Reforming Fiscal Federalism in Europe Where Does The Pendulum Swing

REFORMING FISCAL FEDERALISM IN EUROPE: WHERE DOES THE
PENDULUM SWING?
Elisabeth Alber, Alice Valdescalici
Centre international de formation européenne | « L'Europe en Formation »
2012/1 n° 363 | pages 325 à 365

ISSN 0014-2808
ISBN 9782855051857
DOI 10.3917/eufor.363.0325
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Reforming Fiscal Federalism in Europe: Where
Does the Pendulum Swing?
Elisabeth Alber & Alice Valdescalici
Elisabeth Alber, Senior Researcher at the Institute for Studies on Federalism and Regionalism
at the European Academy of Bolzano/Bozen (EURAC)
Alice Valdesalici, Researcher at the Institute for Studies on Federalism and Regionalism at the
European Academy of Bolzano/Bozen (EURAC) and Ph.D. Candidate in Italian and Euro-
pean Constitutional Law, Graduate School of Law, University of Verona
1. Introduction
Against the backdrop of the financial and economic crisis, federal and regional
States are engaging in several reforms. The financial constitutional design and
institutional setting in the area of fiscal and financial matters are being revised in
order to better adapt to the current challenges, which result both from the supra-
national sphere of economic governance and the domestic one. It goes without
saying that both the allocation of financial resources to each government tier as
well as intergovernmental relations are critical for the economical performance
(and thus for the very existence) of a compound State. Both federal and regional
States are calling for a new era of fiscal federalism in order to meet required
budget stability objectives and boost their economic performance. They do so
either by reshaping existing frameworks or by trying to overhaul their multi-
tier government and governance system in its principles. The rationale behind
these reforming processes lies in the struggle between the apparent needs to re-
centralize while accommodating decentralization claims. Which tier of govern-
ment is better at attributing legislative and executive powers? How can a State
best meet budget stability objectives while being a player in various polycentric
spheres? There is an obvious need to reduce public expenditure and public debt,
but both seem to be a result of a high degree of centralized management in public
L’Europe en formation nº 363 Printemps 2012 - Spring 2012

326 Elisabeth Alber & Alice Valdescalici
affairs. Moreover, there is a quest for more efficiency and transparency in allocat-
ing responsibilities to better match citizens’ needs and preferences, and effectively
respond to the so-called democratic deficit. States have to come to terms with
the changing scope, character and varied dimensions of interdependence among
governments and governance actors. As a general rule, the decentralization of
public service provisions at the local jurisdictions of concern has been widely
recognized as a necessary and efficient tool of multilevel government and govern-
ance. Within the European Union it translates in the ‘principle of subsidiarity’,1
enshrined as a fundamental principle in the Maastricht Treaty, while elsewhere
it is pursued more informally as the counterweight to the ‘one size fits all’ ap-
proach. All in all, what is taking place is a growing complexity and specialisation
not just in the vertical but also in the horizontal structure of the public sector.
Functions amongst government tiers are increasingly overlapping. As a result, the
multiplicity of processes coming to the fore has to be newly organized in a flexible
way, providing for example territorial entities with more autonomy, both on the
expenditure side and on the revenue side. At the same time, equalization systems
have to grant equality and solidarity for the sake of the unity as a whole.
This paper focuses on federal and highly regionalized European States and
analyses reform processes in the fiscal and financial area from a comparative do-
mestic perspective. Germany, Switzerland, Spain and Italy are referred to most in
this paper while marginal remarks are devoted to Austria and the United King-
dom. This paper starts by providing a comparative overview of the rationale that
lies at the bottom of the reform processes within the proposed multi-tier systems
(chapter 2). It investigates the characteristics that permeate the various legal or-
ders. From a comparative perspective, it tries to single out the different trends
in shifting powers in favour of either (re)centralization or decentralization. The
key elements of the reforms will be scrutinized in order to attempt an evaluation
of the changing fiscal and financial settings. Then the paper goes on by paying
nuanced attention to fiscal decentralization (chapter 3). The recognition of au-
tonomy on the revenue side is one of the most important aspects as far as fiscal
decentralization is concerned. Revenue regimes are briefly described through a
comparative perspective. Afterwards, the paper focuses on the problem of how
to accommodate autonomy and differentiation as well as solidarity and equity
within the new fiscal regimes (chapter 4). An analysis of the different ways for-
ward will be offered (for instance, equalization schemes and debt brakes). The
importance of intergovernmental cooperation will be discussed in the following
chapter (no. 5). The paper goes on in describing the main features of intergov-
1. In the course of the common elaboration of the present paper, the chapters 2, 3 and 4 were written by Alice
Valdesalici, the chapters 5, 6 and 7 by Elisabeth Alber and the introduction and conclusions by both.
In short, public policy and its implementation should be attributed to the lowest level of government capable
to achieve the objectives.

Reforming Fiscal Federalism in Europe: Where Does the Pendulum Swing? 327
ernmental cooperation in fiscal and financial areas (chapter 6). The paper con-
cludes with an analysis of recently established bodies and procedures in the fiscal
area and public finance sector. It briefly outlines some emblematic cases from an
institutional point of view by describing the rules of the bodies as well as their
role within the respective economic governance system (chapter 7). Finally, some
conclusive statements are given to summarize the trends, which characterize the
ongoing reform processes (chapter 8).
This paper does not stipulate a definition of the various terms used. As a gen-
eral rule, it adopts terminology with regard to reforming processes as commonly
used in the respective State and its official documents as well as widely recognized
doctrine. For example, Italy’s so-called fiscal federalism reform translates into a
rearrangement of financial relations while in Germany the reforms are in general
called Federalism Reform I and Federalism Reform II and do have a larger scope
of application. The context of each chapter will be self-explaining with regard
to the used terminology. Moreover, when referring to the government levels the
adjectives ‘multilevel, multilayered and multi-tier’ are used as interchangeable
terms.
2. The rationale behind the reforms: decentralization or (re)centralization

of powers?
European countries are being struck by reforms in fiscal and financial areas,
which are either recently concluded or in discussion. They all aim at restructuring
the financial system and their intergovernmental cooperation schemes allowing
both for the accommodation of pluralism and context-specific interests, and for
the maintenance of unity and equity. For the sake of this analysis it is worth mak-
ing a distinction at the very beginning between ‘mature federations’ (for example,
States with a deep-rooted long federal tradition and a strong federal political cul-
ture) and ‘emerging federations’ (for instance, States with a less-rooted multi-tier
system and a rather weak federal political culture). The federal States Switzerland
and Germany are examples of the first group, while the highly regionalized States
Spain and Italy fit in the second group, being defined as ‘quasi-federal’ and as a
“devolutionary asymmetric federation in the making”.2 Keeping this distinction in
mind, several differences can be highlighted while analyzing the processes which
characterize these two types of federations. As a matter of fact, in mature federa-
tions the spirit of fiscal and financial reforms seems to be less linked to the growth
of power decentralization and is rather perceived as an opportunity (and necessity
for competitive economic performance) for bringing coherence to a system by
2. See for example F.Palermo, “Asymmetric ‘Quasi-Federal’ Regionalism and the Protection of Minorities: The
Case of Italy,” in: federalism, Subnational Constitutions, and Minority Rights, eds. A.Tarr, R.Williams, J.Marko,
(Praeger, Westport, 2004), 107-132.

