Nicolas Véron

How Unequal Is the European Parliament’s Representation?

This blog post, co-authored with Anish Tailor at the Peterson Institute, was published yesterday by Bruegel and the Peterson Institute. 

The European Parliament election of May 22-25, 2014 has several unprecedented features.  It is the first election under the Lisbon Treaty. As a consequence, and for the first time, the main pan-European parties – including the center-right European Peoples’ Party (EPP) and the center-left Socialists and Democrats (S&D) – are fielding lead candidates for European Commission President. Turning the election into a presidential horse race was intended to increase electoral participation and enhance the Parliament’s democratic legitimacy, even though it remains to be seen whether voters will actually see things these way.

The European citizens’ relative lack of interest in the European Parliament is often blamed by critics on its inherent inequality of representation. Voters in smaller member states are overrepresented. Germany’s Federal Constitutional Court, when ruling on the Lisbon Treaty on June 30, 2009, said that the European Parliamentary election process “does not take due account of equality.”  In the Court’s view, this constitutes one of two key factors in the European Union’s “structural democratic deficit,” the other being the European Parliament’s “position in the European competence structure,” i.e. its lack of power compared to other EU institutions.[1]

How much change would produce an acceptable level of equality of representation? Article 14(2) of the Treaty on European Union gives disproportionate weight to smaller countries, stipulating that “no “Representation of citizens should be degressively proportional, with a minimum threshold of six members [of the European Parliament] per [EU] Member State. No Member State shall be allocated more than ninety-six seats.” But the treaty does not provide a specific formula for representation, and the exact composition is to be adopted by unanimous decision of the European Council. The latest apportionment decision was adopted on June 28, 2013 (European Council Decision 2013/312/EU), in the run-up to the accession of Croatia as the EU’s 28^th member state.

In the charts at the end of this post, we compare the skewed nature of the European Parliament’s representation of European voters with other lower houses of large or medium-sized democratic polities. The European Parliament is at the low end in terms of electoral equality. For each chamber, the chart shows the distribution of number of eligible voters per representative, from the one(s) representing the lowest number of eligible voters, on the left end, to the one(s) representing the most, on the right end. A flat distribution indicates a high level of equality of representation. A sloped or skewed distribution indicates inequality of representation.[2]

These distributions are summarized in a “Voting Gini Coefficient,” akin to the familiar cross-country comparative measure of inequality of income. Here the Gini coefficient measures not income inequality, but voting power inequality due to skewedness of representation across territorial subdivisions of the relevant polity.[3] A high Voting Gini Coefficient suggests a high degree of voting power inequality among citizens eligible to vote.

The comparison suggests that the European Parliament is indeed outside the norm of European countries in terms of equality of representation. In its own way, so is Germany, whose professed commitment to this principle is unparalleled among countries reviewed. Higher levels of inequality of representation may be expected in larger, more diverse polities where the political complexity of federal arrangements leads to awkward institutional compromises, which is definitely the case of the EU. In our sample, higher Voting Gini Coefficients are indeed also observed for the lower houses in India and Brazil, which come closest to the EP on that measure. For example, in Brazil voters from Sao Paulo state are notoriously underrepresented. Yet the US and Indonesia, which are also large and diverse, both display comparatively low Voting Gini Coefficients.

The implication is that the European Parliament would not need to reach a level of representative equality as high as the German Bundestag to join the norm of lower chambers in democratic polities. A modified distribution that would sharply reduce the EP’s Voting Gini Coefficient to a level around 10 percent could be achieved without entirely renouncing the principle of “degressive proportionality,” but would require lowering the minimum of six MEP seats per member state, and thus a modification of the Treaty on European Union.[4]

If such a level were reached, our international comparison suggests that it would no longer be reasonable for the German Federal Constitutional Court or other watchdogs to label the European Parliament’s representative inequality as an element of “structural democratic deficit.” This labelling, however, does not appear unreasonable under the current arrangements.

 

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[1] The court’s press release in English about its ruling on the Lisbon Treaty is at https://www.bundesverfassungsgericht.de/pressemitteilungen/bvg09-072en.html.

