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One Market, One Voice?

One Market, One Voice?. Benoît Coeuré (Ecole polytechnique) Jean Pisani-Ferry (Paris-Dauphine) October 2003. What this paper is about. Awful!. Can We Do Better?. Outline. Europe’s external arrangements Where do they come from? How efficient are they? Theory

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One Market, One Voice?

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  1. One Market, One Voice? Benoît Coeuré (Ecole polytechnique) Jean Pisani-Ferry (Paris-Dauphine) October 2003

  2. What this paper is about

  3. Awful!

  4. Can We Do Better?

  5. Outline • Europe’s external arrangements • Where do they come from? • How efficient are they? Theory • How efficient are they? Appraisal • Policy conclusions

  6. Survey

  7. Three basic models

  8. Where does this assignment of competence come from? • Standard federation models: preferences / economies of scale, externalities • Preferences are frequently heterogenous within Europe: trade, FX, international finance • But economies of scale may be overwhelming : customs union, single currency, Kyoto • Political externalities are overlooked:no pooling of votes in IMF, separated foreign aid policies • Assignment choices currently dominated by functional logic: internal unification determines external unification • No major change proposed in draft EU constitution

  9. Some theory Our lens: theory of contracts (as for theory of the firm, corporate governance, political institutions) • Unconditional delegation ~ judicial powerprincipal(s) give the mandate, agent decides on implementation • Supervised delegation ~ representative democracyagent is held accountable of performance in implementing mandate • Coordination ~ direct democracyno delegation to agent, joint action on case by case basis

  10. What we know (Maskin-Tirole) • Unconditional delegation better when: • Information costs (e.g. on technical matters) • Risk of tyranny of the majority • Supervised delegation better when: • Principals may learn on outcome of agent • Principals use temporary delegation to screen agents • Few arguments for coordination, except when: • Principals are well informed • Agent may be captured by minority (pork-barrel pandering) • Preferences are homogenous

  11. Practical appraisal • Theory • Other risks: • Inertia (difficulty to depart from past compromises) • Mutual inconsistency between policies • Inconsistency between EU and other players

  12. Three test cases • Trade: • Pure example of supervised delegation, but only for trade in goods • But permanent recontracting through Committee 133 is detrimental to negotiation efficiency • Macroeconomic surveillance: • FX policy is single but poorly implemented (lack of discipline) • Coordination sometimes futile (single views at IMF board on all internal Eurozone matters) • International finance: • Strong common European interests (SDRM) but Europe in an inertial mode • Not enough delegation on technical issues

  13. Conclusions • Arrangements dominated by functional logic rather than welfare maximisation • Envisaged reforms only incremental • But pressure for change: • Rise of emerging countries (Cancun) • EU foreign minister

  14. Wish list • Limited scope for further unconditional delegation (except European SEC?) • Move to single template for supervised delegation: • Commission as single agent • Time-limited mandates • Ex-post control rather than permanent monitoring • Coordination remains useful in the absence of a predefined agenda (G7) • Single EU seat in IMF?

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