adjusting to new scenarios. Put differently, States have no other choice than to get
functioning systems to adapt. Emerging federations are without a doubt hit by
these same challenges, but their need for a new era of fiscal federalism does come
as a consequence to the decentralization of public functions within their federal-
izing processes (for example Italy).
In Switzerland, the emblematic example of a mature federation, in 2008 a
reform has entered into force aiming at both the rearrangement of competenc-
es between the Confederation and the cantons, and the reorganization of the
equalization system. The existing tax competition inherent to the Swiss Con-
federation causes wide discrepancies among the cantons (and in some cases also
among the municipalities), even though the Swiss Confederation is a relatively
small country. Both endogenous and exogenous factors called for new rules as the
former system was inefficient in coping with the discrepancies. The new system
combines vertical and horizontal components with a twofold objective: keeping
the country together, while maintaining cantonal tax sovereignty.3 Moreover, the
reform intervenes in disentangling several competences that previously were joint
tasks. However, a set of common responsibilities is maintained, because in certain
circumstances a strict separation is not sustainable. As a general rule, new forms
of cooperation between the federal and the cantonal level have been established
and block grants have been substituted to the former matching grants, in order
to diminish the dependency of the cantons (especially in the poorest ones) from
conditional federal transfers (for example, grants and subsidies). Finally, inter-
cantonal collaboration and cost-compensation is fostered also through federal
intervention on cantonal demand (for example with regard to the university sec-
tor). Switzerland’s reforms are perfectly in line with the reforms elsewhere, offer-
ing adjusted procedures to better respond to new scenarios and better meet the
quest for coherence and efficiency. As a matter of fact, the Swiss Confederation
is one of the most decentralized federations4 and the reform in 2008 does not
change in its principles; it confirms the status quo ante. The changes, as such, do
not interfere in the equilibrium between decentralization and (re)centralization
(or, put differently, in the balance between autonomy and solidarity) and confirm
the inherent rationale of federal systems: dynamic and process-oriented systems
that require a constant and accurate maintenance.
3. See G Kirchgässner, “Swiss Confederation,” in: The practice of fiscal federalism: comparative perspectives, A
Global Dialogue on Federalism, eds. A. Shah, J.Kincaid, vol. IV, (McGill-Queen’s University Press, Kingston/
Montreal, 2006), 338-339.
P. Mischler, “Il federalismo fiscale in Svizzera,” in:, Federalismo fiscale ‘learning by doing’: modelli comparati di
raccolta e di distribuzione del gettito tra centro e periferia, ed. A. De Petris (Cedam, Milano, 2010), 68-74.
4. R. Watts, Comparing Federal Systems (Montreal, 3rd ed, 2008), 176-177.

In recent years also the mature federation of Germany has experienced two
federalism reforms, respectively in 2006 and in 2009.5 Some of the main objec-
tives of Federalism Reform I in 2006 were the improvement of the decision-mak-
ing capabilities of the Bund (at the federal level) and its Länder (at its constituent
units). This was reached by the redefinition of the Länder’s participation rights
in the legislature of the Bund, a clear allocation of political responsibilities and
a clarification of the legislative competences of the Bund and the Länder (the
so-called disentanglement). This first constitutional revision did lead to a clearer
distinction in the competences allocated between Bund and Länder. Moreover,
it limited both the need for approval on federal legislation (Zustimmungsgesetze)
by the Bundesrat (the Federal Council representing the Länder) and the federal
intrusion in ‘affairs’ belonging to the Länder jurisdiction (for example by elimi-
nating the framework legislation, reducing the so-called common competences
and redefining the functioning of the concurrent legislative competence). Even
if it overcame the ‘reform tailback’ (Reformstau) that prevented the start of the
reform process, the 2006 revision missed dealing with the issues related to public
finances and intergovernmental financial relationships, and, in particular, with
the equalization transfers from the richer to the poorer Länder.6 Finances between
the Bund and the Länder had been excluded from the reform. The purpose was to
postpone the revision of ‘fiscal federalism’ to Federalism Reform II, whose joint
parliamentary commission started its works in December 2006 and completed
them in 2009. The second reform was supposed to address the system of inter-
governmental finances as a whole. However, a comprehensive restructuring of
the system was missed. The joint commission of the Bundestag and the Bundesrat
failed to elaborate proposals on important issues like taxation and fiscal equaliza-
tion. The questions related to the equalization system were left off the agenda.
Both the federal and state governments have agreed to keep the existing intergov-
ernmental transfer scheme (Finanzausgleichsgesetz), which expires in 2019. This
system was agreed upon in 2005 on the basis of the 1999 decision of the Federal
5. For an in-depth analysis of fiscal federalism in Germany, see: J. Woelk, “I rapporti finanziari tra i livelli di gov-
erno nell’ordinamento tedesco,” in: Federalismo fiscale in Europa, Esperienze straniere e spunti per il caso italiano,
eds. F. Palermo, M. Nicolini, (Edizioni Scientifiche Italiane, Napoli, 2012), 15-42.
6. The 2006 reform indeed comprises some adjustments as far as Bund-Länder financial relations are concerned.
To this regard it is worth mentioning the amendments of art. 104a of the German Basic Law, that now includes:
1. the requirement of the Bundesrat approval over federal laws that provide for Länder administration or funding
(para. 4); 2. The joint responsibility of both the Bund and the Länder as far as EU law violations are concerned,
together with the respective percentage in costs bearing in case the EU should fine Germany (par. 6). On the
Reformstau, see Woelk, J.Segnali, “di crisi nel federalismo tedesco: verso un modello più competitivo?,” in: Le
Regioni (1999), 217-244.
On the Federalism Reform I, see A.Gunlicks, “German Federalism Reform: part one,” in: German Law Journal,
vol. 8, n. 1 (2007): 111-132 ; the Law Review Diritto Pubblico Comparato ed Europeo, no. 1 (2007).
J. Woelk, “Eppur si muove: la riforma del sistema federale tedesco,” in: Le Istituzioni del Federalismo, no. 2,
(2007): 193-216.

Constitutional Court,7 which with regard to arising conflicts between richer and
poorer Länder, obliged the legislative bodies to adjust the equalization scheme.
This adjustment fixed the equalization scheme for the period between 2005 and
2019 and took place shortly before the commission of Federal Reform II started
its works8 Therefore the main outcome of Federal Reform II is the revision of the
constitutional rules that govern sub-national and federal borrowing. The so called
‘debt brake’ (Schuldenbremse) was introduced. It reshaped the constitutional in-
debtedness rules for both the Bund and the Länder and institutionalized an early
warning system to prevent and remedy future budget crisis. Since the seventies
both the Bund and the Länder have experienced a high level of public debt and
the 2008 financial and economic crisis have worsened the state of public financ-
es.9 At a certain point, when some Länder claimed a federal bailout asserting that
debt levels were no longer sustainable, the situation began to degenerate.10 The
constitutionalization of the ‘debt brake’ (see details in chapter 3) prompted a
re-centralization effect by introducing strong budgetary restraints on the Länder
finances. This trend could have been offset by the recognition of more autonomy
to the Länder as far as the revenue side is concerned, but the reform did not in-
tervene on tax autonomy, confirming the status quo ante.
A peculiarity of the German federalism is the gap between the rationale for
reform and the objectives reached once the process was concluded. As a matter
of fact, while the German Federal Republic has always been referred to as an
example of stability, constitutional revisions have been relatively numerous. This
is due to the very nature of a federal system, which can work effectively only if
conceived as a process and not as a static equilibrium. Reforms have to be viewed
as a rule rather than as an exception, a tool for maintenance rather than as a tool
7. BVerfG, 2 BvF 2/98, 11.11.1999.

