Fiscal federalism, EMU and shock absorption mechanisms: a guide to the literature.

Abstract

Fiscal federalism theory seeks to establish the optimal organization of a government, confined by certain geographic boundaries. The implications of that theory for the monetary unification process are shortly inquired. The literature measuring the redistribution and stabilization effects of the tax and transfer systems in different monetary unions is surveyed. The prospects of evolution to integration models with a federalist countenance are briefly analysed and it is given special attention to the projects of creation of a European Fiscal Transfers Scheme. That mechanism would provide the European economies with some degree of stabilization in substitution for the loss of the adjustment mechanisms. However, after analysing the different proposals for the creation of such mechanism we conclude that, given the shocks persistence, they easily become redistribution mechanisms.