LAW AND POLITICS: the use of public law in regional coordination

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LAW AND POLITICS: the use of public law in regional coordination
By Jan-Erik Lane (University of Geneva and National University of Singapore)
ABSTRACT
European integration may be regarded as a unique process of regional coordination, which
harbours a new model of economic integration that can be applied in other parts of the world
such as e.g. the ASEAN. Understanding European integration entails a search for a different
approach than that launched by Austrian Economics and Law & Economics, focussing upon
spontaneous orders. Law may evolve from a political process of regional coordination where
governments rely upon treaty law and supranational legislation. Critical in European
integration has been the reliance upon the Civil Law approach, whose usefulness has been
underestimated in the literature on economic regulation. It underlines the useful of the
introduction of general and abstract norms in guiding coordination towards political goals.
INTRODUCTION
The emergence of European integration calls for an analysis in order to understand how such
major institutional developments could take place within such a limited period of time, or 50
years. The process of European integration is different from all comparable processes of
integration in the emphasis given to law as an instrument of achieving the goals of integration.
Whether one deals with economic integration or policy harmonisation in Europe, it is EU law
that is the core of the process of regional integration. Thus, real economic integration has gone
far due to the institutional integration of Western Europe. And policy convergence is strong
for the same reason. This amounts to a beautiful success of governance without a state, a
display of strength from the Civil Law tradition. Let me explain why I argue this way.
Thus, the purpose of this article is to discuss the nature of EU law, as we need a better
understanding is how such a spectacular development of public law could prove beneficial for
real life economic outcomes. The main approach to law, viz. Law & Economics fails to
appreciate the success of the Civil Law approach used in European integration, which is also
in contrast with Austrian economics and its teachings concerning coordination in social life.
The Austrian School underlines the advantages of spontaneous coordination whereas Law &
Economics emphasizes that the Common Law framework focussing upon case law is the legal
approach most suitable for enhancing economic efficiency. Yet, the emergence of EU law
forces us to reconsider public law, especially in its Civil Law approach, and its relevance for
promoting economic efficiency through a regional coordination mechanism. The EU approach
to regional integration offers a model of institutional development which is relevant in other
parts of the world, for instance for the ASEAN. It is a matter of politics and law, or the
employment of legal codification of basic principles conducive to regional economic
integration.
EU: REGIONAL COORDINATION
The emergence of EU law as a major legal framework in Europe would naturally lead one to
the conclusion that EU displays stateness. After all, law and state are intimately connected, as
legal scholars of a positivist bend would suggest. However, the equation Law = State, does
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not apply in relation to the Union. Governments can create a legal order in the form of a union
without setting up a federal state or a full federation. The EU lacks several of the most
important state attributes, but it harbours none the less a strong legal order. Of its three pillars
it is the EC, which constitutes a legal order. It is the Economic Community, which is the
model for future integration as it displays the firmness of law at the same time as it offers
flexibility. As a matter of fact, the EC offers a solution to a classical problem in political
science: How can states cooperate without abandoning what is the characteristic feature of a
state, viz its national sovereignty? The European answer to this question has not been to erect
a new federation but to maintain the nation-states in Europe while at the same time delegating
enough power to the Union so that it can function as a legal order.
Integration can take place in two different ways. Either the integration process is
unintentional, working itself out through the invisible hand of market interactions resulting in
a so-called spontaneous order. Much of globalisation is of this kind of unintentional
integration, for instance through private law mechanisms such as contracting and arbitration.
Economic dependencies tend to result in economic integration, either in the real or the
financial economy. Or integration is done through a process of institutional policy-making
where explicit rules are enacted and there is a master design behind various integration
measures. European integration has been of both these types. Here we focus upon how
governments can enhance integration through the creation of institutions and the making of
public policy.
When the integration process is analysed as a choice or as an intended process of change, then
it may be looked upon from the means-end perspective. And one may evaluate the extent to
which expectations have been materialised. Integration in Europe has occurred both
unintentionally, especially economically, and intentionally. When governments decide to
integrate their countries, then how could they proceed? What are the lessons from the great
European experiment, which is still ongoing with the major Copenhagen decision to enlarge
the Union to 25 members by May 1 2004?
When governments decide to integrate economically, then what strategy can be employed?
