Fiscal federalism in monetary unions: hypothetical fiscal transfers within the Euro-zone

Johannes Kabderian Dreyer and Peter Alfons Schmid

International Review of Applied Economics, 2015, vol. 29, issue 4, 506-532

Abstract: Net fiscal transfers are commonly seen as a possible means to ensure the well-functioning of a currency area. We show that US net fiscal transfers, measured as the difference between gross federal revenues and federal expenditures per state, are enormous. Moreover, we run panel regressions that suggest their dependence on relative GDP and relative GDP growth during crisis periods, evidence of net fiscal transfers from relatively rich to relatively poor states (redistributive effect) and to states with an underperforming economic development (stabilization effect). The Euro-zone (EZ) lacks a system of fiscal federalism, which raises the question of whether it should be established in the medium- and long-run. If so, which should be the magnitude of net fiscal transfers? We calculate these transfers hypothetically for 1999-2010, using a relative volume comparable to the one in the USA.

Date: 2015
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DOI: 10.1080/02692171.2015.1016407

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