The Fiscal Compact, the 'Golden Rule' and the Paradox of European Federalism

Abstract

The paper analyzes the central provision of the recently enacted Fiscal Compact, which directs member states of the European Union (EU) to incorporate into their constitutions a “golden rule”, i.e. a requirement that yearly budgets be balanced. The purpose of the paper is to examine – by surveying the introduction of these pervasive budgetary constraints in four selected states (Germany, France, Italy and Spain) – the institutional implications that the “golden rule” has on the role of the political and judicial branches, both in the states and in the EU. The paper argues that, while the domestic effects of the “golden rule” are likely to vary from one state to another, the Fiscal Compact systematically enhances the powers of the EU institutions to direct and police the budgetary policies of the states, thus increasing centralization in the EU architecture of economic governance. The paper contrasts this development with the federal experience of the United States (US). In a comparative perspective, in fact, it appears that while most US states are also endowed with “golden rules” in their constitutions, the federal government never played a role in the adoption of these balanced budget rules and still today is barred from interfering with the budgetary processes of the states. In conclusion, the paper suggests that an unexpected paradox emerges in the new constitutional architecture of the EU: although in crafting the institutional response to the Eurozone crisis state governments have repeatedly discarded a US-like federal model as being too centralized and centripetal for the EU, they have ended up establishing a regime that is much less respectful of state sovereignty than the US federal system.

Keywords: EU, US, economic crisis, balanced budget, constitutions, federalism