Does the European Union have its own system of fiscal federalism?

Vila Maior, Paulo

http://hdl.handle.net/10284/1434

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Vila Maior, Paulo

Abstract(s)

There has been a lively debate among scholars about the feasibility and desirability of fiscal federalism in the European Union (EU). The paper addresses the question of whether ‘conventional fiscal federalism’ is feasible in the EU, considering the distinctiveness of European integration and the political-economic template of Economic and Monetary Union (EMU). It is an attempt to bridge the gap between economics and political science by adding the political conditions that might create difficulties to the economics’ rationale. Starting from the conceptual instruments used (fiscal federalism, centralisation and decentralisation) the paper highlights how fiscal federalism is multi-faceted concept embracing both a centralisation and a decentralisation outcome. Borrowing the Musgravian classification of allocation-equity-stabilisation, the EU is examined as far as redistribution and macroeconomic stabilisation are concerned. The aim is to conclude whether centralisation or decentralisation is the prevailing outcome for both functions. Considering that in the EU: i) the current distribution of fiscal competences is favourable to member states; ii) the overall outcome for the aforementioned fiscal functions is decentralisation; iii) despite monetary policy is the main tool for macroeconomic stabilisation, and this is a policy arena where centralisation prevails; iv) the diminished scope for inter-state solidarity averts more centralisation in redistribution; and v) the absent political willingness from national governments to increase the EU budget; all this suggests that ‘conventional fiscal federalism’ is ruled out as a feasible solution for the EU. Notwithstanding this doesn’t imply that fiscal federalism is absent from the EU. A distinct,decentralised modality of fiscal federalism already exists, coping with the ‘sui generis’ nature of European integration.