"Obligations of good faith"? On the Difficulties of Building EU Federalism US-Style

The sovereign debt crisis has exposed the weaknesses of the regulative and institutional arrangements of the European Monetary Union (EMU). American scholars highlighted that there were lessons for Europe to be learned from the US. But to what extent can the US model of fiscal federalism be transferred to the European context? Our general assumption is that besides the different historically grown institutions, structures and economic concepts it is the different logics driving the two integration processes to render such transfer doubtful. Building on Oates’ theory of fiscal federalism we can discern two different approaches pursued by the US and the EU.

The logic of macro-economic stabilization essentially characterizes fiscal federalism US-style, providing for the crucial role of central government to correct market failures and, if needed, to distribute resources to local jurisdictions. By building on a firm constitutional framework since the end of the 18th century the US system was able to overcome not only severe economic and constitutional crises, but also to progressively enhance the power of the centre  to redistribute without relinquishing the no-bail out rule established in the 1840s. On the other hand,  fiscal federalism EU-style is of a contractual or confederate nature, that while aiming to support a common market, remains keen on avoiding  the emergence of a "resource-extracting" Leviathan in Brussels, putting great emphasis on combating moral hazard and shunning the logic of financial solidarity. Moreover, EU fiscal federalism rests on an intergovernmental decision-making mode enhancing the power of creditor states vis-à-vis debtor states.

Thus, although transfers are inevitable and conducted through rescue mechanisms, "surveillance and punishment" remains an essential element in a system where diverging interests of economically strong and weak states cannot be balanced by the commitment to a common constitutional framework. Instead of strengthening the federalization of the Union the most likely outcome of the crisis is therefore an increasingly differentiated integration.

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