8. With regard to conflicts arising within the equalization scheme between richer and weaker Länder, the Court
deemed the equalization system as constitutional, but under the condition that clear and objective criteria are
settle by the law (so called “Maßstäbegesetz” that can be translated as “measure-law”). On the 2005 reform of
fiscal equalization system in Germany, see: G.Färber, K. Baranova, “Centralisation and Decentralisation of Fis-
cal Federalism in Germany,” in: Institut d’Estudis Autonòmics, Decentralizing and Re-centralizing Trends in the
Distribution of Powers within Federal Countries, (2008 IACFS Conference, Barcelona, 2010)
For further details on the reform see: Bundesministerium der Finanzen, Länderfinanzausgleich at< http://www.
bundesfinanzministerium.de/nn_3378/DE/Wirtschaft__und__Verwaltung/Finanz__und__Wirtschaftspoli-
tik/Foederale__Finanzbeziehungen/Laenderfinanzausgleich/27457.html?__nnn=true>(last access on 3rd March
2012).
9. On the link between incentive problems and the growth of public debt in the German Länder, see J. Rod-
den, A. Hamilton’s Paradox. The Promise and Peril of Fiscal Federalism (Cambridge University Press, New York,
2006), 153-187.
10. The Federal Constitutional Court (BVerfGE) provided for a bailout of the Länder Saarland und Bremen,
thus Berlin was denied a federal bailout (respectively, BVerfGE 86, 148 – Finanzausgleich II – and BVerfGe
116, 327 – Berliner Haushalt). On the issue of Länder bailouts see: Seitz H., Subnational Government Bailouts in
Germany, in: ZEI working paper B20, Bonn, 1999 <http://www.uni-mannheim.de/edz/pdf/zei/b99-20.pdf>.

for revolutionary changes.11 They permit the system to evolve and adapt to new
internal and external challenges. Also in Austria, a centralized federation, the
thirst for reform in the area of fiscal federalism derives from the need to keep the
system coherent while trying to accommodate different interests. The revision of
the financial constitution has been a part of the political agenda since 2003, but
no agreement has been reached yet.12 The aim is to rationalize the system of finan-
cial relations through an effective implementation of the connection principle13
between revenue and expenditure by means of endowing its nine constituent
units (Länder) with more fiscal autonomy as well as with an equalization system
based on real needs.
Referring to the emerging federations, it is interesting to reflect on the Span-
ish case,14 As a matter of fact, in Spain the recent reforms are a consequence of
major power decentralization. This is a relentless motus that has characterized the
Spanish system during the last three decades. Thus, the seventeen Autonomous
Communities (ACs) are in charge of the most relevant public functions (such
as education, social services and, since 2002, health) as well as important ad-
ministrative powers. The decentralized public expenditure has increased due to
the re-allocation of competences and thus the resources were in many cases no
more adequate to the needs. Moreover, the reduction in State competences was
not accompanied by the respective decrease of State resources in favour of the
Autonomous Communities. The discrepancy in the distribution of resources and
functions has triggered a vertical imbalance between the central and the interme-
diate level of government. Additionally, the differences among the Autonomous
Communities generated horizontal imbalances. Indeed, the previous financing
system was unable to grant territorial equality in the provision of public functions
(basing the amount of revenues only on the population parameter). These imbal-
ances have been the main reason for the reform of 2009.
Finally, even the wave of reforms since 2006 has characterized the Statutes
(Estatutos) of the Autonomous Communities as a motor for overall innovative
changes. As a matter of fact, due to the revision of the Statutes, the framework
11. F. Palermo, “Recenti sviluppi del federalismo tedesco, tra continuità e innovazione,” in: Federalismi a con-
fronto. Dalle esperienze straniere al caso veneto, ed. A. Benazzo (Cedam, Milano, 2010), 71-73.
12. F. Palermo, “Il federalismo austriaco: un cantiere sempre aperto,” in: I cantieri del federalismo in Europa, ed.
D’Atena Antonio (Giuffrè, Milano, 2008), 19-24.
13. The connection principle suggests that public tasks should only be shifted to a lower level if the level is
also provided with the respective financial means and responsibilities to execute the additional functions. For a
comprehensive and comparative analysis of the connection principle see; M. Nicolini, “Principio di connessione
e metodo comparato,” in: Federalismo fiscale: una sfida comparata, ed. F. Palermo, E. Alber, S. Parolari, (Eurac
Research, CEDAM, Padova, 2011), 97-120.
14. For an in-depth analysis of fiscal federalism in Spain, see: A. Carmona Contreras, “Il finanziamento delle
Comunità autonome in Spagna,” in: Federalismo fiscale in Europa. Esperienze straniere e spunti per il caso italiano
ed. F. Palermo, M. Nicolini (Edizioni Scientifiche Italiane, Napoli, 2012), 63-94.

legislation at central level (known as LOFCA)15 had to be revised in order to

comply with the new fiscal provisions contained in the single Statutes.16 Put dif-
ferently, some provisions of the new Estatutos called for a revision of the State
legislation itself. All in all, the ‘Spanish Financial Constitution’ consists of the
so-called ‘constitutional block’ (the Spanish Constitution itself ), the Ley Orgánica
de Financiación de las Comunidades Autónomas (LOFCA) and the Statutes (Es-
tatutos) of each Autonomous Community (AC). This results in a very complex
system of financial relations. 17 The Spanish Constitution itself contains only a
few provisions relating to fiscal federalism and limits itself in defining the general
principles guiding the system as a whole. The LOFCA and the Statutes are sub-
ordinated to the Constitution. In particular, the LOFCA contains general provi-
sions enforceable in all Autonomous Communities, while the Estatutos define the
rules regarding each single AC. In practice, the recent revision of the Statutes in
the area of fiscal autonomy turned out to be in contrast with the general provi-
sions of the LOFCA and called for an amendment of the LOFCA itself while
affirming a de facto supremacy of the Estatutos.18
Italy, a highly regionalized State, is affected by a similar anomaly. Back in
1997 (Bassanini Laws) significant executive competences were decentralized and
in 2001 a constitutional reform revised the intergovernmental relationships, es-
pecially with regard to its fifteen ordinary Regions.19 Regions were given more
legislative and administrative powers and provided with fiscal autonomy, both on
the revenue and expenditure side.20 The 2001 Constitutional Reform reshaped
the constitutional relations between the central State and the Regions by chang-
ing the distribution of legislative and administrative powers among these govern-
ment tiers. Art. 117 of the Italian Constitution now lists all exclusive legislative
15. LOFCA stands for Ley Orgánica de Financiación de las Comunidades Autónomas no. 8/1980, adopted on
22 September, as later on amended, last with the LOFCA 3/2009 adopted on 18 December 2009.
16. F. Balaguer Callejon, “Lo Stato ‘Autonómico’ Spagnolo: La stagione delle riforme,” in: I cantieri del federal-
ismo in Europa, (ed. D’Atena Antonio Giuffrè, Milano, 2008), 333-393.
17. At present the financing system of the common regime Autonomous Communities is disciplined in the
LOFCA 3/2009, of 18 December, in modification of the LOFCA 8/1980, of 22 September; and the Law
22/2009, of 18 December, regulating the financing system of the common regime Autonomous Communities
and Cities with a Statute of Autonomy, for the reforms that did not require an Organic Law (that is a super-
primary Law, with a status in between an ordinary Law of the Parliament and a constitutional Law). On the
special rank of the LOFCA in the Spanish system, see: Parolari S. and A. Valdesalici, “Le fonti del federalismo
fiscale e le tendenze riformiste,” in Federalismo fiscale: una sfida comparata, ed. F. Palermo, E. Alber, S. Parolari,
(Eurac Research, CEDAM, Padova, 2011), 339-370.
18. G. Carboni, “Il federalismo fiscale dinamico in Spagna,” in: federalismi.it, no. 9, (2010): 4-8.
19. Italy’s cooperative regionalism consists of fifteen ordinary regions and five special regions. The ordinary
regions remained on paper until the 1970s, while the special regions as a general rule developed their autonomy
systems since 1948. As mentioned in art. 116 of the Italian Constitution the latter are: Friuli Venezia Giulia,
Sardegna, Sicilia, Trentino-Alto Adige/Südtirol (consisting in the two Autonomous Provinces of Trento and
Bolzano) and Valle d’Aosta/Vallée d’Aoste.
20. Art. 117 and 118 of the Italian Constitution.

