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Fiscal Federalism in Europe: Good (and Bad) Lessons from Brazil, Germany, and the United States

Thursday, January 20, 2011
5:00 AM
1636 International Institute/SSWB, 1080 S. University

CES – EUC Winter 2011 Conversations on Europe lecture series

Mark Hallerberg, professor of public management and political economy. Hertie School of Governance. Sponsors: CES-EUC, Department of Political Science.

Further Information
There are two plausible ways the EU can stabilize the finances of its member states over the longer term. The first is to take steps that complement market discipline of individual member states. For market discipline to play this positive role, three conditions need to be met: markets need to have accurate information on member state finances; market valuation of a given state also has to be an accurate valuation of the sustainability of that state’s finances; and populations need to interpret market discipline as a signal about their government’s competence and punish governments that face market pressure. Such a system is possible under the current Stability and Growth Pact, and indeed it appears that all three conditions held in summer 2009. Any bailout of a member state, however, undermines this type of system. As the Greek crisis has demonstrated, markets will then focus on the probability of a bailout, and populations will focus their blame on Europe rather than on domestic issues. More political integration would then be needed to prevent a state from getting into a situation where a bailout would be an option. The Brazilian model is then a precedent that the European Union could emulate. The steps required to go this route would require a new treaty, however, and it would be more desirable to reform the existing Stability and Growth Pact in ways that preserve market discipline. Current arrangements do not appear stable over the medium to long run.