[2] For most countries reviewed, average voting-age population per government representative is based on the total population per relevant territorial subdivision (e.g. state or province), taken from each country’s census bureau, and on the “Voting-Age Population” (VAP) variable from the International Institute for Democracy and Electoral Assistance (IDEA)’s database (http://www.idea.int/). The charts depict the simple division of voting-age-population per territorial subdivision by the number of representatives in the lower house that serve that particular territorial subdivision. The number of government representatives from each subdivision was found in each country’s lower house website. Voting-age population per subdivision was calculated by multiplying the VAP number by the subdivision’s percentage share of the country’s total population. Percentage shares were calculated based on census data for total population from each country’s statistics bureau. IDEA estimates the VAP number based on data from the International Database of the U.S. Census Bureau. IDEA includes all citizens over the age of 18 within the scope of VAP. However, this figure does not take into account legal barriers, such as registration. It also excludes resident non-citizens from the pool. For the United States, we used data from the United States Elections Project at George Mason University (http://elections.gmu.edu/). For the United Kingdom we used the total number of parliamentary electors from the UK Office of National Statistics, which they define as “residential qualifiers, attainers and overseas electors” (http://www.ons.gov.uk/ons/taxonomy/index.html?nscl=Elections+%28Local%2C+National+and+European%29#tab-data-tables).

[3] Gini Coefficients were calculated with the STATA command ineqdeco on the variable "Voting Power." To calculate Voting Power, each representative’s share of the chamber (1/n, where n equals the number of representatives serving in the lower house) is divided by the voting-age population in the corresponding electoral district. This number represents the amount of representation each individual in the population has in the lower house.

[4] As an illustration, we find a Voting Gini Coefficient of 10.0% with a distribution of seats that is identical to the current one for the larger member states (Germany, France, UK, Italy, Spain, Poland), halves the number of seats of the smallest member states (Malta, Luxembourg, Cyprus and Estonia) from six to three each, and smoothens the distribution with a less sharp reduction in seats numbers for the remaining 18 member states. 

Even after “Losing” Alstom, France Has More Corporate Champions than Most

This blog post was published by Bruegel and the Peterson Institute. 

The bid from General Electric (GE), a leading US-headquartered conglomerate, for the power division of Alstom, a maker of turbines and trains, has prompted much soul-searching in France. Alstom's acceptance of GE's bid  is widely seen in France as symbolic of the country’s relative decline. The argument is that the glorious France of yesteryear could muster an array of vigorous national corporate champions, but these are disappearing or leaving the French territory one after the other.

The same litany of loss is repeated again and again. Pechiney, an aluminium producer, was purchased by Canada’s Alcan in 2003. Arcelor, the heir to France’s historically strategic steel industry, was merged into ArcelorMittal in 2006. More recently, Publicis, a communications behemoth, has considered moving its headquarters to the Netherlands as a consequence of its merger with Omnicom; Lafarge, a cement maker, is similarly moving its head office to Switzerland while merging with Holcim; and the purchase of SFR, France’s second-largest mobile phone company, implies it will become a subsidiary of Altice, a Luxembourg-based group. France is described as at risk of being left without economic centers of decision, a vassal of foreign business powers.

The description of mass corporate exodus fits a narrative of national decay. France’s exports are slumping. Its tax burden has grown unbearably high, feeding an inadequate state-centered economic model. Its credit has been downgraded by the leading rating agencies. It is unable to match either the performance of Germany or the structural reform of its southern neighbors. Its best minds and entrepreneurs are emigrating, discouraged by the lack of opportunity at home. It is rapidly losing soft power. Its cherished language is increasingly neglected internationally. Even its restaurants are falling behind.

But on the specific issue of corporate champions, this story is not backed by the facts. Compared with the rest of Europe and the world, France is not losing ground as the location of major corporate headquarters—if anything, the opposite is true.

To get a sense of the bigger picture, let’s look at a comprehensive set of the world’s largest companies, France’s position, and its evolution over time. A good proxy is the 500 biggest listed companies by market capitalization, as published regularly by the Financial Times (FT 500). We make minor corrections on head office location (which we define as the main center of corporate decision-making, while the Financial Times refers to the place of listing or incorporation—this only makes a difference in a limited number of cases). The omission of nonlisted companies creates little distortion in the case of France, most of whose large companies have been publicly listed since at least the early 1990s—the name of the local stock index, known as CAC 40, is routinely used as shorthand for the country’s largest businesses. Market value is subject to financial cycles, but, as these tend to be largely synchronous, it is a good measure for cross-country and cross-sector comparisons.

