politicians offer voters a „package‟ of policies
   Local government can offer package that better
    reflects local needs
   Decentralization gives voters better control over
    policies
       The same voter can support different parties in
        national and local elections
Summary
   Decentralization: advantages
       Policies reflect local conditions and needs
       Voters have better democratic control over policies
   Centralization optimal when economies of scale
    and/or spillovers are important.
   1st pillar (economy): large spillovers
   2nd pillar (foreign/security policies): important
    economies of scale but also large differences in
    preferences across countries
   3rd pillar (justice/home affairs) – intermediate case:
    moderate economies of scale and moderate
    diversity in preferences
Efficiency of decision making
   Fiscal federalism theory: which decisions should
    be made at the EU level
   Focus now: How does the EU make its
    decisions? How likely is a decision-making
    gridlock? What was the impact of enlargement?
       e.g., Institutional changes in Constitutional/Lisbon
        Treaty, Nice Treaty
       Qualified majority voting (QMV)
       Enlargement-related institutional reform.
Qualified Majority Voting
   Most EU decisions made by co-decision
    procedure
       Proposal adopted in the Council of Ministers by
        QMV and in the EP by majority voting
   Voting in the Council reflects States‟ national
    interests
   QMV requires more than a simple majority to
    approve a decision
   This makes it easier for small Member States
    to block decisions
QMV History
   Before November 2004: Basic form
    unchanged since the 1958 Treaty of Rome.
   Post-2004: Nice Treaty QMV rules, unless
    replaced by Lisbon Treaty rules.
   Constitutional Treaty rules supposed to be
    effective from 2009 but rejected in referenda
    in France and the Netherlands.
   Lisbon Treaty rules effective from 2014, or
    2017 if delay requested by member states;
    rejected in referendum in Ireland
Pre-2004 QMV
   Number of votes not perfectly proportional to
    population:
   Total number of votes in the EU15: 87
   Threshold for winning majority: 62 votes
     „qualified majority‟: about 71% of votes required
     to adopt proposal.
   Relatively large coalition required to win a
    vote.
   Relatively small coalition of countries can
    block a vote.
Nice Treaty Reforms
 Two main changes:
1. QMV rules more complex: two new criteria in
  addition to votes
       votes: 255 votes out of 345 Council votes in EU27
        (74%)
       number of members: half of the member states,
        i.e. 14 out of 27
       population: 62% of EU population.
2. Votes reallocated in favour of big nations
Nice-Treaty QMV Votes
Country      Votes   Population   Country       Votes   Population
Austria       10        8.1       Latvia         4         2.4
Belgium       12       10.2       Lithuania      7         3.7
Bulgaria      10        8.2       Luxembourg     4         0.4
Cyprus        4         0.8       Malta          3         0.4
Czech Rep.    12       10.3       Netherlands    13       15.8
Denmark       7         5.3       Poland         27       38.7
Estonia       4         1.4       Portugal       12        10
Finland       7         5.2       Romania        14       22.5
France        29        59        Slovakia       7         5.4
Germany       29        82        Slovenia       4          2
Greece        12       10.5       Spain          27       39.4
Hungary       12       10.1       Sweden         10        8.9
Ireland       7         3.7       UK             29       59.2
Italy         29       57.6
Constitutional Treaty
   Nice Treaty QMV rules: relatively small
    coalition can block important decisions.
       Risk that Council‟s becomes deadlocked
   CT QMV rules: proposal wins if backed by
    member states with
       At least 65% of EU population
       At least 55% of member states.
       At least 15 member states (irrelevant if the EU
        has 27 or more members: 15/27=56%)
   Reallocation of vote shares: large nations
    gain (except Spain and Poland)
Lisbon Treaty
   Lisbon QMV rules replicate CT rules
   Proposal wins if backed by member states
    with
       At least 65% of EU population
       At least 55% of member states.
   Unless replaced by Lisbon Treaty or another
    new treaty, Nice Treaty rules remain in effect
QMV: Shadow Voting
   QMV is rarely actually used by the Council
   Most decision made by „consensus‟
   Shadow voting:
       If country knows it would be outvoted, it usually
        joins the consensus
       Otherwise, the vote does not take place to avoid
        failure
       QMV rules matter because they help countries
        determine the likely outcome if vote were held
EU Decision-making Efficiency
    Efficiency in decision making: ability to
     reach decisions
    Voting rules and thresholds required to
     accept a proposal are crucial
    Formal Measures:
1.   Passage Probability.
2.   Blocking coalition analysis
3.   Normalised Banzhaf Index.
    Many others are possible
Passage Probability
   The number of all possible winning coalitions
    divided by the number of all possible coalitions.
       E.g.: almost 33 ths possible coalitions in EU15;
       Over 33 million possible coalitions in EU25.
   Passage probability equals probability of
    winning if all coalitions are equally likely.
       i.e. if countries‟ voting behavior is random
   Caveat: very imperfect measure.
       Proposals and countries‟ positions not random
   But useful to measure decision-making
    efficiency.
     Historical Passage Probabilities