Economic integration will be promoted through the creation of common rules for economic
activities, ranging from an economic zone all the way to a monetary union. The European
approach to creating a level playing field including a common market and one monnaie
unique is worth a closer analysis. An explicit and intentional process of integrating countries
must rely upon the states. Governments may initiate a policy of integration by amalgamating
the countries in a Union. Integration may be achieved by the erection of a new state, but
European integration has not gone this far. European integration is sui generis, accomplishing
both strong integration by fiat while retaining the sovereign nation-states of Western Europe.
How was this possible - an institutional innovation in the history of mankind? Reply: through
the explicit development of public law as the foundation for regional state coordination. What
mattered critically in the success story of European integration was the codification of general
principles through treaties, legislation and case rules by the European Court of Justice – what
I will call the Civil Law approach to regional integration. It should be contrasted with the
main theory of economic regulation within Austrian Economics and Law & Economics.
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SPONTANEOUS ORDER
Whatever the differences may be between the classical Austrian School and the modern
school of Law & Economics, one may still argue that these two schools share the same view
upon the distinction between state and market as well as upon economic regulation. It is
certainly the case that the theoretical argument that lead to the scepticism of governmental
intervention differs between the classical Austrians and the modern adherents of transaction
cost economics with Law & Economics. Here though the emphasis is upon what unites the
two schools, which is their preference for voluntary coordination and the emergence of
spontaneous orders such as the competitive market and the Common Law institutions.
For Law & Economics as well as for Austrians, explicit public economic regulation is mainly
destructive of prosperity because it misallocates resources and it constitutes a negative for
small business and entrepreneurship. Thus, explicit public policy will be captured by special
interest groups and it will lead to lower standards of living. And antitrust policy, in contrast to
its stated policy, does not generate more of competitiveness. Dumping is not a problem
because any firm that attempts to sell below the costs of production will merely suffer loses.
The moment it attempts to raise prices, it invites competitors back into the market. Civil rights
legislation represents one of the most intrusive regulatory interventions in labour markets.
When employers are not able to hire, fire, and promote based on market criteria of merit, then
dislocations occur within the firm as well as in labour markets at large. Moreover, civil rights
legislation, by creating legal preferences for some groups, undermines the public sense of
fairness that is the market's hallmark. Moreover, governmental economic regulation by fiat
tends to impede the entrepreneurial discovery process. This process is based on having a wide
array of alternatives open to the use of capital. Yet government regulation limits the options of
entrepreneurs, and erects barriers to the exercise of entrepreneurial talent. Safety, health, and
labour regulations, for example, not only inhibit existing production, they impede the
development of better production methods.
Finally, Law and Economics as well as Austrians tend to be critical of redistribution as it
takes from property-owners and producers and gives, by definition, to non-owners and nonproducers.
This diminishes the value of the property that has been redistributed. Far from
increasing total welfare, redistribution diminishes it. By making property and its value less
secure, income transfers lessen the benefits of ownership and production, and thus lower the
incentives to both. Thus, Austrians reject the use of redistribution to stimulate the economy or
otherwise manipulate the structure of economic activity. Increasing taxes, for example, can do
nothing but harm. A shorthand in Austrian economics for taxes is wealth destruction, because
they forcibly confiscate property that could otherwise be saved or invested, thus lowering the
number of consumer options available. Moreover, there is no such thing as a strict consumer
tax. All taxes decrease production through excess burden to the economy.
Now, how do we reconcile the scepticism of the classical Austrians and the modern school of
Law & Economics with the success of the European project? The European Union is not a
spontaneous order, but it has achieved the miracle of integrating Western Europe
economically in a short period of roughly fifty years. Two forces have driven west European
integration in close collaboration. On the one hand, there is the institutional integration of
countries with separate legal systems and national traditions. On the other hand, there is farreaching
economic integration creating one market economy with closely interlinked financial
markets. Here we focus upon the institutional integration of Western Europe, which has been
accomplished by fiat, i.e. by a series if key policy decisions implemented through a political
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process. We find both the making and implementation of economic rules as well as the
conduct of massive redistributive policies in the form of the Common Agricultural Policy and
the Structural Funds.
Thus, the successful European project forces us to reconsider the negative view of public law
and regulation that is pervasive in Austrian Economics as well as in Law & Economics.
