Fiscal Federalism, EMU and Shock Absorption Mechanisms

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.