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(1919-)
James M. Buchanan
 
: Kyklos, 1994, Vol. 47 Issue 3, p321, 19p
Kirchgassner, Gebhard
CONSTITUTIONAL ECONOMICS AND ITS RELEVANCE FOR THE EVOLUTION OF RULES
I. INTRODUCTION
If there exists any situation where Constitutional Economics, as developed by BUCHANAN and others[1], can be applied it should be a situation where a (real) new constitution is discussed and it is decided upon. Today, in Europe, there are two relevant cases: Firstly, in the new Eastern democracies new constitutions are being developed. Secondly, and this is the point this paper is about, the unification of (at least a major part of) Europe within the European Union goes along with the development of a constitution for this future Europe. Its future shape will depend to a large extent on this constitution, on the rules which are laid down in the European treaties, especially the Treaty of Rome in 1957, the Single European Act of 1987, and, as the last step until today, the Treaty of Maastricht in 1991.
Constitutional Economics is just one part of modern political philosophy since the second world war, whose most prominent contribution was probably RAWES [1971]. In this development (old) contractarian ideas are coming up again[2]. It is the intention of these approaches to rationalize the existence of certain (constitutional) rules, i.e., to derive rules which rational individuals in a constitutional situation would choose. Insofar, it is first of all a normative theory, providing arguments for (or against) the introduction of certain rules. However, at least partly, it can also be used as a positive theory, explaining why certain rules have been included into existing constitutions and others not. Thus, it can also be used to explain (parts of) an ongoing constitutional process.
Two kinds of rules which are closely related, have been at the center of the debates: rules about taxing and redistribution. Starting with RAWLS [1971] questions of 'justice' were discussed, especially by comparing the Rawlsian difference principle and the utilitarian rule of expected utility maximization. BRENNAN and BUCHANAN [1977, 1980] changed the perspective: their main theme was the protection of the citizens against exploitation by a Leviathan government which uses tax instruments. Thus, in both cases the discussions centered around fiscal policy; monetary policy was discussed, at best, at the margin. On the other hand, there have been some contributions of monetary economists dealing with constitutional problems of central banks[3]. These authors sometimes include Public Choice arguments, but they hardly take on a constitutional perspective, at least not explicitly. Nevertheless, these contributions can be helpful for constitutional discussions as well.
Until now, there have been only very few attempts to apply Constitutional Economics to the analysis of real constitutional processes[4]. If one considers the European Union from a constitutional perspective, there are two special features which are important: Firstly, during the last decades there has been a large amount of deregulation within the Union, abolishing quite a lot of national regulations. This induced a progress in productivity, which - according to national rent-seeking activities - hardly had been possible if the decisions had been made exclusively by national governments and parliaments. Secondly, there is a new bureaucracy in Brussels growing, which is under less democratic control than any national bureaucracy in the twelve member countries. As a positive theory, Constitutional Economics should be able to explain why deregulations on the European level were possible which did not take place at the national level. On the normative side, Constitutional Economy should provide suggestions how to tame the threatening Leviathan of the Brussels bureaucracy.
This paper is an attempt to go some steps in both directions and to demonstrate the relevance of constitutional economics for both aspects, by dealing with fiscal and with monetary policy problems. First, it is shown why Constitutional Economics is applicable to the European process, and how some aspects of this process are in line with Constitutional Economics (Part II). The Treaty of Maastricht about the introduction of a European Monetary Union (EMU) is taken as an example in Part III. Part IV deals with taxation rules. We finish with some remarks concerning other fields where, and reasons why Constitutional Economics could and should be made fruitful in discourses about the European process.
II. SOME THEORETICAL CONSIDERATIONS
Basic for Constitutional Economics is the distinction between two levels of argumentation: the constitutional level and the post-constitutional level of the ongoing politico-economic process. Constitutional Economics deals especially with the former level, where the individuals decide about the (constitutional) rules which are to be applied later on in the post-constitutional stage. The basic property of the constitutional level or, to use the term of RAWLS [1971], the 'original position', is that decision makers are ignorant with respect to their future position in society: they know the possible states of society with their different positions, but they do not know in which position they will be. This 'veil of ignorance' may even be stronger: the individuals might know the possible preference orderings, but they do not know their own future preferences. In such a situation the individuals will vote for 'just' and, therefore, for 'fair' (and also efficient) rules; justice is, as RAWLS pointed out, in such a situation, a question of fairness.