•Source: Baldwin & Widgren (2005)
Blocking-coalition analysis

   Ability of „likely‟ coalitions to block EU decisions.
   Less formal and easier to think about.
   Probably close to what EU leaders had in mind.
   Example: “Newcomers” and “Poor” in EU27
       Newcomers: 12 new member states
       Poor: Newcomers+4 „cohesion‟ members (ES, PT,
        GR & IE)
   „Poor‟ exceed the Nice Treaty blocking
    thresholds of votes and member states
   „Newcomers‟ exceed the votes threshold only
Example: 2 blocking coalitions, Nice rules
                             EU27-population threshold
                             (millions of citizens)
  200
          Poor coalition votes                       183
                                    166                    170
          Newcomers
          coalition votes
             Council-votes
             threshold
                                          108                    106
                               91
        Number-of-Members
        threshold




          14 16 12
   0

            Members                 Votes                  Population
Normalized Banzhaf Index (NBI)

   Power to break a winning coalition
   NBI is Member‟s share of swing votes
   Caveat: NBI disregards issues such as
    agenda-setting power, and again assumes
    voting behavior is „random‟
Normalized Banzhaf Index
   Consider all possible „random‟ coalitions
   n voters: number of possible coalitions is 2n.
       Example with 3 voters: ABC
       Possible coalitions: ABC, AB, AC, BC, A, B, C, [none]
   Compute the number of winning coalition in which the
    voter/nation is pivotal, i.e. the coalition would fail if the
    voter defects
   BNI is the ratio of the number of coalitions in which
    the voter/nation is pivotal over all possible coalitions
       BNI measures the probability that the voter is a „deal breaker‟
Power measures: Example
   Why use complicated formal power measures
    instead of vote shares?
   Simple example: 3 voters, A, B & C
   A = 40 votes, B=40 votes, C=20 votes
   Need 50% of votes to win.
   All equally powerful!
   Suppose now the threshold rises to 80 votes.
   C loses all power.
    Distribution of power in the EU
   For EU15, NBI is very similar to share of Council votes,
    so the distinction is not so important


          14%


          12%
                                                       Power measures in EU15
          10%
                                                                      NBI         Vote share
          8%


          6%


          4%

          2%


          0%
                 D       UK      F        I      E      NL     Gr      B      P          S      A     DK     SF      Ire    L
    NBI         11.2%   11.2%   11.2%   11.2%   9.2%    5.9%   5.9%   5.9%   5.9%      4.8%    4.8%   3.6%   3.6%   3.6%   2.3%
    Vote share 11.5%    11.5%   11.5%   11.5%   9.2%    5.7%   5.7%   5.7%   5.7%      4.6%    4.6%   3.4%   3.4%   3.4%   2.3%
Do power measures matter?
                           12
 Budget Share/Population



                           10
                                                                Luxembourg

                            8
         Share




                            6

                            4

                            2

                            0
                                0   5          10        15           20     25

                                        Vote Share/Population Share
Do power measures matter?
  Budget Share/Population Share
                                  4.5
                                   4                                                             Ireland

                                  3.5
                                   3                                     Greece

                                  2.5                                                     y = 0.9966x + 0.0323
                                                                      Belgium
                                   2                 Spain                         Portugal    R2 = 0.7807
                                  1.5                                                   Denmark
                                                France
                                   1        Germany                                         Finland
                                                         Italy                    Austria
                                  0.5                            NL     Sweden
                                                     UK
                                   0
                                        0                 1                 2                    3         4

                                                         Vote Share/Population Share

				
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