Public law may be employed as a tool for intentional change, building upon a series of policy
decisions implemented through a public law mechanism. Public law results to a considerable
degree from political decision-making, where governments play a key role. The European
Union is a success because of the existence of European Law, which is the outcome of the
Civil Law approach, meaning the codification of general principles and the predominance of
legislation over case law.
What makes the EU unique is the solidness of its basic legal framework within the pillar One:
the Common Market, which consists of true public law and not merely recommendations or
expressions of intentions typical of international public law. Other continents may wish to
imitate the European project as they set up regional coordination mechanisms as the proper
response to globalisation. Let us explain how public law can enhance economic efficiency in
the process of regional integration.
PUBLIC LAW AS THE TOOL OF REGIONAL COORDINATION
What the basic idea in the Law & Economics literature bypasses entirely is the explicit use of
law for the purpose of intentional integration - institutional policy-making. The emphasis in
Law & Economics is upon the capacity of law to promote unintended outcomes, especially
economic efficiency. This is the positive theory of Common Law, where judges make
reasonable judgements, which tend to promote economic output. However, the use of law as
an explicit instrument for European integration is an entirely different matter. Here, it is the
activities of governments creating treaty law and supranational legislation, which is essential.
Thus, it is not the unintentional developments in law, which is the crux of the matter, but the
explicit use of law making through codification and the making of statute law in order to
further develop treaty law.
In law and economics explicit law making is treated as a mere aberration, as it will be invaded
by rent-seeking activities. Thus, case law is given the driver's seat in enhancing positive
outcomes. However, European integration has not been primarily driven by case law, although
the activities of the ECJ have been very important for the emergence of EU law. EU law
results from a balanced combination of treaty law, secondary legislation (statute law) and case
law. It is a triumph for the Civil Law approach.
In law and economics it is the aspects of law that the Common Law stands for which are
emphasized. However, the success of EU law is based upon the aspects, which the Civil Law
approach expresses. EU law is based upon codification, the derivation of general principles of
law as well as abstract legal reasoning. Although case law plays a prominent role, it supports
statute law and treaty law. Thus, EU law is an intentional process of legal development where
the making of law plays a major role. It is public law writ large, establishing economic
regulation of tremendous import. The Common Law approach singled out for praise in law
and economics is basically tort law or private law, where case law is relied upon to correct for
or supplement statute law, judges using the process of law to arrive at general principles of
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jurisprudence enshrined in key decisions. EU law is the opposite of the Common Law
framework and it has changed Western Europe in a relatively short period of time.
Public law as an instrument of change needs to be reassessed. Its possibilities have not been
correctly evaluated in law and economics. Public law may be employed for governance
purposes, as it displays both inertia and flexibility, the first deriving from constitutional law
and the second from administrative law. EU law displays these two properties, inertia and
flexibility, combining treaty law with secondary legislation. Public law can be established in a
permanent fashion without the traditional framework: constitutional law and administrative
law.
PUBLIC LAW AS INERTIA
The key features of EU law are laid down in treaty law. And the major treaties build upon
each other and have not been revised too often. This enhances stability. The revision of the
treaties proceeds in an incremental manner whereby old rules are simply given a new number.
EU law is placed in a wider context of conventions called Acquits Communitarian, which
entails that major changes in the treaties can only be done through unanimity among the
member states.
The bulk of EU law has thus changed slowly, only four major treaty revisions occurring after
the Rome Treaty during 50 years. However, the treaties - one on the Union and another on the
Community - only contain the essentials. Besides there is secondary legislation: regulation,
directives and decisions. It has been claimed that the EU lacks a basic constitutional
document. However, an EU constitution can only be written down until such time that the
participants know what structure they wish the Union to have. Forcing a choice between
federalism and intergovernmentalism would not make for more of stability. Public law comes
in the form of constitutional law and administrative law. EU law is so far mainly
administrative law. And it has proven enough to bring about economic integration in terms of
a common and enforceable set of rules.
