Fiscal Federalism and the Stability and Growth Pact: A Difficult Union

36 Pages Posted: 29 Jun 2012

Date Written: February 1, 2001

Abstract

Balassone and Franco note that while the budget rules that frame EMU apply to national States, several EMU member nations are already organised on a federal basis and others, pressed by political and economic needs, have started to enact reforms aimed at increasing the degree of decentralisation. They highlight several critical areas in the interaction of fiscal decentralisation and the Stability and Growth Pact. Balassone and Franco point to the reduced flexibility of the European approach compared with solutions adopted in federally structured countries and to the asymmetry between the responsibilities laid on national and local governments by European rules (compliance with the rules depends on the conduct of all levels of government, but de facto it is the central government that is answerable to the EU and that must pay the price for non-compliance). This calls for strict controls over local governments to prevent free-riding. The authors examine alternative solutions to deal with these problems, such as the mechanical extension of the Stability and Growth Pact, the introduction of a golden rule for decentralised governments, also in the form of a market for deficit permits, and the use of reserve funds. Finally, Balassone and Franco analyse how the issue has been addressed in Italy through the introduction of the Domestic Stability Pact and stress the need for further significant refinements of these domestic rules.

Suggested Citation

Balassone, Fabrizio and Franco, Daniele, Fiscal Federalism and the Stability and Growth Pact: A Difficult Union (February 1, 2001). Available at SSRN: https://ssrn.com/abstract=2095225 or http://dx.doi.org/10.2139/ssrn.2095225

Fabrizio Balassone (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Daniele Franco

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy
+39 06 4792 2793 (Phone)
+39 06 4792 2324 (Fax)

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