A Social Europe: Political Utopia or Efficient Economics? An assessment from a public economic approach

Theories of fiscal federalism state that the “redistribution branch” of the government should be attributed to the central level in order to prevent social policy competition. However, when preferences are diverse and production factors are not perfectly mobile decentral redistribution provision may be optimal. But, social security policy consists of more than redistribution. In this paper the traditional fiscal federalism literature is enriched by extending the traditional framework with five functions of social security: horizontal and vertical redistribution and insurance based on income solidarity, risk solidarity and solidarity of chance. The optimal attribution of competences within the European Union is theoretically analysed from a public economic approach. Hence, the relevant factors that determine the optimal decision level for social security are evaluated and related to the empirical economic literature. Explicit attention is paid to co-ordination methods as a solution between a completely central or decentral provision of social security. This is an application of the proportionality requirement of European policies as laid down in the Amsterdam Treaty. It is analysed for which social security functions and under which circumstances delayed integration, the Open Method of Co-ordination (OMC), minimum harmonisation standards, matching grants and flexible integration may be welfare enhancing. The analysis shows that for redistribution as well as for insurances based on income solidarity, delayed integration may be a reasonable compromise between efficient allocative mobility and inefficient social security tourism. Furthermore, the OMC can provide some economies of scale by policy learning, without an inefficient transposition of power to the European level. Paradoxically, the least “social” functions of social security seem to be the first, for which integration may increase welfare. E.g. flexible integration may be useful for supplementary pensions for mobile workers, where economies of scale could be reached. However, this contrasts sharply with several proposals put forward to achieve more positive integration. A “Social Europe” may be a political dream. From a public economic approach, it is inefficient economics.