Brexit and the Economics of Federalism

By Prof. Dr. Niels Philipsen


With Brexit, Yellow Jackets and EU-scepticism dominating the news and everyday discussions, I would like to direct MEPLI blog readers’ attention to some of the lessons that law and economics can offer to the (polarizing) debate on the future of the EU. My impression is that many academics, perhaps also some colleagues, too quickly label certain voters (those who supported Brexit and those who vote for EU-sceptic political parties) as ‘stupid’ and lacking the intelligence to understand and vote on topics like immigration, monetary policy, and environmental law. In my view this is not the right way to contribute to the debate. We need a much more balanced view. Perhaps, law and economics can help.

The so-called ‘economics of federalism’ provides clear-cut criteria that can help answer the question whether moving to a higher level of decision-making (e.g. from local to national level, or from Member State to EU level) would be efficient. As a starting point, however, the economics of federalism suggests a bottom-up approach to law-making. After all, people’s preferences can best be served at a lower level of decision-making (where people can vote or ’vote with their feet’), regulators can learn from each other (‘mutual learning’) and there is some degree of regulatory competition between jurisdictions. Creating EU law means creating a legal monopoly in a certain field, and taking away choices for consumers and business.

There are, of course, also criteria explaining when moving to a higher level of decision-making would be recommended. In simplified form, harmonizing legislation would only be efficient if at least one of the following applies: (1) there are serious transboundary problems (spillover effects, called externalities), like pollution crossing a country border; (2) there is a race to the bottom, i.e. there is an actual (empirically proven) destructive competition between Member States to attract investment at the expense of e.g. consumer or environmental protection; (3) the differences between national laws lead to high transaction costs for private parties and the costs of drafting and implementing EU law are lower than these transaction costs. In addition, there may be some non-economic reasons for harmonization, like guaranteeing a minimum level of protection or guaranteeing a level playing field. However, agreement on these normative issues (e.g. how high should the protection be?) is very difficult at higher levels of law-making. Moreover, introducing a minimum level of protection can lead to perverse effects, such as reducing the welfare in relatively poor Member States. I would like to highlight here that levelling the playing field is not an economic argument. According to the literature the ‘four freedoms’ are sufficient to reach a level playing field; we do not need harmonization of private or public law for that.

Applying these criteria to actual practice in the EU over the years has taught me that in some areas the EU has taken action where it is not efficient (and not wanted by citizens), whereas in others, the EU may have taken too little action. Examples of the former may be found in consumer protection law, localized pollution and composition of food products; examples of the latter in general food safety and global warming. One explanation for these deviations between theory and practice follows from public choice theory – i.e. the branch of economics that analyses the behaviour of politicians and lobby groups. Pressure from interest groups, but also the self-interested behaviour of EU bureaucrats e.g. in terms of maximizing their department’s budget, power, and prestige, may partially explain the ever-growing body of EU law and the ever-growing budgets of EU institutions, besides the valid legal or economic reasons for EU intervention. If we add to that the very poor marketing strategy of the EU, the ‘shifting the blame to Brussels’ attitude that often exists at Member State level, the immigration crisis and the Euro saga, we arrive at a point where understanding Brexit and EU-scepticism and trying to find a balanced solution to it (read: not treating British voters like naughty children) is the only way forward.

Recently I wrote a contribution for the book ‘Don’t Take it Seriously: Essays in Law and Economics in honour of Roger Van den Bergh’ (eds. Faure, Schreuders and Visscher, Intersentia, 2018). Van den Bergh, my colleague at the RILE institute in Rotterdam, is not only famous for his contributions to competition law and economics, but also for his critical essays on the role of the EU. His most (in)famous paper concerning the latter topic is his ‘Farewell Utopia’ article in the Maastricht Journal of December 2016, which I would recommend everyone to read. I therefore decided to write my contribution to Van den Bergh’s Liber Amicorum on the question of the extent to which we need EU regulation in the field of professional services, inspired by Van den Bergh’s work, as well as my own experiences as a former temporary agent at DG COMP and as an academic carrying out research for several DGs.

In that book chapter, as well as in a forthcoming publication by Michael Faure and myself on the use of standardization in the EU (in a volume edited by our colleagues Caroline Cauffman and Mariolina Eliantonio), I explain in much more detail the bottom-up approach to law-making and the criteria for harmonization, as well as the public choice perspective on EU institutions.

Dear readers, the point of this essay and my book chapter is notthat an institution like the EU is bad or inefficient, quite the contrary. Rather, we should try to learn from the past (including understanding Brexit and the rise of Eurosceptic parties) and try to improve the EU as an institution in such a way that it can continue to live on rather than implode – which is what I predict will happen if the current EU leaders do not change their attitude. Taking subsidiarity and the lessons from the economics of federalism seriously would be a crucial first step.