Which relevance, however, can such a model of argumentation have for actual constitutional considerations. This is answered in different ways by different authors. The main intention of RAWLS [1971] is to induce people to take on a 'constitutional perspective' and to make a mental experiment: when discussing constitutional rules or, more generally, moral rules, we can always ask ourselves which rules would be accepted by the individuals in the original position. The answer to this question can provide arguments for or against the acceptance of certain rules. Taking up such arguments in real debates, in only few cases this will lead to unanimous decisions, but in many cases it can narrow down the range of acceptable solutions.
Buchanan [1987] can he interpreted in a different way; his constitutional perspective is somewhat more realistic. He identifies the discourse on the constitutional level more with real discussions which take (or took) place within constitutional assemblies, e.g., in the constitutional convention of the United States in 1787, in the Swiss parliament ('Tagsatzung') in 1848, or in Germany in the 'Parlamentarische Rat' between 1948 and 1949, to name just a few prominent cases. If the members of such an assembly have no strong own (or party) interests, they might also vote for fair and efficient rules[5]. Moreover, if the voting rule which is used in such an assembly demands a large majority, say, two-thirds of its members, and if there is at least some pressure to come in the end to an agreement about some rules, there is a high probability that the assembly will decide in the direction of fair and efficient rules. On the other hand, as the current discussion in the constitutional commission of the German federal parliament (Bundestag) shows, as soon as the status quo can prevail, those who have benefits from the status quo are hardly willing to sacrifice any of these benefits and to accept new rules, even if they are - compared with the status quo - more fair and/or more efficient. In this situation, though constitutional rules are objects of the discussions, these discussions take place on the post-constitutional level with all its political pressures and influences.
These two different views are related to the normative-positive distinction made above. The Rawlsian perspective is clearly a normative one, it is intended to find (convincing) arguments in favour of certain rules, especially in favour of the difference principle. The Buchanan perspective of looking at actual constitutional assemblies is a more positive one. However, the difference between these two perspectives is smaller than it might seem to be at a first glance: The contributions of BUCHANAN and others to this field are nothing else than mental experiments, and they provide arguments in favour of certain rules, different ones of course, as those which are proposed by RAWLS [1971].
Which of these two views can be applied on the design of constitutional rules within the European Union? The Rawlsian concept is always applicable: We can always - and should perhaps more often - ask ourselves: Which rules would be chosen by individuals in the original position? However, arguments derived from such a discourse might politically not become very influential, even if they were published in leading newspapers.
The situation of a constitutional assembly is, however, not given; the process by which the constitutional rules are decided in the European Union is very special: it is neither a constitutional assembly as in the examples given above, nor is it a continuously ongoing process within an existing political system as in the United Kingdom. It is a formal process, going over a long time, with three special features: (i) It is only to a small extent citizens or their representatives who decide about the single steps; the main decisions are taken by the council of ministers, an assembly of the national governments of the EU member states. (ii) Most important decisions have to be taken unanimously. (iii) In many (important) cases there is a comparatively long time between the decision date and the point of time when the decision comes into effect.
Thus, it seems as if constitutional economics were not very relevant for the European process. However, the idea behind constitutional economics can be made fruitful also outside constitutional assemblies: We have to look for other institutional designs which provide incentives for (self-interested) individuals to decide for fair rules.
There are at least three real world situations where the 'veil of ignorance' can be sufficiently strong to lead to fair rules:
(i) If rules are discussed with respect to uncertain, future events, and if the impacts of these events on the individuals are (largely) independent from their current status, especially from their income position. In such a situation, there is enough ignorance about the future 'position' to force people to choose fair rules.
(ii) If individuals decide for their descendants. Individuals are uncertain with respect to the social positions of their grandchildren and, even more, with respect to their great-grandchildren, and so on. Thus, they will try to give them at least a fair chance. However, the amount of ignorance depends on the degree of social mobility; with low mobility the degree of uncertainty especially with respect to the nearer descendants can be rather low.
