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

Abstract

The budget rules that frame the European Monetary Union apply to the national States. Several EMU member nations are already organised on a federal basis; others, pressed by political and economic needs, have started to enact reforms aimed at increasing the degree of decentralisation. This paper examines the financial relations among different levels of government relative to the need to respect the budgetary rules established by the European Union. The analysis points out several critical areas in the interaction of fiscal decentralisation and the Stability and Growth Pact: a trade-off between the allocative benefits of decentralisation and exploiting the margins for counter-cyclical policy offered by compliance with the Pact is identified. The issue has been addressed in Italy through the introduction of the Domestic Stability Pact; this analysis stresses the need for further significant refinements.