Decision Making

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Decision Making

• Jan Fidrmuc
• Brunel University

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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?

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Outline

• Distribution of Power and Subsidiarity
• Theory of Fiscal Federalism
• Qualified Majority Voting
• Efficiency of Decision Making
• Power Indices

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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

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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

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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.

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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?

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Theory of Fiscal federalism

• Basic trade-offs
• Diversity and local informational advantage
• Scale economies
• Spillovers (externalities)
• Jurisdictional competition
• Democracy

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Diversity and Local Information

• Consider provision of a public good when regions
  have different preferences (demand functions)
  Region 1 values the public good less than Region
  2.
• Optimal quantity equates marginal cost and
  marginal value of the public good
• Under decentralization, local governments have an
  information advantage and can implement optimal
  allocations Qd1 and Qd2.

MCmarginal cost MVmarginal value
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Diversity and Local Information

• Centralization (one-size-fits-all policy) is
  inefficient because it provides too much public
  good for R1 and too little for R2.
• Welfare loss of R 1 and 2 is area A and B,
  respectively.
• Examples
• Public transport,
• Schools,
• Language regime in a multi-lingual country.

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Economies of Scale

• Costs of providing public good may fall with
  scale
• E.g. single national rail or bus network may be
  more efficient than many regional ones.
• Different marginal costs apply in centralized and
  decentralized case.
• Region 1 welfare gain C vs loss D ?
  centralization may be preferred.
• National defense and foreign policy

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Spillovers

• Prisoners dilemma situations.
• Examples
• Environmental policies.
• Tax/VAT competition.
• If decentralised, each region chooses a level of
  public good that is too low.
• e.g. Qd2 for Region 2.
• Two-region gain from centralisation is area A.
• Similar conclusion with negative spillovers Q
  too high under decentralization.

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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 ones 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

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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

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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

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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/Lisb
  on Treaty, Nice Treaty
• Qualified majority voting (QMV)
• Enlargement-related institutional reform.

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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

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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

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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.

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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

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Nice-Treaty QMV Votes
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Constitutional Treaty

• Nice Treaty QMV rules relatively small coalition
  can block important decisions.
• Risk that Councils 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 15/2756)
• Reallocation of vote shares large nations gain
  (except Spain and Poland)

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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

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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

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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
• Passage Probability.
• Blocking coalition analysis
• Normalised Banzhaf Index.
• Many others are possible

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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.

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Historical Passage Probabilities

• Source Baldwin Widgren (2005)

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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 Newcomers4 cohesion members (ES, PT, GR
  IE)
• Poor exceed the Nice Treaty blocking thresholds
  of votes and member states
• Newcomers exceed the votes threshold only

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Example 2 blocking coalitions, Nice rules
Council-votes
threshold
Number-of-Members
threshold
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Normalized Banzhaf Index (NBI)

• Power to break a winning coalition
• NBI is Members share of swing votes
• Caveat NBI disregards issues such as
  agenda-setting power, and again assumes voting
  behavior is random

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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

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Power measures Example

• Why use complicated formal power measures instead
  of vote shares?
• Simple example 3 voters, A, B C
• A 40 votes, B40 votes, C20 votes
• Need 50 of votes to win.
• All equally powerful!
• Suppose now the threshold rises to 80 votes.
• C loses all power.

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Distribution of power in the EU

• For EU15, NBI is very similar to share of Council
  votes, so the distinction is not so important

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Do power measures matter?
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Do power measures matter?