Fiscal Federalism in Europe: Is it a Necessary Precondition for a Successful European Economic and Monetary Integration?

IMF Working Papers, June 1, 1994

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Bibliographic details

• Authors: Norbert Berthold
• Published: June 1, 1994
• Series: IMF Working Papers

Research question and theoretical framework

• Examines the appropriate institutional level (centralized vs. decentralized) for stabilization policies in the process of European integration.
• Uses the theory of fiscal federalism to provide criteria for evaluating whether fiscal stabilization policies should be implemented centrally or decentrally.

Key findings and analysis

• Fiscal stabilization policies are in general not the adequate way of responding to shocks.
• Political realities make fiscal stabilization policies effectively unavoidable despite their limited adequacy for shock response.
• Given political inevitability, the paper analyzes which institutional level should house such policies.
• Decentralized fiscal stabilization policies are preferable because they are disciplined more by market forces.

Policy implications and recommendations

• Do not rely primarily on fiscal stabilization policies as the main mechanism for responding to economic shocks.
• If fiscal stabilization policies must be implemented for political reasons, prefer decentralized institutional arrangements to leverage market-discipline mechanisms.

Subjects and analytical scope

• Subjects: Adjustment process; Balance of payments; Economic integration; Fiscal federalism; Fiscal policy; Fiscal stimulus; Monetary unions.
• Analytical concerns include adjustment capacity, expansionary fiscal policies in a monetary union, rule-bound fiscal policy, and the role of market mechanisms.