EUROPEAN UNION AND INDUSTRIAL ORGANIZATION

European Union and Industrial Organization



European Union and Industrial Organization

European Union budget

Following the inception of Economic and Monetary Union (EMU), there has been a lively discussion about the desirability and feasibility of fiscal federalism in the European Union (EU), as a complement to the coherent operation of that monetary union. EMU brought the European integration process into an advanced stage of economic integration that is very similar to other federations: a single currency, with a single monetary policy assigned to a supranational body (the European Central Bank, ECB).

Fiscal federalism is the missing piece in this jigsaw. Here 'conventional fiscal federalism' is understood as a constitutional system assigning fiscal powers among different tiers of government, with a noticeable centralisation bias. From the Musgravian distinction between allocation, equity and stabilisation (Musgrave and Musgrave 1989), the debate around European integration and 'conventional fiscal federalism' pays considerably more attention to the equity and stabilisation dimensions, for the instruments needed and for the implications stemming from the distribution of powers between different government tiers1. In the context of European 'conventional fiscal federalism' can be more problematic due to the distinctive nature of the EU, where member states play an influential role.

Another important issue that must be addressed is the scope for centralisation or decentralisation encompassed by fiscal federalism. When the majority of policy functions are assigned to the federal government (or to supranational institutions, in the EU) this reveals a centralisation outcome. When state and local tiers of government are prominent (national or sub-national in the EU) the outcome favours decentralisation. It is important to realise that this qualification is not inter-temporal. The distinction between centralisation and decentralisation only covers a pattern of distribution of powers in a certain moment, irrespective of the fluctuations over time. It is important to be aware that fiscal federalism can be influenced by centralisation or decentralisation.

The alternative, less-known, model of decentralised fiscal federalism is repeatedly neglected when EMU political economy is examined (Collignon 2003a: 72-8, and Oeter 2003: 12).

The emphasis on decentralisation

To achieve the pattern of interpersonal redistribution of mature federations in the EU might be more problematic, because member states are still the most intense focus for citizens' loyalties. In the European integration context centralised inter-personal redistribution is far away from meeting the necessary political conditions to achieve it:

not least because the degree of inter-state solidarity is low, but also (and mainly) because such modality of redistribution requires an instrument (income taxes) that is not available in the supranational catalogue of competences. National governments' resistance to transfer competences to the supranational level, as far as income taxes are concerned, is well documented (Eijffinger and de Haan 2000, and El-Agraa 2001).

Without the appropriate tool at the supranational level, it is unthinkable to envisage a system of supranational transfers.

This emphasis on decentralisation is not very different from the general pattern observed in three of the federations under assessment. Assuming a differentiated nature between two groups of federal countries - Canada and the US, on the one hand, ...