powers of the State as well as the concurrent ones, while residual powers lie with
the Regions. The implementation of the financial aspects of the 2001 Constitu-
tional Reform remained unresolved and the model of grants made by the cen-
tral government was de facto confirmed. Only in 2008 fiscal federalism entered
once again into the political arena. Framework Law no. 42/2009 implemented
art. 119 of the Italian Constitution [Financial Autonomy]. This delay had further
worsened the asymmetry between the expenditure and the revenue accountabil-
ity as far as territorial autonomies are concerned. While the ordinary Regions
and local entities were entitled to 50% of the total public spending, they were
responsible for only 18% of the revenue. Put simply, the delta of 32% translates
into a vertical fiscal gap and points out the unaccountability of the system. Law
no. 42/2009 and its bylaws (enactment decrees)21 were given the task to reduce
this inconsistency by implementing the constitutional principles of ‘fiscal feder-
alism’. The framework legislation of 2009 provided for a new order of financial
relationships among all tiers of government aiming at entrusting all territorial
entities with more autonomy and accountability, both on the expenditure and
the revenue side. However, the tax system still remains mostly centralized as far as
the legislative power is concerned. This guarantees tax pressure uniformity within
the Italian territory. All in all, this pattern also characterizes the other European
States, with the sole exception of Switzerland.
Finally, even in the devolved United Kingdom a reform is under discussion.22
But the process concerns only a limited part of the territory, more precisely the
devolved administration of Scotland.23 On the one hand, the Scottish territory
has been entitled with a high level of devolution as far as competences are con-
cerned; on the other hand it has not been guaranteed an adequate level of fiscal
autonomy. As a matter of fact, the Scotland Act of 1998 distinguished between
“reserved ” (listed in the Act) and “devolved matters” (not listed in the Act), but
endowed the Scottish Parliament a limited fiscal autonomy. Scotland was recog-
nized the power to vary the tax rate over the income tax up to 3%.
21. With Law no. 42/2009 of 5 May, the parliament delegates the central government for the implementation
of fiscal federalism principles reckoned in art. 119 of the Italian Constitution.
22. For an in-depth analysis of fiscal federalism in UK, see: J. Frosin, “La ‘devolution’ fiscal nel Regno Unito:
verso l’apertura del vaso di Pandora?,” in: Federalismo fiscale in Europa. Esperienze straniere e spunti per il caso
italiano, ed. F. Palermo, M. Nicolini (Edizioni Scientifiche Italiane, Napoli, 2012), 109-123.
23. To follow the steps related to the adoption of the Scotland Bill, see:
http://services.parliament.uk/bills/2010-11/scotland.html.

3.The tax systems: trends in shifting accountability by fiscal decentraliza-

tion
Fiscal relations in multi-tier systems can be conceived as the outcome of cen-

tralization and decentralization trends. Due to its importance for the very ex-
istence of compound States and its inherent dynamic nature, they frequently
undergo reforming processes. Such processes shift accountability and powers in
favour either of the central or decentralized tiers of governments. The recognition
of autonomy on the revenue side is one of the most important aspects as far as fis-
cal decentralization is concerned. A revenue regime in multilevel States typically
consists of three elements: tax sources owned by each level of government, shared
taxes and State transfers. The role played by each element deeply relies on the al-
location of the taxing powers. As a matter of fact, in some countries subnational
entities rely highly on federal transfer or shared taxes, while in others they depend
mainly on own source revenues.24
With the sole exception of Switzerland, in the European scenario the legisla-
tive power to tax is extremely centralized.25 As a norm, the federation has the
legislative competence to create and regulate the tax system, while sub-national
entities are recognized only limited taxing power, usually with regard to tax-
sources having little relevance as far as the revenue is concerned. Additionally,
sub-national entities tend to be reluctant in making use of the limited powers
acknowledged because taxing is considered an unpopular measure (for example,
in Austria).26 On the contrary, expenditure competences and responsibilities tend
to be highly decentralized in European federations, as most of the sub-national
entities are entitled with relevant executive powers. This is the case not only of the
German Länder, which are in charge of both own and delegated executive pow-
ers, but also of the Spanish Autonomous Communities and the Italian Regions.
Indeed, even the sub-national entities of the two emerging federations have been
progressively acknowledged with more and more competences, such as health,
education and social assistance.27 Therefore, in European federations fiscal au-
tonomy and accountability of sub-national entities have to be reached by other
means; such as shared taxes, which are established and regulated by a federal law
24. For an in-depth analysis on fiscal sovereignty and the role of subnational entities in compound States see:
G. Färber, “La sovranità fiscale degli enti territoriali,” in: Federalismo Fiscale: Una Sfida Comparata, (eds. F. Pal-
ermo, E. Alber, S. Parolari, CEDAM, 2011), 123-155.
25. On fiscal federalism in the Swiss Confederation, see: S.Gerotto, “Il ‘federalismo fiscale’ svizzero,” in: Fed-
eralismo fiscale in Europa Esperienze straniere e spunti per il caso italiano. eds. F. Palermo, M. Nicolini (Edizioni
Scientifiche Italiane, Napoli, 2012), 95-107.
26. P.Bußjäger, “I rapporti finanziari in Austria,” in: Federalismo fiscale tra differenziazione e solidarietà. Profili
giuridici italiani e comparati, ed.Woelk Jens (Eurac research, n. 55, Bolzano, 2010), 131-142.
27. Extending the competence not only to the executive power, but even to the legislative one, at least recogniz-
ing a legislative power shared in between different levels of government.

and then distributed among the tiers of government. Depending on the applied
sharing criteria, this source of revenue can foster political and financial account-
ability and the responsiveness to local needs.28 Indeed, if the formula applied in
the distribution, takes into account the amount of receipts collected within the
territory of reference, this results in a linkage between spending capability and
tax capacity.
At this point, it is worth mentioning the reforms recently adopted in the
emerging federations of Spain and Italy. The Spanish Autonomous Communi-
ties have been entrusted with increased autonomy and joint responsibility29 in
order to reduce the dependency on State transfers. The reinforcement can be
traced back to both the rise in the percentage of tax-sharing (for instance, taxes
partially devolved or ‘ceded’, tributs cedidos)30 to the Autonomous Communities
and the increase in the regulatory and administrative powers over them. As far as
revenue sharing is concerned, the taxes assigned are the same already set down in
the previous system.31 The main novelty is the growth in the allotted percentage.
For example, the share in the Personal Income Tax revenue amounts to 50% of
the taxable yield, while before 2009 Autonomous Communities were entitled to
only 33%. Even the part received from the Value Added Tax has been brought
from 33% to 50% of the net collection. While the amount received from Spe-
cial Manufacturing Taxes on Beer (and on Wine and Fermented Liquors), on
Intermediate Goods, on Alcohol and Alcohol Products, on Fuels and on Tobacco
Products has increased from 40% to 50% of the net collection. Moreover, Auton-
omous Communities were recognized the power to set the individual and family
minimum as far as the taxation on Personal Income is concerned, thus enhanc-
ing the legislative powers over the ceded taxes already acknowledged in the 2001
reform.32 Despite the progresses in terms of autonomy and joint responsibility,
the Autonomous Communities still do not have a regional tax system as the tax-
ing power belongs mainly to the central level, in line with the European trend. A
similar remark can be asserted as far as Italy is concerned. Regional autonomy on
the revenue side is indeed rather limited even after the reform. Despite the link-
28. Anderson George, Fiscal Federalism: A Comparative Introduction, Forum of Federations (Oxford University
Press, Canada, 2010), 19-20.
29. See Art. II, LOFCA (Ley Orgánica 3/2009).
30. For an accurate analysis of the Spanish fiscal federalism system before the 2009 reform, see: J.López-Labor-
da, J.Martinéz-Vásquez, C. Monasterio, “Kingdom of Spain,” in: The practice of fiscal federalism: comparative
perspectives, A Global Dialogue on Federalism, eds. A.Shah, J. Kincaid, vol. IV (McGill-Queen’s University Press,
Kingston/Montreal, 2006), 288-316.
31. By Law no. 21/2001, of 27 December, regulating the tax and administrative measures of the new system
of finance applicable to Autonomous Communities under the Common System and Cities with Autonomy
Statutes.
32. Ley Orgánica 7/2001, of 27 December, modifying the Ley Orgánica 8/1980, of 22 September, on Autono-
mous Communities financing (known as LOFCA).

