1 Fiscal federation or confederation in the European

The theory of fiscal federalism prescribes conditions for decentralization of government responsibilities, but with a bias towards a strong central government. In the EU context, the standard theory suggests the establishment of fiscal institutions to handle public goods and with taxing authority in Bruxelles. This article evaluates the experiences made with multi-level public finance within countries in Europe. In practice decentralization of government easily involves common pool problems related to vertical and intertemporal fiscal imbalances. Central governments find it hard to commit to hard budget constraints, and overspending and deficit bias results. Political strength of the center seems to be a precondition for a successful federalism, political centralization must balance economic centralization in fiscal federations. For the EU, this implies a choice between the continuation of a weak center and limited fiscal authority to avoid the common pool problem (fiscal confederation) or broad fiscal responsibilities with strong political centralization to police the common pool problem (fiscal federation)