The European Union (EU) has struggled with the meaning of fiscal federalism in Europe since the Treaty on European Union and the creation of the Economic and Monetary Union (EMU). The model of fiscal federalism inscribed in the Treaty at Maastricht conceived of national governments as distinct, miniature sovereign borrowers which retained the necessary fiscal competencies to manage sovereign economies. Central to the Maastricht model is a prohibition on financial assistance (Article 125 TFEU, ex Article 103 TEC) that enshrines a constitutional consensus on fiscal sovereignty and exposes Member States to market discipline and hard budget constraints.1 This follows a formula for federal equilibrium that is well established in theory and well evidenced in history, visible in the autonomous credit ratings of Swiss cantons, Canadian provinces and American states.2

In order to extract economic criteria for European fiscal federalism, Chapter 3 examines public accounts statistics and the economic literature on EMU from 1992 through the European sovereign debt crisis. It follows a chain of macroeconomic indicators running from nominal interest-rate convergence to the sovereign debt crisis. It examines nominal interest-rate convergence; structural determinants of sovereign bond yields; real interest rates; private-sector domestic credit; cross-border credit flows; consolidated banking claims; current-account imbalances; real effective exchange-rates; public and private-sector debt; the sovereign-bank feedback loop; and fiscal policy. The analysis finds that the Euro Crisis was a private debt crisis, not a public one. The causa sine qua non of the crisis is a severe mispricing of private and public debt caused by a failure of Articles 121-126 TFEU to induce markets to differentiate between sovereign borrowers under a (now realised) bailout expectation – not sovereign debt.

Chapter 8 seeks to extract principles of fiscal federalism for EMU and determine what models of fiscal federalism will ‘work’ in the context of the constitutional boundaries of the European legal order. Chapter 8 first extracts a number of institutional determinants of fiscal discipline in a decentralized federal system: market discipline; hard budget constraints; fiscal symmetry; expenditure and revenue autonomy; and specific characteristics for credibly-designed fiscal rules. It then tests those determinates in operation through a comparative analysis of five federations selected using a ‘most similar cases’ and a ‘prototypical cases’ methodology: Germany, Switzerland, the USA, Canada, and EMU. Chapter 8 finds that from the perspective of fiscal federalism theory, the incumbent prescriptions for centralised EU ‘fiscal union’ are - quite simply and profoundly - wrong. Centralised fiscal governance never works in a decentralised federation without market discipline, and contemporary economists already find the new governance framework no more credible than its predecessor.

Chapter 2 moves from the constitutional foundations of the European legal order to the architecture of fiscal federalism constructed atop them. It investigates where the constitutional principles identified in Chapter 1 inhere in the legal architecture of EMU, and explains the basic principles of economics inscribed for their attainment. The principles of fiscal sovereignty, price stability, and fiscal discipline are shown to penetrate three levels of investigation: The travaux préparatoires and the mandate for EMU (Article 119 TFEU); the allocation of competences in economic policy (Articles 2(3) and 5(1) TFEU); and the technical architecture governing public finance itself (Articles 121-126 TFEU). By those provisions, EU fiscal federalism rests on two principles: (1) Fiscal sovereignty – member state economic/fiscal competences remain outside the EU legal order altogether; and (2) market discipline –member states are exposed to ‘hard budget constraints’ and ‘market discipline’ to ensure fiscal discipline.

The book ends with two conclusions: First, Member State fiscal sovereignty is a permanent constitutional constraint upon the application of fiscal federalism theory in the European Union. Second, hard budget constraints and market discipline are indispensable for the guiding principles of price stability and fiscal discipline in a decentralised federation bound by the fiscal sovereignty of its Member States. In sum, the model chosen for European fiscal federalism must preserve the fiscal sovereignty of its constitutional democracies, and it must have market discipline under hard budget constraints. As for the selection of an appropriate model for EU fiscal federalism, this book proposes that three constitutional tests for fiscal sovereignty identified in Chapter 1, and the five determinates of fiscal discipline identified in Chapter 8, provide an intersecting set of criteria for determining which models of fiscal federalism are compatible and implementable within the boundaries of the European legal order.

Chapter 4 concludes for Part I of the book by setting-out out two criteria for EU fiscal federalism which emerge from Chapters 1-3. First, any model of EU fiscal federalism must preserve the fiscal sovereignty the 28 (now 27) constituent constitutional democracies at the base of its legal order. Second, hard budget constraints and market discipline are indispensable requirements for price stability, sound public finances, and a sustainable balance of payments in an EMU bound by the fiscal sovereignty of its member states. Those criteria are tested and applied as the thesis of the book throughout Part II.

Chapter 5 opens for Part II of the book with the task of taxonomy, classifying the emergent post-crisis EU fiscal architecture from the perspective of fiscal federalism theory in order to determine what it demands from the EU legal order to ‘work’. Chapter 5 finds that, from the perspective of fiscal federalism theory, the EU has sunk the cornerstones of a highly centralized model of ‘proto-fiscal union’ that is far more apt to unitary states than any of the other federations touched upon in this book. At its core, the new model supplants a legal pillar of fiscal sovereignty and market discipline (an entrenched ‘no-bailout’ law) with a legal feature of unitary states: centralized financial assistance and legal governance of fiscal policy. Chapter 5 evaluates the demands this places on the European legal order, and provides directions for the remainder of the analysis of Part II.

Chapter 7 examines whether the fiscal governance architecture enacted since the crisis is reconcilable with the constitutional boundaries of member state fiscal sovereignty underlying the EU legal order as a whole. It conducts a piece-by-piece deconstruction of the European governance framework to identify instruments which trespass on ultra vires and constitutional identity rulings of national constitutional courts. It finds that the new architecture is dependent, for its stable functioning, on instruments which are beyond the boundaries of the EU legal order and profess to bind national legislators in economic/fiscal policy, contrary to member state constitutional identity jurisprudence. By restricting fiscal autonomy and providing bailouts, the EU has sunk the foundation stones of a unitary model that is manifestly incompatible with the constitutional jurisprudence of its twenty-eight member states catalogued in this book. This is not only legally unsound, but economically ineffective and injurious to good principles of fiscal federalism.

Chapter 6 examines whether the instruments of conditional financial assistance enacted since the crisis are genuinely reconcilable with the boundaries of EMU inscribed in the Treaties as a matter of EU law. This is necessary because the text of the Treaty is but the litmus paper for determining whether a legal instrument coheres with much deeper constitutional boundaries underlying the EU legal order. It concludes, unavoidably, that conditional financial assistance under Article 136(3) TFEU and the ESM is simply not reconcilable with the legal architecture in the treaties under the analytical framework developed by the ECJ. This emerges from an analysis of the allocation of competences (within which it does not together sit) and the substantive provisions of Articles 121-126 TFEU (to which it does not adhere). This provides the first testable indication that the emerging new model is incompatible with much deeper the boundaries underlying the EU legal order.