Fiscal Federalism: US History for Architects of Europe's Fiscal Union
AbstractEuropean debates over reform of the fiscal governance of the euro area frequently reference fiscal federalism in the United States. The "fiscal compact" agreed by the European Council during 2011 provided for the introduction of, among other things, constitutional rules or framework laws known as "debt brakes" in the member states of the euro area. In light of the compact and proposals for deeper fiscal union, we review US fiscal federalism from Alexander Hamilton to the present. We note that within the US system the states are "sovereign": The federal government does not mandate balanced budgets nor, since the 1840s, does it bail out states in fiscal trouble. States adopted balanced budget rules of varying strength during the nineteenth century and these rules limit debt accumulation. Before introducing debt brakes for euro area member states, however, Europeans should consider three important caveats. First, debt brakes are likely to be more durable and effective when "owned" locally rather than mandated centrally. Second, maintaining a capacity for countercyclical macroeconomic stabilization is essential. Balanced budget rules have been viable in the US states because the federal government has a broad set of fiscal powers, including countercyclical fiscal action. Finally, because debt brakes threaten to collide with bank rescues, the euro area should unify bank regulation and create a common fiscal pool for restructuring the banking system.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP12-1.
Date of creation: Jan 2012
Date of revision:
fiscal federalism; balanced budget rules; US financial history; state debt; euro crisis; fiscal compact;
Other versions of this item:
- C. Randall Henning & Martin Kessler, 2012. "Fiscal federalism: US history for architects of Europe's fiscal union," Essays and Lectures 669, Bruegel.
- H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- N41 - Economic History - - Government, War, Law, International Relations, and Regulation - - - U.S.; Canada: Pre-1913
- N42 - Economic History - - Government, War, Law, International Relations, and Regulation - - - U.S.; Canada: 1913-
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-01-18 (All new papers)
- NEP-EEC-2012-01-18 (European Economics)
- NEP-HIS-2012-01-18 (Business, Economic & Financial History)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bertrand Candelon & Rabah Arezki & Amadou N. R. Sy, 2011. "Are there Spillover Effects From Munis?," IMF Working Papers 11/290, International Monetary Fund.
- Adam Posen & Nicolas VÃ©ron, 2009.
"A solution for Europe's banking problem,"
- Benedicta Marzinotto & AndrÃ© Sapir & Guntram B. Wolff, 2011. "What kind of fiscal union?," Policy Briefs 646, Bruegel.
- Mathias Dolls & Clemens Fuest & Andreas Peichl, 2009.
"Automatic Stabilizers and Economic Crisis: US vs. Europe,"
CESifo Working Paper Series
2878, CESifo Group Munich.
- Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2012. "Automatic stabilizers and economic crisis: US vs. Europe," Journal of Public Economics, Elsevier, vol. 96(3), pages 279-294.
- Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2009. "Automatic Stabilizers and Economic Crisis: US vs. Europe," IZA Discussion Papers 4310, Institute for the Study of Labor (IZA).
- Mathias Dolls & Clemens Fuest & Andreas Peichl, 2010. "Automatic Stabilizers and Economic Crisis: US vs. Europe," Cologne Graduate School Working Paper Series 01-02, Cologne Graduate School in Management, Economics and Social Sciences.
- Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2010. "Automatic stabilisers and economic crisis: US vs Europe," EUROMOD Working Papers EM2/10, EUROMOD at the Institute for Social and Economic Research.
- Mathias Dolls & Clemens Fuest & Andreas Peichl, 2010. "Automatic Stabilizers and Economic Crisis: US vs. Europe," NBER Working Papers 16275, National Bureau of Economic Research, Inc.
- Neal, Larry, 2011. "Douglas A. Irwin and Richard Sylla (eds.), Founding Choices: American Economic Policy in the 1790s, National Bureau of Economic Research Conference Report (Chicago: University of Chicago Press, 2011, ," Financial History Review, Cambridge University Press, vol. 18(03), pages 357-360, December.
- Mark Hallerberg, 2011. "Fiscal federalism reforms in the European Union and the Greek crisis," European Union Politics, , vol. 12(1), pages 127-142, March.