(iii) There is a long time span between the decision about the rules and the coming into force of these rules. Under this condition, which is a generalization of case (ii), the individuals may have small or even no personal interests at all, if they will not be personally affected. In such a situation, they might have an incentive to act 'morally' and, therefore, to vote for fair rules. It might be, however, that they will be affected, but that they do not know in which way. The current government might be in opposition, and the current opposition in government, e.g., when the rules come into force. Such a situation can provide strong incentives to vote for fair rules.
It is especially case (iii) which is relevant with respect to the process of the European unification. In many cases, for which the Treaty of Maastricht discussed below is just one example, there was (or is) a long time span between the point of time a treaty was signed and the date when it came (or will come) into effect. Moreover, in many cases decisions are rather about general rules, like the abolition of tariffs or of other trade barriers[6]. If such general rules come into force only after some (not too short) time span, it can be (and will be in many cases) open how the single member states will be affected by these rules. Thus, while on a first view the fact that there is no constitutional assembly might seem to make the constitutional view ineffective, in the actual situation of the European process constitutional arguments can play an important role.
What we observe in the development of the European Union is a kind of self-binding of national governments (and parliaments) by international treaties. The question is, however: Why do we need an international level for such self-bindings? As the decisions are taken unanimously, it can be taken for granted that all governments agree that - at least in the long run - the agreements are also in interest of their own countries. But why is it necessary to go to an international level, why can the same rules not be enforced by national agreements?
There are different answers to this question. The first reason is that, as discussed in traditional public finance and international trade theory, the following of such agreements produces an international public good, or, to state it differently, the situation is one of an international prisoner's dilemma. As is shown in the theory of strategic trade policy, a single country can gain by introducing trade barriers, if there is no (or not too strong) retaliation by other countries. Thus, to prevent free-riding of single countries to secure the production of the international public good, international coordination is necessary. However, this argument alone cannot explain the European process, nor, the long time-spans which are often laid between the decision on the rules and the coming into force of these rules.
Once such rules come into force there are often - at least at this point of time - clear winners and losers, even if there are long-run gains for all participants. (This is what makes it so difficult to come to agreements like the GATT, as has been seen again in the 'Uruguay-round'.) A longer time-span will give some time for adjustment. But, as explained above, its main purpose is to introduce some uncertainty about the affection of the different countries. Such uncertainty could also be generated in national decisions, but when the day comes that the rules become effective and if there are some major interest groups which are negatively affected, there is a high probability that national political forces keep the status quo. Thus, effective self-binding is rather difficult on the national level. On the other hand, within an international framework there are only very few possibilities to prevent the rules from becoming effective. This holds especially within the European Union, where a single member country cannot withdraw its consent, but at best try to start re-negotiations with all other member countries. As (rational) interest groups will recognize this, there are much less (rent-seeking) activities to be expected in situations of international compared with national self-binding.
Thus, it is the special combination of setting general rules, providing a long time-span and binding the hands of national political authorities by international treaties which made large deregulations within the European Union possible. On the other hand, as the situation is rather different once the EU negotiates with other countries, it is not astonishing that with respect to third countries the EU behaves quite differently: rather like a protectionist.
III. AN EXAMPLE: THE TREATY OF MAASTRICHT AND THE EUROPEAN CENTRAL BANK
The Treaty of Maastricht fixes the way to the European Monetary Union (EMU)[7]. All twelve governments accepted that - in principle - a monetary union generates economic (and possibly also political) advantages for all member countries[8]. The question was only how to proceed towards a monetary union and which countries should be included. This question has been answered first, by stating some criteria which the members of this union have to meet. Secondly, the date when these criteria have to be met is postponed until 1997 or 1999, respectively. Today, it is rather open which of the member countries will be able to meet these criteria. This holds even for the Federal Republic of Germany, which a few years ago seemed to meet all demanded criteria without problems.
