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The Cost of Fiscal Disunion in Europe and the New Model of Fiscal Federalism

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  • Guido Montani

Abstract

The sovereign debts crisis is a problem peculiar to the European Union caused by the fragility of the EMU, which was set up without a fiscal union nor a federal government. The aim of a monetary union is to remove the political risks – exchange rates and sovereign debt default – for internal financial transactions, as the US have done thanks to their federal constitution. In Europe, the financial crisis has caused a dangerous vicious debts-banks cycle, which can bring on the default of solvent but illiquid states of the EMU. The paper, after an analysis of the emergency measures approved or proposed, upholds that a new model of fiscal federalism is underway, based on the following principles: the relative autonomy of monetary policy from fiscal policy; hard budget constraints for every level of government; a limited transfer union; an autonomous federal budget. At present, the role of the EU budget is neglected. The author warns that a well-run monetary union cannot work smoothly without a federal budget.

Suggested Citation

  • Guido Montani, 2013. "The Cost of Fiscal Disunion in Europe and the New Model of Fiscal Federalism," Bulletin of Political Economy, Bulletin of Political Economy, vol. 7(1), pages 39-68, June.
    • Handle: RePEc:awu:journl:v:7:y:2013:i:1:p:39-68
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