- James M. Poterba, 1997. "Do Budget Rules Work?," NBER Working Papers 5550, National Bureau of Economic Research, Inc.
- Clay, Karen, 2011. "Founding Choices: American Economic Policy in the 1790s. Edited by Douglas A. Irwin and Richard Sylla. Chicago and London: University of Chicago Press. Pp. ix, 352. $110.00, cloth; $35.00, paper," The Journal of Economic History, Cambridge University Press, vol. 71(04), pages 1124-1126, December.
- Joshua Aizenman & Gurnain Kaur Pasricha, 2011.
"Net Fiscal Stimulus During the Great Recession,"
NBER Working Papers
16779, National Bureau of Economic Research, Inc.
- Aizenman, Joshua & Pasricha, Gurnain Kaur, 2011. "Net Fiscal Stimulus During The Great Recession," Santa Cruz Department of Economics, Working Paper Series qt8df5z6j8, Department of Economics, UC Santa Cruz.
- Wallis, John Joseph, 2005. "Constitutions, Corporations, and Corruption: American States and Constitutional Change, 1842 to 1852," The Journal of Economic History, Cambridge University Press, vol. 65(01), pages 211-256, March.
- Bent E. Sorensen & Oved Yosha, 2001. "Is state fiscal policy asymmetric over the business cycle?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 43-64.
- Mark Hallerberg & Guntram Wolff, 2008. "Fiscal institutions, fiscal policy and sovereign risk premia in EMU," Public Choice, Springer, vol. 136(3), pages 379-396, September.
- Fatás, Antonio & Mihov, Ilian, 2004.
"The Macroeconomic Effects of Fiscal Rules in the US States,"
CEPR Discussion Papers
4372, C.E.P.R. Discussion Papers.
- Fatas, Antonio & Mihov, Ilian, 2006. "The macroeconomic effects of fiscal rules in the US states," Journal of Public Economics, Elsevier, vol. 90(1-2), pages 101-117, January.
- John Joseph Wallis & Richard E. Sylla & Arthur Grinath III, 2004. "Sovereign Debt and Repudiation: The Emerging-Market Debt Crisis in the U.S. States, 1839-1843," NBER Working Papers 10753, National Bureau of Economic Research, Inc.
- Mahdavi, Saeid & Westerlund, Joakim, 2011. "Fiscal stringency and fiscal sustainability: Panel evidence from the American state and local governments," Journal of Policy Modeling, Elsevier, vol. 33(6), pages 953-969.
- Bent E. Sorensen & Lisa Wu & Oved Yosha, 1999.
"Output fluctuations and fiscal policy : U.S. state and local governments 1978-1994,"
Research Working Paper
99-05, Federal Reserve Bank of Kansas City.
- Sorensen, Bent E. & Wu, Lisa & Yosha, Oved, 2001. "Output fluctuations and fiscal policy: U.S. state and local governments 1978-1994," European Economic Review, Elsevier, vol. 45(7), pages 1271-1310.
- Sorensen, B.E. & Wu, L. & Yosha, O., 1999. "Output Fluctuations and Fiscal Policy: U.S. State and Local Governments 1978-1994," Papers 22-99, Tel Aviv.
- Sorensen, Bent E & Yosha, Oved, 1999. "Output Fluctuations and Fiscal Policy: US State and Local Governments 1978-1994," CEPR Discussion Papers 2286, C.E.P.R. Discussion Papers.
- Michael D. Bordo & Agnieszka Markiewicz & Lars Jonung, 2011. "A Fiscal Union for the Euro: Some Lessons from History," NBER Working Papers 17380, National Bureau of Economic Research, Inc.
- Poterba, James M, 1994.
"State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics,"
Journal of Political Economy,
University of Chicago Press, vol. 102(4), pages 799-821, August.
- James M. Poterba, 1995. "State Responses to Fiscal Crisis: The Effects of Budgetary Institutionsand Politics," NBER Working Papers 4375, National Bureau of Economic Research, Inc.