The Maastricht treaty implies that the national member states transfer some part of their sovereignty to the institutions of the European Union, especially with respect to monetary policy. Even if all countries agree that such a transfer should take place, some (or even all) governments might try to resist once this transfer actually happens, as it reduces their personal power. However, due to the long time-span, probably none of the politicians who signed the treaty will still be in office when it comes into effect and, therefore, none of them will suffer from a personal reduction of power.
As the treaty was signed, there were quite a lot of national objections against this union. Manay Germands feared the danger of a decline in price stability. Other countries were afraid of a domination by the German Bundesbank[9]. Today, the rate of inflation is lower in France than in Germany. And the largely increased public debt in Germany causes doubts whether the German monetary policy will have the same strong position in the future as it had during the last decades. Thus, if the monetary union comes at all, it is open what the real costs will be to the countries who enter this union; however, in 1997 or 1999 there will no longer a veil of ignorance with respect to this question.
But this is not the only point where constitutional considerations are relevant with respect to the monetary union. Another important point is the relation between monetary and fiscal policy within Europe. In the discussion about the possibility of a European Monetary Union it is often stated that such a union can only work if within the European Union monetary and fiscal policy is coordinated[10]. Setting aside whether this is really true, this argument is sometimes used to demand first the installation of a common political authority which is able to coordinate fiscal policy between the member countries or at least to effectively restrict the leeway of national fiscal policies before a monetary union with a single currency starts.
It is without doubts that uncoordinated fiscal policies can cause problems for a common European monetary policy[11]. Nevertheless, the Maastricht treaty does not provide a (new) coordinating institution for fiscal policy[12]. Instead of such a mechanism, according to the treaty, the European Central Bank (ECB) is not allowed to directly finance the deficit of any member country. This should induce countries to keep fiscal discipline. However, a problem of time inconsistency can arise if the debt of one of the member states becomes too large and this country is in danger of going 'bankrupt'. Can the ECB in such a situation resist the political pressures and strictly observe its constitutional rules?
Under the assumption that political authorities behave like benevolent dictators, the easiest solution to this problem would be to 'complete' the Maastricht treaty and to supplement the Maastricht institutions by an effective coordination mechanism for fiscal policy. However, everyday experience with national governments and their influence on their monetary authorities is that they do not behave as benevolent dictators but, as public choice theory explains, pursue their own selfish objectives. Why should this be different on the European level? As the results of national political influences on monetary policy are sometimes disastrous, why should this be better on a more centralized level? On the contrary, the fiscal authorities of a United Europe will have similar incentives to instrumentalize monetary policy for their own purposes, which could result, e.g., in Europe-wide political business cycles, and - finally - in a considerable amount of inflation.
This is not an argument to principally reject the EMU. However, the constitution of such a EMU should be so that one can expect a reasonable monetary policy outcome, one which leads to a low rate of inlation and creates few (if any) monetary surprises, which generate additional uncertainty in the economic process. Thus, as far as possible, the European monetary authority should follow a (contingent) rule with - on the average - a rate of money growth which should be in the range of productivity growth[13]. To enable the ECB to perform such a monetary policy two conditions are necessary: Firstly, the ECB should be as autonomous as possible. It should be able to resist the demands for discretionary interventions coming from political authorities, who, e.g., would like to have enough support to win their next election. Secondly, there should be precommitments of the ECB policy, which enable the private economic agents to build up (rational) expectations.
Evidence from European countries shows, that strong and independent central banks are most effective in reaching price stability: The two countries which have the best record in this respect, Switzerland and Germany, are both federal countries and have strong and rather independent central banks[14]. Independent central bankers, whose prestige, especially within their own reference group, the other (private) bankers, depends upon the degree to which their main objective, price stability, is realized, have strong incentives to pursue this goal and to resist government proposals which lead in any other direction[15]. The federal structure can, as the German example shows, also be important, a fact which largely has been neglected in the literature so far. As the (leading) central bankers are appointed by political processes, in federal systems the political backgrounds of the people on the board can be (and will be in many cases) quite different. This reduces the probability that the board acts according to certain political preferences and, in this way, it strengthens the independence of the central bank.
