The Strains of Commitment: A Federal System Needs a Common Fiscal Policy

Abstract

The arguments raised in this brief article relate to the problem of fiscal federalism. The article points to the potential contradictions arising from the existence of a European constitution and a broader federal structure already in place in the EU, in the absence of a significant central fiscal system. It then argues that the arguments proposed for the maintenance of full fiscal independence by EMU member countries are weak and do not stand on closer scrutiny. Pooling of some fiscal instruments over which national governments have no or little control is the optimum strategy. It proceeds to argue for the creation of a European Fund that will gradually evolve to a European Unemployment Insurance Fund for all countries of the EU, or initially for members of EMU, as an automatic stabilizer, as insurance against economic and fiscal shocks and as a means for promoting social and political cohesion within the Union.