Monday, October 19, 2009

Dr. Ringe on European Court of Justice case law on tuition fee discrimination

Discrimination can be beneficial – Why the ECJ case law on tuition fees should be reconsidered

Dorothea Ringe, Oxford Centre for Entrepreneurship and Innovation, Said Business School, University of Oxford,

By guarding non-discrimination between EU-citizens, the European Court of Justice has done much to uphold the spirit of European integration and to further efficient provision of goods and services in the internal market. However, non-discrimination is not always beneficial. The ECJ case law on tuition fees is one example. By extending the non-discrimination principle to the area of higher education and especially tuition fees, the ECJ disincentivises European governments from spending tax-payers money on high quality higher education. This is especially problematic given the importance of higher education for economic prosperity and growth.

In its case law, the ECJ ruled that EU Member States are not allowed to differentiate tuition fees according to nationality (seminal case: Gravier v City of Li├Ęge 1985). This line of case law has created a free-riding problem between the EU Member States. The States anticipate that students are willing to study in another Member State if they get a better deal with respect to the quality of higher education in relation to tuition fees. If a State reduces its spending on higher education, it expects a proportion of its high school graduates to move abroad. But there is a high probability that after graduation these students return to their home State because, at least in the long run, Europeans have a high tendency to work and live in their home country. As a result, the government will have saved some resources but still expects to benefit from a highly educated citizen. Politicians can then invest these resources into other politically rewarding projects. All States face the same dilemma and therefore all have an incentive to reduce their spending on higher education.

So what can be done to solve the problem? There are two potential solutions to remove the adverse incentives: the first would be to reverse the ECJ case law and allow national governments to charge migrant students within the EU full-cost tuition fees. This would be to follow the US model of financing interstate student mobility. The other solution would be to follow the Swiss model. In Switzerland, a system of intergovernmental transfer payments exists, which compensates the host canton for educating students from other cantons.

The current ECJ case law prevents the introduction of the US model of differentiated tuition fees mainly on the basis that non-discrimination needs to prevail. However, in its judgements the Court does not consider the adverse effects on investment incentives in higher education outlined above. Taking these effects into account, it seems much less convincing to me that the non-discrimination principle in the EC Treaty should cover tuition fees for mobile students within the EU. On the contrary, I think that increasing overall investment in higher education outweighs the negative effects of differentiated tuition fees on student mobility and should therefore be considered justifiable under the EC Treaty. The ECJ should therefore reconsider its current case law if it has to decide on another case of tuition fee discrimination.

It would be even better, if the EU Member States could agree on introducing the Swiss model of transfer payments. In this system, mobile students do not have to bear extra cost. Student mobility comes with many advantages and should be encouraged if possible. This is the aim of the Bologna process. However, given the current institutional structure within Europe, it comes as no surprise that in the Bologna negotiations, EU Member States’ governments were not able to agree on the allocation of the cost of cross-border student mobility within the EU. Student mobility within the EU is highly unbalanced. As they would financially lose out, net-student-exporting States have no incentives under the current system to agree to a system of transfer payments. By ruling out tuition fee differentiation according to nationality, the ECJ therefore also prevents intergovernmental bargaining with regard to a system of compensation payments.

Realistically, the ECJ is unlikely to change its established case law with respect to tuition fee differentiation in the medium term future. The only option in order to move from the current system to the Swiss system could be to include a system of transfer payments within a grand political bargain in the context of negotiating the general EU budget. If this does not happen, the ECJ case law will continue to aggravate the problem of low spending on higher education teaching within the EU. Many students probably even prefer this regime where they have a lot of choice between Universities in different Member States. The social cost of the current system in the form of lost externalities of higher education, on the other hand, will have to be borne not just by the students but by all European citizens.
This post is based on the final part of my thesis “Tuition fees and equal access to higher education in Germany and the EU: An analysis from a law and economics perspective”