Fiscal Federalism in the EU?: Evolution and

Future Choices for EMU

Dr Alicia Hinarejos

Structure

1. The three challenges that the EU needs to address (similar to other

systems)

2. Evolution of the EU’s system of multilevel fiscal governance

3. Choices for the future: two models and their dangers

The Three Problems of Federal Systems

1. Fiscal Discipline and the Bailout Dilemma

2. Structural Asymmetries

3. Asymmetric Shocks

• All multi-level systems need to address these problems when

allocating fiscal powers

• Exacerbated the more decentralized the system becomes

• Balance between centralization/decentralization

The Evolution of the EU’s Fiscal System I

• Start of EMU: extreme decentralization

• Member States maintain fiscal sovereignty:

o Central bailouts explicitly excluded (Art 125 TFEU)

o Member States are not dependent on transfers

o Member States keep full taxing power

• Fiscal discipline should not have been a problem: markets, SGP.

• Structural asymmetries and asymmetric shocks: economic coordination.

• Failures

The Effects of the Crisis on EU’s Fiscal System II

• Addressing the crisis: the bailouts

• Strict conditionality policy… but still affects market discipline

• Moral hazard: more detailed/stronger discipline rules from

the centre

• Pressure to address structural asymmetries and

asymmetric shocks (more effective economic coord.)

Towards more integration?

• If we wanted to fully address the challenges, more integration seems

necessary

• Further transfer of powers is problematic:

o Democratic legitimacy and allocation of resources

o National sovereignty

o National courts and the identity of the state

The Future: Choice between two Models

• Surveillance Model

• Classic Fiscal Federalism Model

Surveillance Model

• Least change: natural progression in EU rules

• Member States maintain all taxing power; no enhanced fiscal capacity

for euro area

• The EU is only a ‘discipline enforcer’

• But the EU rules change progressively to become more detailed and

more extensive

• The EU decides over economic policy and allocation of Member States’

resources

• Focus on control, discipline

Classic Fiscal Federalism

• Enhanced fiscal capacity for euro area

• EU raises own revenues to provide certain goods (EU taxes?)

• EU would address structural asymmetries and asymmetric shocks

through its own macroeconomic policy

• Less focus on discipline

• Emphasis on autonomy of each level

Problems with fiscal federalism

• Greater transfer of powers

• Institutional reforms:

o Enhanced ability to conduct policy

o Democratic legitimacy

• Fears of constitutional courts

• What about non-euro countries?

But is the surveillance model the solution? (I)

• Fiscal federalism model seems more radical and unrealistic

• Yet progressing along spectrum of the surveillance model is either:

– ineffective

– … or just as threatening to national autonomy and democracy

• To be effective, EU rules gradually become more detailed and more

extensive (see Commission Blueprint/ Five Presidents’ Report: making

economic coordination binding)

But is the surveillance model the solution? (II)

• Ultimately, EU decides over allocation of Member States’ resources

• It turns Member States into mere executors of EU’s will even in their

own areas of competence

• Essential elements of fiscal sovereignty: not just ability to raise

revenues, but discretion to decide how to do so and how to allocate

resources

• Incremental approach: advantage and dangers

Final Reflections- Where are we now?

• Neither model is feasible or satisfactory – combination of both?

• Commission’s Blueprint; Five Presidents’ Report

• Surveillance model as a step on the way to fiscal federalism model:

dangers

Institutional Reform and Democracy

• Five Presidents’ Report:

o Stronger role for EP within European Semester

o [If convergence process becomes binding- EP as co-legislator?]

o More interaction with national parliaments (EP and Commission)

o Integrating intergovernmental mechanisms within EU legal system

o Stronger presidency for Eurogroup

o Euro Area Treasury

• Not enough to address democratic legitimacy concerns/ fears of

constitutional courts

Recap and Conclusion (I)

• The three challenges the EU needs to address:

1. Fiscal discipline

2. Structural asymmetries

3. Asymmetric shocks

• Common problems to all multi-level systems

• Balance between centralization/decentralization

• EMU has seen an evolution in the way it addresses these three

challenges

Recap and Conclusion (II)

• A choice:

o Surveillance model: natural progression from status quo

o Classic fiscal federalism model: two tiers of revenue-raising and

macroeconomic policy

• Fiscal federalism has problems, but surveillance model (if successful) is

just as much of a threat to national autonomy and democracy

Recap and Conclusion (III)

• Dangers of combining surveillance model and fiscal federalism model

(Five Presidents’ Report)

• No effective plans to deal with:

o Democratic legitimacy concerns

o National constitutional courts

• An EMU that muddles through without genuine fiscal and political union