Extensive attention to the completion of the European single market and proposals for economic and monetary union have led to comparative neglect of other effects of the changing balance of powers between the central EC institutions and its member states. In Discussion Paper No. 834, Research Fellow Hans-Werner Sinn focuses on the economic theory of `subsidiarity'. He argues that lack of democratic control leads to excessive rent-seeking, as seen in EC industrial policy and protectionism, while measures against social dumping are impeding the operation of comparative advantage.

Obvious motivations for Europe's integration include member states' tendency to undersupply the `international public goods' needed to form a common defence policy, control cross-border pollution, protect national heritages or establish efficient communication and road networks; only centralized decision-making can overcome such `free riding'. Sinn also advocates redistribution among member states as a mutual insurance device. But increased freedom of trade in goods and factors has subjected EC member countries to a process of fiscal competition which risks wiping out redistributive taxes on mobile factors; this would make income redistribution impossible. If tax revenues prove insufficient even to pay for the cost of hosting mobile factors, and immobile factors must be taxed to subsidize them, this will lead to an inverse redistribution from poor to rich.

For similar reasons, competition among member states will not provide an efficient outcome in the setting of quality standards in cases where national standards were introduced because asymmetric information problems impeded the working of private competition in the first place. While national setting of corrective taxes may lead to an efficient outcome for environmental quality standards, this does not apply at the international level: since part of the imputed rent from the right to pollute flows to foreign wealth owners, national standards will tend to be inefficiently strict.

How Much Europe? Subsidiarity, Centralization and Fiscal Competition
Hans-Werner Sinn

Discussion Paper No. 834, September 1993 (AM)