This makes clear that - if an EMU is to be introduced- it is necessary to have a similar strong (or even stronger) central bank (or federal reserve system) as in Switzerland or Germany, and it has to be largely independent from political authorities[16]. The Treaty of Maastricht has taken this into account and it provides a constitution for the European Central Bank which, though oriented on the German example, gives it - at least formally - even more independence than the Deutsche Bundesbank has[17]. Moreover, the ECB has a federal structure, and it will be located in Frankfurt. Thus, no single national government can expect that it will be strong enough to force the ECB to pursue a policy in favour of its interests (re-election requirements), and the ECB is also independent from the EU political authorities.
One might ask how it was possible to pass such a constitution for the ECB despite the fact that outside Germany there existed at this moment no independent national central bank in the whole EU. Parts of the answer lie certainly in the attractive German example: a combination of an independent central bank and high price stability. A second reason might be that for every participating country it is to be preferred to have an independent ECB compared with a situation where (several) other member countries have influence but not itself. This arguments holds especially for smaller countries, who never have a chance to get strong (political) influence on the ECB. But what is also important, to pass the constitution for such an independent institution was (probably) only possible because there existed no corresponding political authority. Such a political authority with a competence to coordinate fiscal policies and using the argument that fiscal and monetary competencies have to be coordinated would have had strong incentives to make the ECB dependent, and it probably would have been successful. Thus, the absence of a corresponding (fiscal) political institution might have been a (necessary) condition for the creation of an independent ECB.
This does not imply that it is not necessary to coordinate monetary and fiscal policy in the EU. This is a different question. However, it is a strong (constitutional) argument to create first the common monetary institutions and - if demanded - only in the second step common fiscal institutions. In this respect the actual development to create the institutions for a European Monetary Union and especially the ECB before deciding about common fiscal institutions proceeded in the 'correct' order.
IV. ON TAXATION
As mentioned above, at least since RAWLS [1971], rules for taxation and redistribution have been at the center of the debate in Constitutional Economics and the related philosophical literature. Insofar, Constitutional Economics should be able to provide helpful arguments for the debate about tax harmonization and tax competition in the European Union, which has taken place recently and which still continues. In a Rawlsian mental experiment, one can ask the question which taxes would be given to which level, if the individual citizens have to decide behind a 'veil of ignorance'.
However, up to now there are only very few papers in this area which take on a constitutional perspective[18]; most contribution are just applications of traditional public finance (optimal taxation) theory, focusing on efficiency and allocation aspects. Thus, the question of BRENNAN and BUCHANAN [1977, 1980] how the citizens can protect themselves against exploitation by the bureaucracy has been neglected.
One might try to apply just the rules derived by these two authors. However, while concentrating on the protection of the citizens against a Leviathan government, they do not give the efficiency problem the weight they should have. Thus, when discussing the taxing rules of a future Europe from a constitutional perspective, both aspects have to be taken into account, the efficiency and distributional aspects as well as the protection aspects.
Taking on a constitutional perspective, we have to distinguish two different groups who will be important in the post-constitutional stage: the government, including the public bureaucracy, and the private citizens. Behind the 'veil of ignorance', the individuals do not know whether they will be members of the government or whether they will be private citizens later on. Therefore, they have to take into account interests of both groups. This holds especially true if they use a utilitarian rule as proposed by HARSANYI [1975]. On the other side, if they apply the Rawlsian difference principle it is only the interests of the least powerful group which counts, in this case of the private citizens. Therefore, in the following we ask how these citizens can protect themselves against exploitation by politicians and public bureaucrats, taking as granted that the latter have such an institutional advantage and will not come into the weaker position[19]
Even then however, it is not the only and not even the dominant interest of the individuals to control the public bureaucracy. The main objective is to secure the provision of public goods and of redistribution in favour of the poor. Both activities can hardly been done without any taxation and any public employees.
Thus, the question arises on which government level which tasks shall be performed and where the revenue necessary to perform these tasks shall come from. The taxes have to be assigned to the different government levels, especially personal and corporate income taxes, general sales (value added) taxes and specific consumption taxes. Different assignment schedules will have different - positive and negative - allocative and distributional consequences, which have to be taken into account[20]. However, as soon as government and public bureaucracy is needed, a control problem arises. To keep this problem as small as possible, the taxing rules have should be set in a way that, even if the public officials behave purely selfish, the social outcome is acceptable for the private citizens.
