Why Is there Fiscal Capacity but Little Regulation in the US, but Regulation and Little Fiscal Capacity in Europe? The Global Financial Crisis as a Test Case

Abstract

This chapter begins with a discussion of the classic theories of fiscal federalism from economics, and it compares the European Union with fiscal federalism in the United States. The US federal government has fiscal capacity but it does not regulate fiscal conduct at the state level. The EU, by contrast, has little fiscal capacity but it does regulate the fiscal conduct of the member states. After the financial crisis that began in 2008, multiple veto players in the EU left it in a reactive mode. There was still some regulatory change because the two most important states in the Union, France and Germany, can become the crucial agenda setters for reform. The US federal government, in contrast, did not try to regulate the states during the crisis, but it did successfully increase further its fiscal capacity