A note on fiscal federalism: a case for Europe?
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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