Any government will act more in accordance with the preferences of the individuals, the more the citizens are able to control the government. An important mean of control is the introduction of elements of direct democracy into a constitution[21]. Such elements should be included in an European constitution. A second important mean relates to the federal structure: The lower the government level at which a public activity is performed, the stronger are the possibilities for the individuals to influence the respective decisions. From this point of view government tasks should be allocated on levels as low as possible[22], and the sub-federal governments should be equipped with own means to finance their activities.
At the lower levels, with smaller communities, the citizens have better possibilities to control the government and to force it to act according to their preferences. This would hold even if there were only one fiscal unit. On the other hand, as the bureaucracy has informational advantages even in small communities, the existence of several communities at the same level provides the citizens with possibilities to compare and, consequently, to better control the public sector activities. Both effects make 'voice' of the people more effective. Moreover, if there are (on a low government level) different political units between at least some people can choose, 'exit' can also become a mean of control for the bureaucracy[23].
With respect to control possibilities by voice, there exists a significant difference between progressive (direct) and proportional (indirect) taxes. If tax rates can only be changed via changing a law, which is with respect to indirect (proportional) taxes the usual way it works, any relative increase of the government share has to be decided via the parliamentary process (and possibly also via a referendum). This ensures a public discussion, and as recent experience not only in the U.S. and Germany shows, at least as long as government seeks for re-election, it will hesitate to increase taxes and it faces difficulties to get approval by the parliament, not to speak about the general public. Thus, increases of indirect tax rates are comparatively rare events, even with respect to quantity taxes, whose real yield is eroded due to inflation. Such proportional taxes leave a relatively small leeway for Leviathan behaviour of a government.
Progressive direct taxes, on the other hand, create larger revenue not only whenever private economic activity and - consequently - private income increases, but also as long as inflation prevails, if there is no corresponding indexation. Thus, there is hardly ever a need for a change of the tax law if the government wants to collect higher revenue: It gets it automatically. During the whole history of the 'old' Federal Republic of Germany, there has never been a permanent increase of income tax rates based on a change of the tax laws, but - in contrary - several rate reductions took place, which, however, at least until 1990 not even balanced the effects of inflation[24]. Such 'tax-reforms' were used to present 'tax-gifts' to the general taxpayer and/or special groups before general elections. Thus, progressive taxes provide a comparatively wide leeway for government to behave as a Leviathan.
This implies that the necessity of control possibilities differs with respect to different taxes. For taxes whose revenue raises (nearly) automatically there is more need of controllability compared to (indirect) taxes where it is most difficult for the politicians to increase the (relative) revenue: Much more control by the citizens is needed to keep down direct taxes than to restrict indirect, especially general sales taxes.
Still another problem arises with 'specific' taxes, which are borne only from small parts of the population. At the post-constitutional level it is relatively easy to get support for an increase of such a tax from the majority of people not involved. This creates additional leeway for the government. On the constitutional stage, however, the individuals will intend to prevent themselves from being burdened by such a tax. Therefore, they will be very hesitant to admit the use of such taxes at all.
Following these considerations, indirect (proportional) taxes should be preferred at high levels where control by citizens is difficult. Progressive taxes should be given to low governmental levels, where the individuals have more influence. Specific taxes in the above sense should be avoided as far as possible. This implies that the supra-national level of the EU should be financed exclusively by indirect taxes, especially general sales or value added taxes, but obviously not by (progressive) personal income taxes. On the other side, personal income taxes should be assigned exclusively on the lower government level where better control possibilities exist.
These proposals take into account the Swiss experience described in KIRCHGASSNER and POMMEREHNE [1994] that the assignment of progressive direct taxes to subfederal levels with own tax autonomy does not lead to fatal distributional consequences. Redistribution from the rich to the poor can - as today - be a task of the national (or sub-national) governments. There might be some need for redistribution from the rich to the poor countries or regions among the EU members. Yet, to achieve this, no EC-wide direct, progressive tax is necessary, the revenue from a general sales tax or, to take other examples, mineral oil or carbon dioxide taxes, can be used.