PUBLIC LAW AS FLEXIBILITY
EU secondary legislation offers a complement to the treaties. Here rapid changes are possible
as a response to new circumstances or changing needs. It is difficult to estimate the true size
of secondary legislation in the Union, but most estimates count the number of separate laws
and regulations in thousands. EU legislation is the outcome of a transparent process of
decision-making that is highly institutionalised and checked. Although new policies require
considerable preparation in the complicated system of advice and review that predates a
proposal from the Commission, it remains true that there is some scope for initiative and
change. One may interpret the Union policy-making process as a rational trial and error
process through which policies are sorted and refined.
The combination of treaty legislation and secondary legislation is conducive to flexibility in
policy-making. Besides the making of economic regulation by governments, there is case law
which offers a final opportunity to check policy mistakes.
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STATUTE LAW AND CASE LAW
It is true that EU case law is a most vital part of EU law. However, case law in the Union is
not the law. Public law may benefit from case law, as the alternatives are not either public law
or case law. EU law consists to a large part of case law, i.e. the rulings of the EJC. However,
case and statute law go hand in hand in the evolution of EU law, one conditioning the other.
EU case law does not replace treaty law or secondary legislation. In stead it operates to
support policy-making by clarifying the general principles underlying the EU project,
especially the meaning of the Four Freedoms.
EU case law belongs to the Civil Law tradition, meaning that it is orientated towards the
derivation of a small compact set of principles. These high-powered rules may then be
recognized in treaties and secondary legislation. This is the codification of universal norms,
backed up by judge made law: “mutual recognition”, “proportionality”, “subsidiarity”, etc.
Again we underline explicit decision-making by state officials, attempting to steer the
evolution of events.
THE MECHANISM OF EU LAW
The European Union harbours a legal order which displays all the main characteristics of socalled
municipal law (state law), despite the fact that the EU cannot be considered as a new
state. This institutional innovation could only become possible if the EU (EC) could devise an
enforcement mechanism which relies upon the ordinary rules for the enforcement of law in a
national setting, meaning a system of some sort for the adjudication of conflict cases. The key
body in EU Law is the European Court of Justice (ECJ), which is not a court of appeal over
the national courts, such as the German Constitutional Court or the French Conseil d’Etat. The
implementation of EU Law is the sole responsibility of the member states, which employ the
ECJ for guidance as to what is EU Law. Thus, EU Law is an integral part of the legal orders
of member states having direct and immediate legal validity in member countries. Failure to
enforce EU Law entails culpa for the member state governments. Thus, the member states
have through treaty law accepted the obligation to enforce EU Law within their territories,
facing the consequences for failing to do so by means of action by the ECJ or the EU
Commission. EU Law is likely to be enforced although there is no federal or supranational
body to do so.
There are two basic connections between the ECJ and the member states. Thus, the courts of
the member states remain in full capacity but they must interact with the ECJ with regard to
EU Law:
- Interpretation: When the courts in member states are uncertain about whether or how
EU Law applies, then they may consult the ECJ. The opinions of the ECJ as stated in
their rulings are binding upon the member states in all respects.
- Validity: When there is a conflict about what EU Law entails, then it has to be
resolved by the ECJ.
These two requirements upon the courts of the member states create a powerful position for
the ECJ, but it only holds in relation to EU Law. EU Law is often described as extremely
encompassing, comprising thousands of laws constituting far-reaching economic and social
regulation. However, EU Law does not lay down general constitutional principles against
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which the legal orders of member states may be checked. EU Law is the result of delegation
from member states of specific competences in mainly economic and social legislation.
CONCLUSION
Public law results from policy-making and policy implementation. It is regarded by one
dominant school (Austrians) as inferior to private law arrangements. And another influential
schools claims that it will be captured by special interests (Law & Economics). The success of
the European project accomplishing far-reaching integration both legally and in reality forces
us to reconsider this negative evaluation of public law and public regulation.
Explicit policy-making and implementation steering may accomplish much. What is crucial is
the use of administrative law meaning that the rules take on an institutional status with
sanctions against misbehaviour or negligence. States may employ public law in a regional
coordination mechanism, although the coordinating bodies lack own implementation means.
The EU is law in the strong sense of the word, but the EU is not a new federal state, at least
not so far.
EU law is not the collection of a large number of cases, but displays the characteristic features
of the Civil Law approach to legislation: codification, abstractness and generality. In a sense,
EU law and the EU project is the come back of the public law approach to human
coordination, showing that there is efficiency outside of spontaneous order or Common Law
approach.
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