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From sovereign nations to federal states. Creating stable systems of public finance in America and Germany: lessons for the Eurozone

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Abstract

The Eurozone crisis has revealed the need for closer union among EMU members; the debate is about how far this union needs to go in order to create financial stability. This paper looks at the history of the United States and Germany to see how they came to establish financially stable forms of fiscal federalism. In each case the process involved the assumption by a central government of the role of "borrower of last resort" to deal with military and economic emergencies. Relying on sub-national or constituent governments turned out to be inadequate. Military emergencies led to financial collapse in the absence of a central state with adequate powers of taxation. Local governments did not have the resources to undertake countercyclical borrowing during economic downturns. Moreover, sub-national governments have required restraints on their borrowing because of the temptation of relying on central bailouts. The attempt of the Eurozone to circumvent these fiscal and political dynamics has left it without any effective borrower of last resort.

Suggested Citation

  • James Macdonald, "undated". "From sovereign nations to federal states. Creating stable systems of public finance in America and Germany: lessons for the Eurozone," Working Papers 17, Department of Economic and Social History at the University of Cambridge.
  • Handle: RePEc:cmh:wpaper:17
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    File URL: http://www.econsoc.hist.cam.ac.uk/docs/CWPESHnumber17March2014.pdf
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