Comparative Fiscal Federalism. Lessons for the EU

Reacting to the financial and sovereign debt crises, the EU and its Member States introduced a number of measures, such as the ESM, the Fiscal compact, the refurbished Stability and Growth Pact, or the supervision of banks by the ECB, that may well develop into a system of fiscal federalism as it is known from federal states. This development and the accompanying debates about sustainability, stabilization, growth and the setting of right or wrong incentives form the backdrop of our project, that is divided in two steps: In step one we aim at a detailed analysis of fiscal federalisms in seven developed, market-based western federations that also in practical terms may function as a specimen for the EU. These federations are Australia, Austria, Belgium, Canada, Germany, Switzerland, and the USA. Experts from these countries, providing inside knowledge of economy, history, politics and law, will support a Salzburg based, Austrian core team to better understand the development paths of the respective fiscal federal systems, political quarreling about their features, their economic and societal consequences, issues of efficiency, transparency and democratic back-coupling, etc. Starting out from the results achieved in this first phase, step two will answer a similar set of questions for the current EU. Arguably, this will be a rather complex challenge, because the Union neither has a coherent system of financial relations between its levels that deserves the name nor fiscal resources that enables it to provide substantial solutions for severe crises. Finally, based on the results of both step one and in step two, we will develop suggestions for the establishment of instruments of fiscal federalism in the EU that are efficient in day-to-day political practice and can be expected to preclude future sovereign debt crises, while securing a level of democratic control that can be expected from a 21st century Western polity. It goes without saying that pertinent EMU reform proposals will be taken into account. Apart from this practical benefit, the project Comparative Fiscal Federalism. Lessons to be learned for the EU aims at overcoming deficiencies in current academic research in the field by focusing the geographical range of research on federations that can be expected to provide meaningful findings, while widening the horizon of research by building a team transgressing national and disciplinary borders.

Outline Informed by the developments of the EU and the EMU in the wake of the post 2009 financial- and sovereign debt crises, the project started in October 2019. The project united lawyers, economists and political scientists from Australia, Austria, Belgium, Canada, Germany, Switzerland, and the US to sound out fiscal federalism. We aimed at the identification of structures, procedures and institutions that possibly can be useful for future fiscal relations in the EU. Until November 2023, the project proceeded in three steps: Step 1 provided an analysis of fiscal federalisms in the seven federations. Step 2 undertook a similar analysis for the current EU. Based on the findings of steps 1 and 3, in Step 3 we developed suggestions for instruments of fiscal federalism in the EU. Course Immediately after we started we faced an unforeseen challenge by the outbreak of COVID in early 2020. This affected project work in two ways: 'Learning by doing', we upheld a stable research-team and secured a stable flow of issue-related information. Since the support programmes of historic proportions launched by all seven federations and by the EU in the wake of the pandemic went to the heart of our research question - think of the then German Finance Minister Scholz, who qualified the EU measures as their 'Hamilton moment' - the pandemic influenced also our research programme. We met this challenge and published a front-running comparative analysis in late 2021. Parallel to this, we conducted our research programme under the three steps-approach outlined above. Results The differences between our model countries turned allowed the identification of commonalities at a very high level of abstraction only. This is an important outcome: history led to very diverse systems, so copying features from our model countries would most likely not work for the EU. The latter needs to find its specific way forward. That said, we identified one common aspect in our model countries which is missing in the EU: a budget of scale to counterbalance shocks. Learning from our model countries as well as from difficulties during the lifetime of EMU inspired us to come up with five scenarios for reforms: 1. The status quo, improved 2. A more mature EU Fiscal Federal System 3. Common features of functioning fiscal federal systems (where we come up with more inspirations taken from our model countries) 4. Scaling back to the Pre-crisis World 5. Utopia, the perfect fiscal federal system