Federal Dynamics in Times of Economic and Financial Crisis

Abstract

The global economic and financial crisis is a challenge for all governments but in particular for federal states, as divided and/or shared territorial powers make federations susceptible to coordination problems in fiscal policy-making. This article is interested in the effects of the on-going crisis on federal relations. Three kinds of problems are evoked, which may become the cause of federal tensions and conflicts – opportunism of subgovernments, centralisation, and erosion of solidarity amongst members of the federation. Our analysis of fiscal policies and federal conflicts of eleven federations between 2007 and today reveals three kinds of coordination problems: shirking in the use of federal government grants, rent-seeking in equalisation payments, over-borrowing and over-spending. Our results show that shirking remained limited to few cases and occurred only in the first part of the crisis. However, rent-seeking and over-borrowing and -spending led to a reduction of solidarity amongst subgovernments, and increased regulation of fiscal discretion of the members of the federation. Subsequently, tensions in federal relations increased, though only in one case, this has challenged the federal order as such.

Keywords: Federalism, economic crisis, institutional changes