FEDERALISM, SUBSIDIARITY, AND INTEREST GROUPS: A POLITICAL ECONOMY PERSPECTIVE Madeleine O. Hosli European Institute of Public Administration (EIPA) O.L. Vrouweplein 22 P.O. Box 1229 NL - 6201 BE Maastricht Netherlands Fax: +31-43-296 296 Phone: +31-43-296 243 e-mail: Madeleine.Hosli@um.cc.umich.edu The author thanks Mirjam van Bergen, Dieter Burrell, Lars-Erik Cederman, Finn Laursen, and Robert D. Pahre for helpful comments. 1. Introduction With the ratification of the Maastricht Treaty, the principle of subsidiarity has gained a legal basis in the framework of the European Union. Subsidiarity is still a losely defined principle and it is evidently open to different interpretations, but it nevertheless has a considerable political potential1. The subsidiarity clause is contained in Article 3b of the Treaty and basically states that the Union will only take action in areas if it cannot better be taken by the member states and that the Community ought not to go beyond what is necessary to achieve the objectives encompassed by the Union Treaty2. Thus, in the Union framework, policy jurisdiction and responsibilities should remain at the lowest possible level of government, restraining the Community institutions, but also reducing their workload. Subsidiarity has certainly become a word that seems to provide a remedy for all kinds of evils connected with enhanced integration, such as the fear of a centralization and of over-regulation by "Brussels" and of an usurpation of member states' competences by the institutions of the Union. Subsidiarity may have turned into a "fad" in "Eurospeak", but it may nevertheless be crucial for the future development of the Union, even though its effects in political economy terms may not always be immediately apparent. The subsidiarity principle, as formulated in article 3b, basically contains two economic justifications for action by the Union: externalities and economies of scale. The definition of when these effects are large enough to justify Community action can however be expected to prove difficult in practice3. This paper shows different effects implied by the subsidiarity principle as viewed from a rational choice perspective4. It is conceived as a survey of ideas and of the relevant literature. The article gives an overview of theoretical approaches relevant to the issue that bridge the dichotomy of economics and of political science. A main focus is on the link between institutional features and policy outcomes. In this contribution, three main aspects of subsidiarity are looked at. Firstly, the allocation of decision-making power to lower political levels will have repercussions on the behavior of member states and on actors on the sub-national levels (such as national interest groups). In the absence of decisions by institutions of the Union, many policy areas will basically constitute collective action problems: mutually beneficial outcomes (or public goods) can only be secured if member states have no incentives to free ride and if special interest groups are prevented from obtaining benefits to the detriment of the "public interest". Such aspects are considered in Section II. Secondly, subsidiarity may lead to a redistribution of policy competences between the Union institutions and the member states. This has implications on the degree of centralization within the Union (and on political