Policy brief

Fiscal federalism in crisis: lessons for Europe from the US

Drawing comparisons between the fiscal architecture and situation in the US and the European Union, Bruegel Research Fellow Zsolt Darvas answers three

Publishing date
11 July 2010
Authors
Zsolt Darvas

The euro area is facing crisis, while the US is not, though the overall fiscal situation and outlook is better in the euro area than in the US, and though the US faces serious state-level fiscal crises. The focus on the euro area is a consequence of the Greek solvency problem, fear of contagion, the ambiguous policy response and institutional deficiencies.

A higher level of fiscal federalism would strengthen the euro area, not least because it could help to constrain member state-level fiscal policy, allow the resolution of banking issues, and would give less opportunity for conflicting responses. But a higher level of fiscal federalism is not inevitable.

Current fiscal reform proposals (strengthening of current rules, more policy coordination and an emergency financing mechanism) will if implemented result in some improvements. But implementation might be deficient or lack credibility, and could lead to disputes and carry a significant political risk.

Introduction of a Eurobond covering up to 60 percent of member states’ GDP would bring about much greater levels of fiscal discipline than any other proposal, would create an attractive Eurobond market, and would deliver a strong message about the irreversible nature of European integration.

About the authors

  • Zsolt Darvas

    Zsolt Darvas, a Hungarian citizen, joined Bruegel as a Visiting Fellow in September 2008 and continued his work at Bruegel as a Research Fellow from January 2009, before being appointed Senior Fellow from September 2013. He is also a Senior Research Fellow at the Corvinus University of Budapest.

    From 2005 to 2008, he was the Research Advisor of the Argenta Financial Research Group in Budapest. Before that, he worked at the research unit of the Central Bank of Hungary (1994-2005) where he served as Deputy Head.

    Zsolt holds a Ph.D. in Economics from Corvinus University of Budapest where he teaches courses in Econometrics but also at other institutions since 1994. His research interests include macroeconomics, international economics, central banking and time series analysis.

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