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The implications of an EU fiscal union for local and regional authorities

Fiscal union / PUBLICATION
Fabian Zuleeg , Claire Dhéret

Date: 03/12/2012

The current move of the Euro Area towards the creation of a fiscal union represents a turning point for LRAs and is likely to have significant consequences that must be properly understood. In this report, Claire Dhéret, Francesco Nicoli and Fabian Zuleeg analyse the implications of the integration of the European fiscal and budgetary governance for LRAs. The aim of this report is to provide a useful tool to frame the discussion concerning the opportunities and challenges that a full-fledged fiscal union may raise in Europe.

The authors shed light on the features of a full-fledged fiscal union, based on the US example, and compare them with the current European situation. Based on this comparison the authors conclude that, although a series of important reforms and new measures have been adopted, the EU is still far from being a full-fledged fiscal union. In particular, the authors underline that the legal framework currently implemented is not strong enough to ensure proper crisis prevention.

Against this background, the authors suggest a model based on three pillars – an independent budget for the EU (1), coordinated budgetary procedures (2), and independent national budgets at the national level (3) – that could provide a long-term vision for a fiscal union in Europe. However, it should be reminded that such a move would be a long-lasting process only doable with the political will of national leaders.

In the second section of the note, the authors assess the consequences of the current measures adopted by the EU as regards fiscal policy and governance.

Seven main findings arise from the analysis: the introduction of a coordinated process of fiscal governance has been a long-lasting process accelerated by the crisis (1); the introduction of budgetary discipline within different MS emerged alongside, and occasionally following, the input of European policies (2); the process of fiscal governance seems to take two directions: fiscal decentralisation on the one hand, and Europeanisation of fiscal policy on the other hand (3); the effect on regional tiers seems to be twofold: from one side, their autonomy is restricted, especially in regions with direct taxation powers; on the other, their bargaining power towards the central state is increased (4); direct and indirect implications will emerge for LRAs, including the alignment of regional budget cycles with European rules and the shift towards multiannual budgetary planning (5); the more autonomy a regional authority enjoys within the national framework, the more likely the new European governance is to affect its powers and the decision-making process (6); there is a lack of theoretical and empirical literature concerning the effects of a full-fledged fiscal union over LRAs (7).

Having analysed the study's findings, the authors list three main recommendations aimed at ensuring the success of a European fiscal union. Firstly, they suggest that any progress towards a full-fledged fiscal union must be achieved in the full respect of the subsidiarity principle, deploying policies and responsibilities at the governance tier where it appears to be more effective and appropriate.

Secondly, a full-fledged fiscal union, if applied to a heterogeneous community like the EU, shall be designed to achieve policy dissemination and coordination, and will require direct involvement of the LRAs at EU level for the design of the policies of their competence. Finally, we believe that on the long term a true fiscal union must be empowered with a true EU budget able to pursue discretionary spending and investment, not least to help regions exit the economic crisis.

To read the study, please click here.

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