V. CONCLUDING REMARKS
This paper is an attempt to show that it can be useful to take on a constitutional perspective as proposed, e.g., by Constitutional Economics, when discussing problems of the constitution of the European Union. As examples the constitution of the European Central Bank and the assignment of different taxes to different government levels are taken. Thus, despite the fact that Constitutional Economics has hardly been applied to problems of the European process so far, it should be obvious that it can be made fruitful in this area.
Of course, there are other problems which could be tackled as well. One is certainly the question of direct versus representative democracy. As mentioned above, at the moment there is only very indirect control of the main European institutions: the council of ministers and the commission. In the original position, the individuals would probably change this and select at least some element of direct democracy. Another point is the voting rule. The unanimity which is demanded today for most decisions can be seen as being in line with Constitutional Economics, at least as long as the governments of the different countries (and not the citizens themselves) decide and as long as constitutional rules are considered. It is questionable, however, whether the individuals in the original position would accept that decision rules on the post-constitutional stage also demand unanimity.
However, it is not only that Constitutional Economics could be applied to the European process, there are also good reasons why it should be applied. Up to now, most of the discussions about the European development are purely 'technocratic'. This holds for the political as well as the scientific discussions. With respect to the latter ones, this is obvious for the discussion about tax harmonization and competition. The methodological basis is, as mentioned above, the theory of optimal taxation, i.e., traditional public finance. In this discussion it is asked how tax rules should be assigned which enable a benevolent dictator to generate a socially efficient outcome. Of course, one might underlay a political model of 'proportional representation' and, thus, assume that the government is closely following the citizen's interests[25]. However, such a model neglects the fact that politicians and bureaucrats have own interests, the theoretical insights which have been derived from this assumption in the theory of public bureaucracy[26], and the available empirical evidence that the interests of politicians and bureaucrats are in many cases contrary to those of the private citizens[27]. As there is nearly no democratic control in the EU, this question is even more relevant there than on the national levels. Nevertheless, the question of protection of the private citizens against the Brussels bureaucracy has never been discussed in this literature, despite the fact that this question plays a major role in the actual discussions of the citizens[28].
With respect to political discourses, a constitutional perspective could be no less fruitful. If the individuals in the original position decide to build up an economic (and political) European Union, they know that, to be stable, in the post-constitutional situation such a union has to be accepted by the (majority of the) private citizens. As, according to DOWNS [1957], rational voters are rational ignorants, it is necessary to build the European Union in a way that at least some advantages of this union can be perceived by the ordinary citizens as well, even if they are not well informed. Up to now, however, the large advantages of the European process for the citizens are very indirect and often not at all obvious, while the public discussions center about the interests of (producer) interest groups and, as mentioned, about the influence of the Brussels bureaucracy. Thus, today the political opinion of ordinary citizens about the European Union varies between apathy and refusal; the public support for the European process is in most EU member countries rather small. If in the actual political process a constitutional perspective would be applied more often, this could lead to higher acceptance of this process by ordinary people.
SUMMARY
This paper is an attempt to apply Constitutional Economics in its positive and normative aspects on the European unification process and to develop some proposals for European constitutional rules. First, it is shown why this approach is applicable to this process, and how some aspects of this process are in line with Constitutional Economics. Some aspects of the treaty of Maastricht about the introduction of the European Monetary Union is analysed under this perspective. Fiscal rules are developed, concerning the assignment of direct (progressive) and indirect (proportional) taxes on the different governmental levels. It is concluded by some remarks concerning other fields where, and reasons why Constitutional Economics could and should be made fruitful in discourses about the European process.
Notes
1. See, e.g., BUCHANAN and TULLOCK [1962]; BUCHANAN [1975, 1976, 1987, 1987a]; BRENNAN and BUCHANAN [1977, 1980, 1983, 1985]; BUCHANAN and WAGNER [1978]. For reviews see CONGLETON [1989] or SANDMO [1990].
2. Besides RAWLS [1971] and BUCHANAN [1975], the most important contribution to this literature might be NOZIK [1974]. For a comparison of these 'New Contractarians' see GORDON [1976].