age between regional financing and tax revenue as well as the abolition of State
transfers, the legislative power to tax is still extremely centralized. According to
art. 119 of the Italian Constitution, Regions have to fund their expenditure by
means of their own taxes, shared taxes and un-earmarked transfers financed from
an equalization fund. With the reform of 2009, State transfers have been abol-
ished and replaced with revenues related to the fiscal capacity of each territory. At
present, Regions are entitled to a 44,72% share of the Value Added Tax revenue,
which is calculated in appliance to the territoriality principle. This means that in
estimating the regional revenue the reference goes to the amount collected within
the territory and not anymore to the value statistically assessed by the National
Statistical Institute (ISTAT).33 The reform pursues the accountability of the inter-
mediate level of government, connecting the revenue amount to the development
of local economy.34 Nonetheless, it has to be kept in mind that the legislative
power to set and levy the most relevant taxes still remains in the hands of the
State. In practice, regional tax autonomy is limited to taxes with little quantita-
tive relevance due to the stringent limits put in place (most importantly, the
prevention of double taxation on the same tax base). The most significant tax will
probably be the regional tax on auto vehicles.35 From a comparative perspective,
the Italian Constitution does not list the own-taxes of each level of government
as the German Basic Law does.36 Nevertheless, a new order in terms of major fis-
cal autonomy has been reached for certain taxes and under specific conditions.
Regions have been acknowledged the power to intervene on the surtax of State
taxes varying the tax rate within well-defined constrains set forth by the State.
For example, regional sources comprise a surcharge on Personal Income Tax and
the reform has endowed the Region with the legislative power to vary the tax rate
within certain limits established by the State. Another example of increased fiscal
flexibility concerns the regional tax on the Income of the Productive Activities
(so-called IRAP). As a matter of fact, Regions have been provided with the power
to reduce the tax rate, if they meet specific requirements.37
33. The normative reference is the enactment decree no. 68, of 6 May 2011, published in the Official Bulletin
no. 109, of 12 May 2011 and entered into force on 27 May. The decree regulates the autonomy on the revenue
side of both ordinary regions and provinces and disciplines the criteria for defining standard costs and needs
in the health field. For a commentary see: E. Buglione, and E. Jorio, “Schema di decreto legislativo in materia
di autonomia di entrata delle regioni a statuto ordinario e delle province nonché di determinazione dei costi e
dei fabbisogni standard nel settore sanitario,” in: Il federalismo fiscale, ed. Antonio Ferrara, Giulio M Salerno.
(Commento alla legge n. 42 del 2009, Napoli, Jovene editore, 2nd edition, 2011).
34. This principle already applies as a general rule to the five special Regions.
35. Gilberto Muraro, Federalismo regionale: la rivoluzione può attendere, in: Lavoce.info, 05.04.2011.
36. See Art. 105 Grundgesetz.
37. Art. 2, 4, 5 and 6, enactment decree no. 68/2011, of 6 May, on regional and provincial fiscal autonomy on
the revenue side.

In Austria, the reforming project aims at conferring the intermediate level of

government more fiscal autonomous powers on the revenue side, but the Länder
do not welcome this.38 They ask for more competences, but do not seem to be
keen on getting more responsibilities. The discussion over the conferral of a great-
er autonomy in the power to set taxes is telling in this regard. The limits that the
European Union interposes in order to ensure effective fiscal harmonization is
one counterargument, while another one can be inferred from the federal pro-
posals formulated in order to enhance their taxing powers. In practice, the Fed-
eration seems to be willing to attribute to the Länder only tax sources that have
little relevance as far as the revenue are concerned. Furthermore, the Länder did
not even exploit the powers, they have been recognized, over tax bases. So far the
system fails in providing the right incentives for changing the status quo, because
the Länder have at disposal adequate sources by means of federal transfers.39
Even the Federal Republic of Germany is tremendously centralized as far as
the legislative power to set and regulate taxes is concerned. Moreover, the tax sys-
tem is strongly harmonized (especially at the intermediate level).40 The system is
characterized by a predominant role of the Bund in ruling the major tax-revenue
sources with the consequence that the tax pressure is equal within the territory.41
It is therefore not relevant where one is resident (whereas residency in Switzerland
can make a significant difference with regard to tax pressure). The Länder lack au-
tonomy as far as the revenue side is concerned, even if they can exert their influ-
ence via the Bundesrat, because legislation in fiscal matters requires its approval.
Indeed, the major receipts at the state level are shared taxes (Income and Corpo-
ration Tax as well as Value Added Tax) regulated by the Bund, while tax-revenue
belonging exclusively to the Länder are residual. The other relevant sources are
equalization transfers from other Länder (horizontal equalization) or from the
Bund (vertical equalization). If tax-revenue and equalization transfers were not
adequate, the only practical remedy until now was borrowing. Federal Reform
38. For an in-depth anaysis of financial intergovernmental relations in Austria see: E. D’Orlando, “I rapporti
finanziari tra i livelli di governo e le antinomie del modello federale austriaco,” in: Federalismo fiscale, Esperienze
straniere e spunti per il caso italiano Europa, eds. F.Palermo, M.Nicolini (Edizioni Scientifiche Italiane, Napoli,
2012), 43-62.
39. To this regard see: P. Bußjäger, “Novità nell’intreccio dei rapporti finanziari in Austria,” in: Federalismo
fiscale: una sfida comparata, ed. F. Palermo, E. Alber, S. Parolari (Cedam, Milano, 2011), 189-190.
40. The situation is slightly different as far as local jurisdictions are concerned. As a matter of fact, the municipal
level has the power to set the rate over the local business and the real estate taxes. See P. Feld Lars, Jürgen von
Hagen, “Federal Republic of Germany,” in: The practice of fiscal federalism: comparative perspectives, A Global
Dialogue on Federalism, vol. IV, ed. A. Shah, J. Kincaid (McGill-Queen’s University Press, Montreal, 2006),
138-143.
41. Further details on Federalism reform II and the new “Schuldenbremse”, in: Feld P. Lars Baskaran Thunshy-
anthan, Federalism Commission II – Recent Reforms of the Federal-Länder Financial Relationships in Germany, in:
www.forumfed.org, 26.10.2009
D. Heinz, Federal Reform II in Germany, in: Centro Studi sul Federalismo, Perspectives on Federalism, vol. 2,
issue 2, 2010.

II introduced strict borrowing rules both at the constitutional and primary law
level.42 The issue of fiscal autonomy has been discussed by the Federalism Reform
Commission II, but no agreement has been reached on the point.
In the United Kingdom, the Scotland Bill 2010-2011 should take into ac-
count the recommendations advanced by the Calman Commission, recognizing
the Scottish Parliament as having the power to set the rate on the income tax
and to make adjustments to the boundaries of the devolved responsibilities. The
recognition of a major degree of fiscal autonomy in the United Kingdom follows
the decentralization of competences and aims at creating accountability. But the
devolution regards only 15% of the territory and this is one of the most relevant
differences compared with emerging federations. The remainder is highly cen-
tralized, not only as far as the taxing power is concerned, but with regard to the
overall system.43
The Swiss model represents an exception to the European panorama. Can-
tons have significant taxing powers, while the Confederation can exploit a tax
base only if explicitly defined in the Constitution. In particular, indirect taxation
belongs to the federal level (for example, the value added tax), while direct taxa-
tion is a joint competence of all tiers of government. Cantons can, for example,
set tax rates, schedules and deductions as well as define the progressivity of the
tax scheme on individual income, wealth and corporate profits and capital.44 En-
lightening to this regard is the fact that the federal power to set taxes on income
is temporary and it will expire in 2020.45
4. The problem of squaring the fiscal reforms between autonomy and soli-
darity
As previously analyzed, the tax system of European multilevel States remains

as a general rule centralized in both mature and emerging federations; the sole
exception is Switzerland. As ensuring equality is a recurrent trait d’union of all
multilevel States, autonomy and differentiation are to be balanced with the equity
42. But things will be changing because the 2009 reform has regulated borrowing restrictions in detail both at
constitutional and primary-law level. See E. Bertolini, “I rapporti finanziari intergovernativi nell’ordinamento
federale tedesco,” in: Federalismo, sistema fiscale, autonomie, ed. G.Ferrari, (Donzelli editore, Roma, 2010),
77-105.
43. S.Parolari and A. Valdesalici, “Le fonti dell’ordinamento finanziario e le tendenze riformiste: spunti per una
comparazione,” in: Federalismo fiscale: una sfida comparata, ed. F.Palermo, E.Alber, S.Parolari (Cedam, Milano,
2011), 362-369.
44. Mischler P. “Il federalismo fiscale in Svizzera,” in: Federalismo fiscale ‘learning by doing’: modelli comparati di
raccolta e di distribuzione del gettito tra centro e periferia, ed. A. De Petris (Cedam, Milano, 2010), 68-74.
45. See T. Fleiner, “The current situation of Federalism in Switzerland,” Revista d’Estudis Autonòmics i Federals
(REAF), Institut d’ Estudis Autonòmics (IEA), Barcellona, no. 9 (2009): 56.
S. Gerotto, “Il ‘federalismo fiscale’ svizzero,” in: Federalismo fiscale in Europa. Esperienze straniere e spunti per il
caso italiano, ed. F.Palermo, M.Nicolini (Edizioni Scientifiche Italiane, Napoli, 2012), 95-107.

