DOI: 10.1515/tfd-2016-0002
THE FEDERALIST DEBATE
Year XXIX, N° 1, March 2016
THE FEDERALIST DEBATE
Papers on Federalism in Europe and the World
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Monetary Power and Fiscal Power in a Federal System
Alfonso Iozzo
Having created the institutions necessary for running the monetary union, Europe now needs
adequate institutions able to manage the requisite budget increase, mainly to be funded by its own
resources. However, there are major institutional differences between the two processes.
Monetary Power
In a federal system, responsibility for currency is held solely at central level: a single centre must
have the right to issue currency and to regulate its quantity. In federal systems such as the United
States and Switzerland, a central institution holds this monopoly but it includes representatives of
the lower level of government: the Federal Reserve System and the Swiss National Bank. Before
the advent of the Euro there was a similar institution in the Federal Republic of Germany: the
Bundesbank.
Characteristic of these monetary institutions is the composition of the governing bodies. In the case
of the US, the Board (of 7 members) is appointed by the President (after consultation with the
Senate) but its members have a very long mandate to ensure that they make decisions independently
of the incumbent President who can appoint its majority only in special circumstances1. Reinforcing
this independence is also the composition of the Open Market Committee which is responsible for
approving purchases of securities on the market, thereby determining the level of interest rates. In
addition to the 7 Federal Board members, on this “Committee” 6 other members are selected in
rotation from the 12 Reserve Banks (although the Federal Reserve Bank (Fed) of New York, which
intervenes on the foreign exchange market, is always present). An important relationship also exists
between the Fed and Congress, to which the Federal Reserve Bank must regularly report. The
European Central Bank has a similar structure where, alongside the 7 members of the Steering
Committee appointed by the Council (after consulting the European Parliament), the governors of
the central banks of Euro area countries participate in the meetings of the European System of
Central Banks (ESCB).
In a federal system, currency is the responsibility of the central level, but the body responsible for
its management has a federal nature.
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DOI: 10.1515/tfd-2016-0002
THE FEDERALIST DEBATE
Year XXIX, N° 1, March 2016
Fiscal Power
In a federal system, fiscal power is shared – at least as regards matters of constitutional importance:
in the United States, it is shared at federal and state levels. In a national system, fiscal power can be
devolved to local levels (regions, municipalities), but on the decision of the central state which can
always modify its criteria. In the federal systems, each level of constitutional relevance must have
its own fiscal powers, not just “devolved” from the higher level.
The European Union is now facing this difficult transition: the current system is, in practice, a
reverse “devolution” from state level to European level, which occurs by adopting a multiyear
financial programme that requires a “unanimous” decision by the Member States, which therefore
have the power to determine the quantity of resources that can flow into the common EU budget.
The shares of fiscal resources due to Europe can be defined in three ways:
- the one currently in use, in which the share for Europe is decidedly unanimously by the Member
States
- the provision in the “fundamental law” (Treaty or Constitution) of the share due to Europe
- the setting of the share by the federal bodies (Commission, Parliament and Council), with
decisions taken by a qualified majority.
Establishing the “share” in the “fundamental law” makes the system rigid, unable to quickly adjust
(a constitutional amendment is required) to the changing economic and social situation which may,
in time, require giving more resources to the federal budget – owing to common needs emerging –
or to the national budgets for exceptional economic situations.
The Procedure for Federal Bodies to Set the Share
If there are no limits to the power of the federal institutions to raise their share, this could result in
growing centralisation which would be to the detriment of the lower levels, even when certain
expenses would be more efficiently managed by the nation states or even by regions and
municipalities. This trend has taken hold in the United States, increasing the proportion of the
federal budget in the last century from 2.5% to 20% of GDP, reducing the share of state budgets to
10%. In some respects, particularly as regards the evolution of the budget, it can be said that the US
has now become more a centralised nation than a true federal system. In Europe it is necessary to
establish a system able to avoid “forced centralisation”, but without remaining with the current
system blocked by the veto power of the Member States. During the debate at the first term of the
elected European Parliament which culminated in the approval of the Spinelli project in 1984,
Mario Albertini set out a procedure that could reconcile the two previously mentioned
requirements2.
The decision on the proportion of fiscal power that can be acquired by the EU should provide, in
place of the current multiyear financial programme:
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DOI: 10.1515/tfd-2016-0002
THE FEDERALIST DEBATE
Year XXIX, N° 1, March 2016
- a proposal from the newly elected Commission at the outset of each “term of office” that takes
account of the debate before the European election on the priorities for action, as well as of the
discussion that took place during the vote of investiture by the European Parliament
- the evaluation of the proposal by a “Fiscal Conference” consisting of representatives of the
European Parliament (one-third) and the national Parliaments (two-thirds) with qualified majority
voting
- final approval from the European Parliament and the Council, again by qualified majority.
The Commission’s proposal should indicate the new common policies expected to be financed, the
savings possible at national level from the resultant economies of scale, the resources acquirable
from own taxes and those jointly managed with the Member States. The system would, in practice,
introduce a simplified constitutional procedure guaranteed by the “Fiscal Conference”. An early
indication of the validity of the procedure proposed can be found in the Fiscal Compact Treaty that
introduces, in Article 13, a European/national parliamentary conference.
Translated by Roger Gibson
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2
A case in point is when President Reagan was able to appoint the majority.
Il Federalista, XXIII, 1981, No 2, p. 115
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