- Poterba, James M. & Rueben, Kim S., 2001. "Fiscal News, State Budget Rules, and Tax-Exempt Bond Yields," Journal of Urban Economics, Elsevier, vol. 50(3), pages 537-562, November.
- English, William B, 1996. "Understanding the Costs of Sovereign Default: American State Debts in the 1840's," American Economic Review, American Economic Association, vol. 86(1), pages 259-75, March.
- Wallace E. Oates, 1999. "An Essay on Fiscal Federalism," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1120-1149, September.
- Robert P. Inman, 1998. "Do Balanced Budget Rules Work? U.S. Experience and Possible Lessons for the EMU," NBER Working Papers 5838, National Bureau of Economic Research, Inc.
- Edwin Perkins, 2011. "Founding choices: American economic policy in the 1790s," Business History, Taylor & Francis Journals, vol. 53(4), pages 649-651.
- Sylla, Richard & Wilson, Jack W., 1999. "Sinking funds as credible commitments: Two centuries of US national-debt experience," Japan and the World Economy, Elsevier, vol. 11(2), pages 199-222, April.
- Glenn Follette & Byron Lutz, 2010.
"Fiscal Policy in the United States: Automatic Stabilizers, Discretionary Fiscal Policy Actions, and the Economy,"
Revista de Economía y Estadística,
Universidad Nacional de Córdoba, Facultad de Ciencias Económicas, Instituto de Economía y Finanzas, vol. 0(1), pages 41â73, January.
- Glenn Follette & Byron Lutz, 2010. "Fiscal policy in the United States: automatic stabilizers, discretionary fiscal policy actions, and the economy," Finance and Economics Discussion Series 2010-43, Board of Governors of the Federal Reserve System (U.S.).
- Jonathan A. Rodden & Gunnar S. Eskeland (ed.), 2003. "Fiscal Decentralization and the Challenge of Hard Budget Constraints," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262182297, December.
- Anna Iara & Guntram B. Wolff, 2011. "Rules and risk in the euro area," Working Papers 615, Bruegel.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- The European Debt Crisis in an American Fiscal Mirror
by Manuel Bautista in NEP-HIS blog on 2012-02-05 09:37:05
- Honkapohja, Seppo, 2013. "The euro crisis: a view from the North," Research Discussion Papers 12/2013, Bank of Finland.
- Győrffy, Dóra, 2014.
"Válság és válságkezelés Görögországban. A puha költségvetési korlát szerepe a gazdasági összeomlásban
[Crisis and crisis management in Greece. The role of soft budget constraints in," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 27-52.
- Keuschnigg, Christian, 2012. "Welche Finanz- und Wirtschaftspolitik braucht Europa?," Economics Working Paper Series 1201, University of St. Gallen, School of Economics and Political Science.
- Antonio Estella, 2013. "Determinants of Spain’s decision to leave the European Monetary Union," EUI-RSCAS Working Papers 56, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
- Tröger, Tobias H., 2013. "The single supervisory mechanism - Panacea of quack banking regulation? Preliminary assessment of the evolving regime for the prudential supervision of banks with ECB involvement," SAFE Working Paper Series 27, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
- Mario Sarcinelli, 2013. "The European Banking Union: Will It Be a True Union without Risk Sharing?," PSL Quarterly Review, Economia civile, vol. 66(265), pages 137-167.
- Keuschnigg, Christian, 2012.
"Should Europe Become a Fiscal Union?,"
Economics Working Paper Series
1205, University of St. Gallen, School of Economics and Political Science.
- Angel Ubide, 2013. "Reengineering EMU for an Uncertain World," Policy Briefs PB13-4, Peterson Institute for International Economics.
- Antonio Estella, 2013. "Determinants of Spain's decision to leave the European Monetary Union," RSCAS Working Papers 2013/56, European University Institute.
- Winkler, Adalbert, 2013. "Der lender of last resort vor Gericht," Frankfurt School - Working Paper Series 206, Frankfurt School of Finance and Management.
- Philip R. Lane, 2012. "The European Sovereign Debt Crisis," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 49-68, Summer.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peterson Institute webmaster).
If references are entirely missing, you can add them using this form.