The following charts show the findings for the latest ranking, as of end-2013, and the earliest one, in September 1996. For each date, we look at the number of FT 500 companies headquartered in a given country in proportion to that country’s GDP (at market exchange rates, from the International Monetary Fund’s World Economic Outlook database), and compare the ratio to the global average. If the corresponding number is above 1, the country is overrepresented in the global population of corporate champions in comparison to its economic importance; if the number is less than 1, the country is underrepresented. The same calculation is then made on the basis of aggregate market capitalization instead of number of companies, to account for differences of corporate size within the FT 500 list. (The numbers are unaffected by the eventual fate of Alstom, Lafarge, and Publicis, whose respective market values are not large enough to be included among the 27 French companies in the list.)

As this chart illustrates, France is ahead of the EU average, let alone its peers in the euro area. Archrival Germany is well behind. The United States, the world’s leading corporate powerhouse, does even better, but not by a wide margin. Corporate champions from China (which in this calculation includes Hong Kong and Macau) and the other BRICs—Brazil, Russia, and India—remain well underrepresented in the global landscape and would be even more so if the measure of GDP used was calculated at purchasing power parity. When measured by market capitalization, the United States and Switzerland are further ahead, as they are disproportionately home to very large corporate concerns. But France’s relative position is largely unaffected in comparison with its European peers, which suggests that its champions are not particularly lagging towards the bottom of the FT 500 list.

Trend-wise, and implausible as it may sound to Parisian pundits, France is actually doing better in this competition than it used to. The earliest available FT 500 list shows France’s corporate champions comparatively underrepresented, and slightly behind the EU average, both in terms of numbers of companies and of aggregate market value. (This list shortly predates the Asian financial crisis of 1997–98 and illustrates a temporary overrepresentation of some Asian countries, but this factor does not create much distortion from a global perspective and only marginally affects the relative positions of European countries and the United States.) Strikingly, in less than two decades France has gained considerable ground in comparison with the two traditionally headquarters-rich EU countries, the United Kingdom and the Netherlands, and even with Switzerland, whose stability, discretion, and tax restraint has made it a global magnet for corporate head offices.

What factors lie behind France’s position? No general explanation is ventured here. Many factors influence the rise and fall of companies in the FT 500 list. However, one may note one aspect that resonates with the current Alstom saga. Of the 18 French companies in the 1996 list, four have been absorbed by a French peer but none by a foreign buyer; by contrast, among the 108 other European groups in that same list, 21 (or almost one in five) have been the targets of a cross-border acquisition. When Arnaud Montebourg, France’s opinionated economics minister, recently commented that “French companies are not prey,” he was in a way making a statement of fact. This distinction is probably at least partly policy-driven—i.e., the French government is more determined than its European peers to prevent its national champions from being taken over, and when such an outcome is unavoidable, it tends to favor national mergers over cross-border ones. This hypothesis fits with anecdotal evidence, such as when the French authorities appeared to dissuade Novartis from bidding for Aventis in 2004, PepsiCo for Danone in 2005, unnamed interested parties for Société Générale in early 2008, or indeed Siemens for Alstom, also in 2004.

Whether this policy serves the French national interest, as opposed to the special interests of the respective companies’ management and shareholders, is a matter of debate. Both the French elites and the wider public seem to take it as an article of faith that the more national champions, the better. In business matters, the French often appear to believe in intelligent design: Incumbency is viewed favorably, and any evolution in the corporate landscape is viewed with suspicion. Thus, the implicit premise of many discussions in France is that protecting, promoting, or otherwise helping established champions is good for the country.

By contrast, the economic case for such “neo-Colbertism” is far from self-evident. On the one hand, companies may have a home bias in locating their investments, and headquarters themselves are a source of high-quality jobs. On the other hand, the home bias appears to have decreased over time as the champions internationalize their production infrastructure and increasingly their research and development operations as well. The protection of incumbents erodes market discipline and encourages rent-seeking and ineffectiveness, and more dynamic new entrants are discouraged from the national market. The cost-benefit analysis of France’s “economic patriotism” is made even more difficult by the opaqueness of tax arrangements made with large companies (in France as in other countries), and the fact that, more generally, many of the corresponding costs are hidden. More economic research is needed on these trade-offs, the terms of which are continuously modified by globalization and technological change.

Irrespective of the economics, however, the factual observation remains unambiguous. French-headquartered companies are well represented among the population of global business giants, and increasingly so. France may have ninety-nine problems, but an extinction of corporate champions is not one of them. 

GE's Bid on Alstom and Economic Nationalism

In this new podcast interview with Steve Weisman, I comment on GE's bid for Alstom's power operations, Pfizer's offer on AstraZeneca, and the ambiguities and ironies of economic nationalism and corporate nationality.