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A note on fiscal federalism: a case for Europe?

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  • M. Demertzis

Abstract

The creation of Monetary Union in Europe has specified a centralised role for the monetary instrument but has left the fiscal instrument within the nations' jurisdiction. It remains unclear how national fiscal policies will interact with the common monetary policy and whether there will be increasing pressures to establish a centralised fiscal counterpart. This paper has two aims: first, to describe the US federal structure and the relative size of each level of government, and second, to use the US example as a yardstick of comparison for Europe. We aim to review the existing literature on whether Europe can or indeed should, mimic the US in terms of its fiscal architecture. We conclude that the need for a federalist structure is not argued unambiguously in the literature. However, what is clear, is that advancing towards a federalist structure requires not only economic adjustments, but also adjustments that might be politico-economic in nature. Two questions remain: does the Maastricht scenario provide for a successful monetary and fiscal co-habitation? If not, is Europe prepared to undertake the necessary changes that will guarantee it?

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 614.

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Date of creation: 2000
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Handle: RePEc:dnb:wormem:614

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Related research

Keywords: Fiscal Federalism; stabilisation; redistribution; Monetary Union; asymmetric shocks;

References

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  1. Maurice Obstfeld & Giovanni Peri, 1998. "Regional non-adjustment and fiscal policy," Economic Policy, CEPR & CES & MSH, vol. 13(26), pages 205-259, 04.
  2. Eichengreen, Barry, 1990. "One Money for Europe? Lessons from the US Currency Union," Department of Economics, Working Paper Series qt6ks1k831, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Xavier Sala-i-Martin & Jeffrey Sachs, 1991. "Fiscal Federalism and Optimum Currency Areas: Evidence for Europe From the United States," NBER Working Papers 3855, National Bureau of Economic Research, Inc.
  4. Michael D. Bordo & Lars Jonung, 1999. "The Future of EMU: What Does the History of Monetary Unions Tell Us?," NBER Working Papers 7365, National Bureau of Economic Research, Inc.
  5. Maurice Obstfeld, 1997. "Europe's gamble," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 241-317.
  6. Bayoumi, Tamim & Masson, Paul R, 1994. "Fiscal Flows in the United States and Canada: Lessons for Monetary Union in Europe," CEPR Discussion Papers 1057, C.E.P.R. Discussion Papers.
  7. Antonio Fatás, 1998. "Does EMU need a fiscal federation?," Economic Policy, CEPR & CES & MSH, vol. 13(26), pages 163-203, 04.
  8. Frankel, Jeffrey A & Rose, Andrew K, 1996. "The Endogeneity of the Optimum Currency Area Criteria," CEPR Discussion Papers 1473, C.E.P.R. Discussion Papers.
  9. Olivier Jean Blanchard & Lawrence F. Katz, 1992. "Regional Evolutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 1-76.
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