and solidarity principles in order to grant equal or at least similar opportunities

in all territorial autonomies.46 As a matter of fact, uniformity in tax pressure does
not guarantee homogeneity in tax revenue, because fiscal capacity tends to vary
widely under the impact of several other factors like socio-economic development,
the availability of resources, the demographic consistency, the population density
and age, as well as topographic and structural aspects. Consequently, multilevel
States aim at reducing the existing disparities through equalization mechanisms.
The goal is to ensure equality in the access to civil and social rights in the entire
territory, independently from the place of residence. Comparative reflections are
of significant interest in this regard. The German Basic Law mentions as one of its
main goals the guarantee of “comparable living conditions throughout Germany”,47
while in Italy the Constitution refers to the “essential levels of services related to civil
and social rights”48 (a minimum level to be guaranteed in the field of health, edu-
cation and social assistance and to a certain extent, local public transport). Also in
Spain, the legislator has foreseen the guarantee of an “equivalent level of essential
services in all the territory” with regard to essential services (health, education and
social assistance) by taking as a benchmark the average national level.49
After these preliminary and general remarks, it goes without saying that equal-
izing funds are highly controversial instruments. They are differently interpreted
and create conflicts between territorial entities that de facto or de jure contribute
to them and the ones that benefit from them. Their regulation calls for periodical
maintenance acts in order to effectively balance autonomy and solidarity for the
sake of the unity of the State.
In Switzerland the reform of the fiscal equalization system has been one of the
core objectives of the 2008 reform. In particular, two different tools have been in-
troduced. The first tool aims at ensuring fiscal equity among the cantons through
an equalization based on fiscal resources and consisting of both a vertical (Con-
federation-cantons) and a horizontal (among the cantons) component. A second
tool—the equalization of the expenditure needs—aims at reducing cantonal dis-
parities caused by structural factors. In particular, the latter is twofold: it consists
of two funds that focus respectively on geo-topographic and socio-demographic
46. On the balance between solidarity and autonomy/accountability see: M. Bertolissi, “Il bilanciamento tra
solidarietà e responsabilità nell’ambito del federalismo fiscale,” in: Federalismo Fiscale: Una Sfida Comparata, (ed.
F. Palermo, E. Alber, S. Parolari, CEDAM, 2011), 13-64.
47. Art. 72, par. 3, Grundgesetz. Actually, before Federalism Reform I the German Basic Law referred to the
guarantee of equal living conditions throughout Germany.
48. Art. 117, par. 2 m), Italian Constitution.
49. The reference goes to Art. 2, par. 1 c), of the LOFCA 3/2009.

needs.50 It entails both a vertical and a horizontal component, the horizontal

dimension contributing in mitigating any re-centralization effect. Furthermore,
the system has been conceived to guarantee the cantons the chance to compete on
equal footing without setting differences to zero. Fiscal autonomy has been pre-
served, keeping fiscal competition as a sound characteristic of the Swiss system.
This contributes in offsetting potential re-centralization effects.
Even in Germany the financial equalization mechanism will be reformed rela-
tively soon as the system in force will expire in 2019. The present system has been
shaped in 2005 with the aim of creating and keeping comparable living condi-
tions on the entire territory by means of a complex intergovernmental transfer
scheme.51 It consists of four steps52 and two dimensions: a vertical (Bund-Länder)
and a horizontal one (Länder-Länder). It aims at adjusting a distribution of rev-
enues based on territorial fiscal capacity with transfers that come either from the
other territorial entities or from the Bund. Nevertheless, in practice, the equaliza-
tion system does not set differences to zero. Moreover, in Germany it is prohibited
to overweaken net-contributors to the equalization fund (the strongest Länder).53
In Italy, the reform of the equalization mechanism has been included in the
2009 reform (Law no. 42/2009). More precisely, other than regulating the sys-
tem, the reform sets the basic principles. Quite relevant to this regard are the
changes in the financing criteria in order to grant the so-called “essential levels of
public services” throughout the territory. The funding of functions will be gradu-
ally based on standard costs and needs which are been calculated with regard to
each ‘essential’ public service. This new system of predefined costs will substitute
the principle of historic expenditure, which consisted in transfers calculated on
the last year’s expenditure. As far as the changes in the equalization mechanism
stricto sensu little has been done so far. It will remain a vertical system aiming at
guaranteeing an equal starting point. The reform poses the prohibition of setting
differences to zero. Therefore, future will show how the Italian regional asym-
metries will evolve and how each Region will perform.
Also the 2009 reform in Spain has put much emphasis on the equality prin-
ciple. According to art. 158 (1) of the Constitution and in compliance with the
50. For further details on the new equalization system see: Nuova impostazione della perequazione finanziaria e
della ripartizione dei compiti tra Confederazione e Cantoni (NPC), Rapporto finale sulla legislazione d’esecuzione,
Berna, 2004; and Rapporto sull’efficacia della perequazione finanziaria tra Confederazione e Cantoni 2008–2011,
Berna, 2010; both available at: <http://www.efd.admin.ch/dokumentation/zahlen/00578/index.html?lang=it>
(last access on 3rd March 2012).
51. For futher details on the topic, see: V. Losco, “Gli sviluppi dell’equalizzazione fiscale in Germania nella
nuova leggedi perequazione,” Le Regioni, n. 6 (2005): 1099-1117.
52. Only two of them can be envisaged has equalization mechanism stricto sensu.
53. H. See Scheller, “Solidarietà e senso di responsabilità nello Stato federale tedesco – cresce il divario tra i prin-
cipi costituzionali e la realtà politico-finanziaria?” in: Federalismo Fiscale: Una Sfida Comparata, (ed. F. Palermo,
E. Alber, S. Parolari, CEDAM, 2011), 65-95.

guarantee of an equivalent basis-level (nivel base equivalente) of fundamental pub-

lic services (Art. 2.1, Law no. 3/2009), the legislator (Art. 3, Law no. 3/2009) has
set up the Basic Public Services Guarantee Fund, which aims at ensuring all Au-
tonomous Communities the same resources per unit of need in order to finance
the essential public services in the field of health, education and social services.
The overall fund amount is calculated yearly by taking into account the fluc-
tuation in terms of fiscal capacity, while the sum assigned to each Autonomous
Community is determined using the index of the weighted population through
several new variables: some of them linked to the population like the school- or
elderly-age and some others that go beyond the spread (dispersion), the surface
and the insularity criteria. By doing so, the equalization system reflects much
more the effective conditions of each Autonomous Community and the resource
distribution matches the real expenditure needs.54 Nonetheless, a step towards de-
centralization could stem from the two additional Convergence Funds (the Fund
for Competitiveness and the Fund for Cooperation), newly set up by the Spanish
reform (Law no. 22/2009). Even if the funds are centralized as they are financed
with additional State resources, they are meant to enable all Autonomous Com-
munities to compete on an equal footing,55 as they aim at decreasing disparities
in terms of revenues available per inhabitant and at fostering regional economic
balance, enhancing equality and equity.
As a matter of fact, equalization systems do not per se exert a re-centralization
effect. For instance, the boundaries associated to these mechanisms can help in
mitigating the re-centralizing trend associated to them. In general all systems
meet a common limit to the extent that in reducing disparities they have only to
guarantee a common starting point, avoiding setting to zero the territorial dif-
ferences. In order to safeguard fiscal autonomy, differences among the territorial
entities are only partially reduced. Only by doing so, the overall aim of fiscal
decentralization can be met: ensuring equality in the opportunities and not in
the goals.
Furthermore, the re-centralizing outcome could be offset by an institutional
framework, which effectively provides for participation of sub-national entities
in decision-making processes at the federal level (see details in the chapters 5-7).
As a matter of fact, the way equality is realized by means of a co-decision mecha-
nism or of a unilateral decision can exert a relevant influence on its perception.
Germany and Switzerland, for example, ensure an effective involvement of all
levels of government in the decision making process favouring a sound sense of
54. I. Mut Aguilar, E. Cuéllar Barbeito, “Il federalismo fiscale in Spagna,” in: Federalismo fiscale ‘learning by
doing’: modelli comparati di raccolta e di distribuzione del gettito tra centro e periferia, ed. A. De Petris (Cedam,
Milano, 2010), 41-45.
55. They are regulated in Title II of the Law no. 22/2009.

