Farewell Utopia? Why the European Union Should Take the Economics of Federalism Seriously

Following the Brexit vote, the European Union (EU) is experiencing a deep institutional crisis. The economic theory of federalism may explain the causes of this crisis and suggest ways to overcome it. The core of the problem is that the EU has taken action in areas where it would have been preferable to leave the initiative to the Member States and that it has neglected to act in fields where the central level enjoys a comparative advantage compared to lower levels of government. The paper presents the economic criteria that may be used to decide the appropriate level of decision-making in a (quasi) federal union. It argues that political distortions have inhibited the use of these arguments and have consequently led to the current institutional crisis. Both market integration and the monetary union have become a goal in itself and are no longer connected to the original ambition of the Treaty to increase social welfare and guarantee a peaceful coexistence between the Member States. This article suggests a deregulation of market integration legislation and a reform of the Euro system, which are in conformity with the basic lessons of the economics of federalism.

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