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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

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Fiscal Federalism in the EU?: Evolution and Future Choices for EMU (by Alicia Hinarejos)

  • 1. Fiscal Federalism in the EU?: Evolution and Future Choices for EMU Dr Alicia Hinarejos
  • 2. 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
  • 3. 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
  • 4. 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
  • 5. 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.)
  • 6. 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
  • 7. The Future: Choice between two Models • Surveillance Model • Classic Fiscal Federalism Model
  • 8. 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
  • 9. 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
  • 10. 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?
  • 11. 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)
  • 12. 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
  • 13. 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
  • 14. 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
  • 15. 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
  • 16. 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
  • 17. 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