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EXECUTIVE SUMMARY
Background
The major geopolitical shocks that started with the COVID-19 pandemic have challenged the responses of both the European Union and its Member States. This has led to a wide array of proposals to develop European public goods to be operated and financed as the European level.
Public goods are goods and services that are freely accessible and whose use by one does not affect (too much) use by someone else. For this reason, they can only be provided by the public sector.
The theory of fiscal federalism provides a framework to evaluate at what level of government a public good is best offered. This study uses fiscal federalism to evaluate some of the most frequently offered proposals.
Main points
• Fiscal federalism lists two criteria that argue for the central (EU level) provision of a public good: increasing returns to scale and spillovers. It also lists four criteria for a national (country level) provision: divergent national preferences, better information at the national level, more effective democratic control at the national level, and better possibilities to move to a different jurisdiction. Importantly, the framework also asserts that financing of a public good ought to occur at the level where it is provided.
• Climate change is frequently seen as a European public good. Depending on the instrument to be used, it matches or it does not match the fiscal federalism criteria. A carbon tax should operate at the EU level. The EU has adopted the near-equivalent instrument, the Emissions Trading System (ETS) and is gradually improving and spreading.
• Other climate change instruments are not efficient. This concerns the vast subsidy system of the Green New Deal. Because of its complexity, it is inefficient and in many ways arbitrary, with different levels of support in different countries, and it requires local considerations that cannot be factored in at the EU level. In such cases, the EU level may formulate general objectives but leave design and implementation to the national level. Outright bans are highly inefficient.
• It is also often proposed to make health a European public good. However, health includes a wide range of policies. Some of them quality for being operated at the EU level: collection and exchange of information, procurement of medicines and vaccines, and the provision of treatment during unexpected emergencies. On the other hand, the provision of health services, the bulk of health policies, are national public goods.
• In spite of numerous endorsements, the digital transition is not a public good, because it is better provided privately, nor is seeking to defend competitiveness in this industry. Regulation of digital activities and cyber security are European public goods.
• Strategic sovereignty is a multi-pronged concept that extends far beyond economic issues. The idea that the EU must foster a wide range of activities where it currently is weak or not present seems obvious, but it is not. Most suggested policies are protectionist and rely on industrial policies, both of which stand in contradiction with single market, arguably Europe’s biggest economic success.
• Research and Development, broadly defined, is a European public good. Some important steps have been taken in this direction but much remains to be done to come close to the level and scope of the US arrangements....
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