Fiscal Federalism and EMU

The prospect of monetary union has renewed an interest in an old theme of the economic and political literature: federalism. What lessons can be drawn from existing federations for the building of Europe? The first part of the paper surveys the features of existing federations and the impact of federal budgets in stabilizing regional business cycles. The second part analyzes the contribution of the economic theory of federalism on the European integration and the prospect of monetary union. It examines the following points: the organization of powers in EU; the problem of fiscal coordination and monetary policies; and the allocation of public between different levels of government. The conclusion advocates for a strengthening of solidarity mechanisms within the Union, in particular on the budget side, which should parallel the higher democratization of Community institutions