Fiscal Federalism in the European Union: How Far Are We?

In this paper, we compare the present process of definition and implementation of fiscal policies in the European Union with the main conclusions of the “fiscal federalism” theory. This is done in order to draw possible lessons for future evolution, particularly taking into account the possibility of creating a European “Federation of Nation-States”, which we supported in a previous work. We argue that these main conclusions are easily compatible with the emergence of a largely decentralised “Federation”, but are still far distant from the present situation. In this context, we argue for several important lines of change in the short-run, namely an effective change in the process of coordinating fiscal policies and a credible reform of the Stability and Growth Pact, and in the medium-long-run, namely an important increase in the size of the European budget.