3. See, e.g., NEUMANN [1991]; VAUBEL [1992].
4. See, e.g., HOLCOMBE [1991] for the analysis for the American constitution, FAINA MEDIN and PUY-FRAGA [1988] and BUCHANAN [1991] with respect to the European process.
5. These can be situations of 'low-cost-decisions', where people are more inclined to behave according to moral rules than in situations of 'high-cost decisions' as, e.g., on the market place [see KIRCHGASSNER, 1992].
6. This is in contrast with many actual policy decisions of the council of ministers or other European committees, if, e.g., agricultural prices are adjusted, where there are very clear winners and losers and where, due to the unanimity constraint, the loser countries have to be compensated by the winner countries.
7. For a discussion of this treaty see HAUSER [1992] and BERTHOLD [1992].
8. There is an estimate that a monetary union would save (all countries together) the amount of 30 billions of German Marks per year. On the other hand, there are also good reasons which cause doubts about the validity of this argument and of the usefulness of a EMU, at least at this point of time (see, e.g., VAUBEL] 1990]). However, in this paper we accept the political decision of the twelve member states and do not discuss the advantages and disadvantages of a currency union.
9. Actually, without being explicit in such a position during the 80s Germany dominated the European Monetary System (see, e.g., KIRSCHGASSNER and WOLTERS [1993, 1994]).
10. The coordination problem of fiscal policy in a monetary union is discussed, e.g., in FRENKEL and GOLDSTEIN [1991]; ANDERSEN and SORENSEN [1993] and, concerning the U.S. experience, EICHENGREEN and BAYOUMI [1993].
11. See BERTHOLD [1991], pp. 184ff.
12. The existing institutions provide already a lot of possibilities for the coordination of fiscal policies; however, there are only few possibilities to force single member countries to perform certain policy measures.
13. Following a fixed rule, as proposed originally by FRIEDMAN [1948] and since then by many monetarist economists might be a theoretical ideal but is hardly possible (and also not 'optimal') in a world of uncertainty.
14. For empirical studies about the relation between central bank independence and price stability see, e.g., BANAIAN, LANEY and WILLET [1983]; HAVRILESKY and GRANATO [1993] or EIJFINGER and SCHALING [1993].
15. Of course, this does not preclude debates how to achieve this objective, e.g., following a money supply rule or by interest rate targeting, and they might, for one reason or another, follow the 'wrong' policy.
16. This does not imply, however, that there should be no political control at all of central bankers, as has been proposed in several papers by, e.g., VAUBEL [1992] and NEUMANN [1991]. As like other people central bankers are selfinterested and do not necessarily strive for social welfare, they also should not be allowed to come in a dictatorial position.
17. In Germany, the independence of the Bundesbank is guaranteed only in the 'Bundesbankgesetz', a federal law, and not in the 'Grundgesetz', the federal constitution.
18. See, e.g. FAINA MEDIN and PUY-FRAGA [1988] or KIRCHGASSNER and POMMEREHNE [1993]. In the later paper a more extensive discussion of the tax assignment problem is given.
19. On the basis of this argument, one can defend the objective function used in BRENNAN and BUCHANAN [ 1977, 1980] against the critique of WEST and CORKE [1979].
20. These consequences have extensively, but rather controversial been discussed in the literature. See, for some recent contributions with respect to the European process, GENSER [1992]; SINN [1990]; MINTZ and TULKENS [1986, 1993].
21. See for this, e.g., KIRCHGASSNER and FREY [1994].
22. This is an implication of the principle of subsidiarity which is part of the European treaties (see, e.g., CEPR [1993]).
23. For the different effects of voice and exit see HIRSCHMAN [1970].
24. See for this, KIRCHGASSNER [1985].
25. For a politico-economic model which proceeds in this way see WINER and HETTICH [1993]. For the theory of probabilistic voting see COUGHLIN [1992].
26. See, e.g., DUNLEAVY [1991].
27. For the situation in Germany, see, e.g., ARNIM [1993].
28. The fear of the Brussels bureaucracy was a major reason for the rejection of the treaty about the European Economic Area (EEA) by the Swiss electorate.
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