balance to the system, even though they have introduced wide-scope equalization
mechanisms. In practice, Germany’s equalization fund has a greater scope than
the Swiss one.
Other tools exerting a re-centralizing effect are the ‘debt brake clauses’. Eu-
ropean States are obliged to severe budget stability objectives for both internal
reasons (economic performance) and external ones (EU stringent limits set up
for the Eurozone member States).56 In Germany, as already mentioned, Federal-
ism Reform II has regulated the so-called Schuldenbremse57, which forbids incur-
ring into new debt in normal economic circumstances and foresees restructuring
programs for budget offenders. The new ‘close to zero balance provision’ will
be effective in 2016 for the Bund and in 2020 for the Länder, replacing the old
restrictions based on art. 115 and on art. 109 of the German Basic Law (budget
deficit linked to gross investment spending). Once into force, temporary and
well-defined exceptions will be accepted.58 Moreover, the new system applies dif-
ferent criteria to the Bund, on the one hand, and to the Länder, on the other
hand. As a matter of fact, the federal budget is balanced even if there is a struc-
tural deficit of 0,35% of the annual GDP growth, while for the Bund and the
Länder the maximum debt rate has to be 0,5% of the annual GDP growth.59 The
stricter limitation introduced for the intermediate level of government together
with the limited legislative power to tax could challenge the Länder as they are
accountable in providing the most relevant public functions as far as the welfare
state is concerned.
The issue of a balanced budget has been recently put in the agenda of the
legislator even in Spain and in Italy. The Spanish Parliament has approved a con-
stitutional amendment on the so-called “estabilidad presupuestaria” that entered
into force in September 2011 and revised art. 135 of the Constitution.60 The
reform in constitutionalizing the principle of the balanced budget makes explicit
reference to the EU criteria, but at the same time introduces some derogations
following the model of the German Schuldenbremse. At this point, it is worth
mentioning the ruling of the Spanish Constitutional Court in July 2011, where
56. F. Fabbrini, , “Il pareggio di bilancio nelle costituzioni europee,” Quaderni costituzionali, Il Mulino n. 4
(2011): 933-934.
Even stronger constrains will have to be respected by the EU Member States once the Fiscal Compact Treaty
(signed on 2 March 2012) will enter into force.
57. Artt. 109 and 115 of the German Basic Law.
58. For further details on the Schuldenbremse, see: Feld, P. Lars, Baskaran, Thushyanthan, “Federalism Com-
mission II – Recent Reforms of the Federal-Länder Financial Relationships in Germany,” in: www.forumfed.
org, 26.10.2009.
59. In practice, the Länder budgets’ debts can reach at the utmost 0,15% of the annual GDP growth. See
D.Heinz, “Federal Reform II in Germany,” Centro Studi sul Federalismo, Perspectives on Federalism, vol. 2, issue
2 (2010), 5.
60. Palomar, n. 47, 2011, available online at: <http://www.unisi.it/dipec/palomar/palomar.html > (last access
on 20 March 2012).

the Court recognizes the power of the central Government to limit the spending
of the Autonomous Communities in order to reach budgetary stability. By doing
so, the influence of the central State is even more strengthened (re-centralization
trend).61
The same goes for Austria. The Austrian government decided to enshrine a
debt brake, which is intended to set a limit to the structural deficit and to the
state debt in order to comply with the EU standards.62
In Italy discussions on the debt brake are going on, but the rule has insofar
not been constitutionalized.63 Indeed, the constitutional amendment is following
the procedure as regulated in art. 138 of the Constitution and is still missing the
second approval of the Senate.
Broadly speaking, the need to comply with the limits set up by the EU in-
struments of stability and budget consolidation puts decentralization even more
in trial. The purpose of involving all territorial entities to reach the goals set by
the EU is not per se exerting a re-centralizing effect. Such a consequence derives
mainly from the implementation process at national level. As an example, in
Spain anticrisis measures have strengthened the position of the State at the ex-
pense of the intermediate level. The State has for instance made a distorted use
of the spending power issuing and managing conditioned subsidies (the so-called
stimulus measures) in economic and social areas which belong to the shared or
even exclusive competences of the Autonomous Communities. Some of them
have filed an appeal against the Constitutional Court alleging a conflict of com-
petences (for example, Catalonia). Even the austerity measures, imposed unilat-
erally by the State, have triggered a (re)centralizing effect further on.64 Also in
Italy, the central state has unilaterally imposed a reduction in the decentralized
public expenditure without involving the representatives of the territorial entities
into the decision-making process. The issue is again referable to the institutional
framework and its capability in ensuring the participation of sub-national auton-
omies in decision-making at national level. Only if mechanisms and procedures
are clearly structured and well thought through, the (re)centralizing trends can
be mitigated.
61. Tribunal constitucional de España, no. 134/2011, of 20 July (published in Boletín Oficial del Estado,
no. 197, of 17 August 2011).
62. See Art. 51 B-VG. For an analysis see: E. D’Orlando, “I rapporti finanziari e le antinomie del modello fed-
erale austriaco,” in: Federalismo fiscale in Europa. Esperienze straniere e spunti per il caso italiano, ed. F. Palermo,
M. Nicolini (Edizioni Scientifiche Italiane, Napoli, 2012), 59-62.
63. In order to follow the ongoing debate, updated information can be found in the website of the Italian Parlia-
ment (rectius of the Camera dei Deputati) at: <http://www.camera.it/465?area=1&tema=496&Il+pareggio+di+
bilancio+in+Costituzione >(last access 31th March 2012).
64. See C. Pi-Suñer Viver, “Impact of Global Economic Crisis on the Political Decentralizazion in Spain,” in:
L’Europe en formation, no. 358 (2010): 80-87.

5. The importance of intergovernmental relations for a new era of fiscal

federalism
Growing complexity and specialisation in the vertical (but also horizontal)

structure of the public sector poses new challenges to the institutional arrange-
ments, both internally (central-regional/provincial-local) and externally (supra-
national-international). The rapid growth both in the autonomy and in the re-
sponsibilities of sub-national and local governments and in the growth of the
plurality of actors is a widely recognized trend in multi-tier government and mul-
tilevel governance. Due to these developments, questions of institutional design
and coordination are of utmost importance, especially while calling for a new era
of fiscal federalism and financial relations. From an institutionalist point of view
sub-national governments’ fiscal powers are only meaningful and self-enforcing
when the central government cannot challenge the authority of the lower levels.
The nature as well as legal source of institutional arrangements and coordination
procedures are thus of fundamental importance. A set of formal and informal
institutions as well as procedures should effectively be put into place in order to
create an integrated coordination policy in economic and public finance within
systems, which nowadays have to come to grips with emerging overlays of inter-
nationalism and (g)localism. A coordinated approach within intergovernmental
relations is needed to guarantee that institutional arrangements—no matter if
new or already in force—are being adequately adapted during and in view of the
reform processes in order to efficiently support a new era of fiscal federalism.
As a rule, intergovernmental relations and its institutional arrangements have
a twofold objective. They offer a platform where to negotiate on issues still at
stake and, subsequently, they should guarantee the embodying of the right sorts
of incentives and flexibility for public decision makers in order to both accom-
modate common but also differentiated interests. If only viewed in its economic
component, any reform of fiscal federalism might easily end up in having a series
of commitment problems, resulting in what Rodden would call, “the most for-
midable challenges facing multi-tier systems of government: fiscal indiscipline among
sub-national governments”.65 In order to avoid such commitment problems, one
has to reflect on the functioning of existing institutional arrangements and its
evolution within ongoing reforms. How do fiscal and political institutions co-
evolve and under which conditions does coordination in fiscal matters and public
finance run amongst the different authorities and stakeholders?
The importance of intergovernmental relations has been widely recognized in
international doctrine. There are key features for putting into place fundamen-
65. J. Rodden, “The Dilemma of Fiscal Federalism: Grants and Fiscal Performance around the World,” in:
Federalism, ed. J. Kincaid, Volume 4, Sage Library of Political Science (2011): 71-100. [originally published in
American Journal of Political Science, 46(3) (2002): 670-687].

