Models of supranational policymaking and the reform of the EMU

Abstract

Under what conditions do sovereign governments agree to create a common policy institution? And what model of supranational policymaking may be preferable? To answer these questions, we introduce a policy game of two interdependent countries with reciprocal negative externalities created by shocks to a socially relevant variable. Depending on national preferences over policy options and their outcomes, both countries incur welfare losses if governments pursue non-cooperative policy choices. Then we examine what kind of supranational policy regimes may be endorsed by both governments according to the Pareto criterion. Two regimes are “technocratic” (they do not take national preferences into account), two are “political” (they do). One political regime that we call “union” aggregates the national preferences additively. The thrust of our analysis is that the technocratic regimes are dominated by non-cooperation, so that the single alternative is between the union and non-cooperation. Yet an important point is that the union is the Pareto-dominant regime only within a limited range of asymmetry between countries’ preferences. This result has notable implications for the debate on the reform of the European Economic and Monetary Union (EMU) facing the challenge of further integration of member countries. Application to the EMU case is assisted by numerical simulations based on empirical parameters drawn from qualified external sources, which show that aymmetries in national attitudes towards policies that “Europe wants” may jeopardize the creation of a union in alternative to non-cooperation.