tal mechanisms aiming at insuring intergovernmental harmony and cooperation,

whereas the Constitutional Courts should—at least ideally—only be the last re-
sort for ultimately deciding on intergovernmental disputes. Ron Watts defines
“processes and institutions to facilitate intergovernmental collaboration in those areas
where government responsibilities are shared or inevitably overlap” as a structural
characteristics of a federal system.66 Many other distinguished federal scholars
define intergovernmental relations as an essential feature of federalism (next to
other elements, such as a bicameral legislature with a strong federal chamber
to represent the constituent units, a written constitution, which is difficult to
amend, and a Constitutional Court protecting the Constitution through the
power of judicial review). With regard to federal fiscal powers and fiscal rela-
tions, Ron Watts in his works points out that in most federations the jurisdic-
tion appropriate for allocating expenditures tends to be the one closest to the
people, thus the lower levels, but that the appropriate jurisdiction for raising
revenue tends to be at intermediate and higher levels. Major taxes as the Indi-
vidual and Corporate Income Tax as well as the Value-Added Tax are usually
set up by the central level, which is the major policy-maker for economic de-
velopment. As a general rule, the regulation of economic activity is best left to
the central level and due to the influence of Keynesian policies, central govern-
ments have become the major actors in economic stabilization by developing
a variety of intergovernmental relations through the means of institutions and
procedures, which create ties that bind local tiers of government to the deci-
sions taken at the highest level of government (spending power at central level);
additionally, conditional grants, transfers to correct vertical and horizontal fis-
cal imbalances as well as tax sharing and harmonization are fiscal measures that
foster intergovernmental relations. In practice, all this underlines the hypothesis
of a (re)-centralized outcome, reinforced by the fact that as a general rule the
federal government is at the end of the day made responsible for the design of
fiscal arrangements. As already mentioned earlier, constitutional restrictions on
the ability of the central level to override decisions taken at a lower level of gov-
ernment may overcome this problem. Against the backdrop of the economic and
financial crisis, intergovernmental relations thus end up playing a crucial role in
economic stabilization, being the most appropriate forums for adjusting financial
relations in order to both directly or indirectly comply with the parameters set
either internally or externally (for example, the stability pacts). No fiscal reform
can be carried out effectively without the involvement of each local jurisdictions,
not only because of the emerging overlaps of government functions but also be-
66. R. Watts, “The Federal Idea and its Contemporary Relevance,” in: The Federal Idea – Essays in Honour of
Ronald L. Watts, eds. T. Courchene, J. Allan, C. Leuprecht and N. Verelli (McGill-Queen’s University Press,
Montreal/Kingston, 2011), 13-27.
For a comprehensive analysis of the works of Ronald Watts with regard to intergovernmental relations see R.
Agranoff, “R.L. Watts and the Managing of IGR in Federal Systems,” in: The Federal Idea – Essays in Honour
of Ronald L. Watts, ed. T. Courchene, J. Allan, C. Leuprecht and N. Verelli (McGill-Queen’s University Press,
Montreal/Kingston, 2011), 269-287.

cause of the widely recognized fact that fiscal policies have worked well in highly
decentralized federations such as Canada, Switzerland and the United States.
6. Casting intergovernmental cooperation as ‘pulling together or apart

forces’
There is no single model when it comes to deciding who should be responsible

for the design of the system of intergovernmental fiscal relations.67 In practice,
it is often the norm to make the central government solely responsible for the
design of fiscal arrangements. This underlines the hypothesis of a (re)centralizing
trend, despite the fact that the common characteristics of the ongoing reform
processes in fiscal arrangements are to make sure that local jurisdictions are be-
coming more responsible and accountable by granting them more autonomy.
Separate bodies and ad hoc created commissions can be involved in the design
and implementation of fiscal arrangements. Such temporary or permanent bodies
vary across the States and may be composed of both central and local representa-
tives on an equal footing and their decisions may be either of binding or consulta-
tive nature. What acuminates all models is their aim of facilitating cooperation
and coordination, while also reconciling the central level need for balancing soli-
darity and autonomy, or, in other words, equity and diversity. Some States use
intergovernmental forums, executive federalism or federal-provincial committees
to come to terms in negotiating fiscal arrangements. This is the case of States
like Canada and Germany. In Germany, the Basic Law promotes concurrency
of functions and provides that federal laws in fiscal matters have to be submitted
for approval to the Bundesrat (Federal Council), where the state governments
(Länder) are represented. This system enables each state government (Land) to
participate in the legislative and executive state functions at the federal level and
ensures negotiation and consensus in the whole process of shaping fiscal policy,
which is then readily implemented because everybody has previously agreed upon
the issues at stake.68 However, it induces decision-making by agreeing on a mini-
mum denominator or preservation of the status quo. Put differently, Germany’s
intrastate federalism allows for decision-making in fiscal area at the federal level
where the Länder, who are responsible for implementation, have their say. The
Länder quota of members is proportional to the relative population size and can
67. A. Shah, “Introduction: Principles of Fiscal Federalism,” in The Practice of Fiscal Federalism: Comparative
Perspectives, A Global Dialogue of Federalism, ed. A. Shah (McGill-Queen’s University Press, Kingston/Montreal,
2007), 3-43 (35-37).
68. A keyword of H. Kelsen see: M. Kotzur, “Federalism and bicameralism – the German ‘Bundesrat’ (Federal
Council) as an atypical model,” in: A world of second chambers. Handbook for constitutional studies on bicam-
eralism, eds. J. Luther, P. Passaglia, R. Tarchi (Centro Studi sul Federalismo, Studi 4, Giuffrè, Milano, 2006),
257-58.

be from three to six. The integrative character of the federal legislature69 also
serves the function of being a guardian of legislative power because of the rep-
resentation it gives different national and regional, as well as popular and party
interests. The ability of the German Bundesrat to serve as an institution to facili-
tate intergovernmental co-operation and collaboration is conducive to the fact
that —“… unlike the other federal second chambers, …it is composed of instructed
delegates of the land governments”,70 even though one has to keep in mind that the
system applies to the vertical federal/regional relations as the Bundesrat is a federal
organ and as such it is concerned with matters within the federal competence and
thus not directly with the horizontal coordination among the Länder themselves.
In fact, interlocking politics refers to the relations between the federation and the
Länder (Politkverflechtung).71
It seems that vertical intergovernmental relations predominate. In practice,
however, the presence of the relevant federal minister at the interdepartmental
conferences of the Länder ministries, where items of both federal and Länder
competence are discussed, favour a network of horizontal intergovernmental rela-
tions. Depending on the interests of the respective Länder, the states coordinate
their policies in negotiations for or against the federal level.72 It goes without
saying that horizontal intergovernmental relations are especially developed in the
fields for which the Länder hold exclusive powers (for example, education and
culture).
In fiscal policies the different interests between richer and poorer Länder eas-
ily create conflicts and intergovernmental cooperation is politicized (especially
since German unification). Prior to the establishment of the Stability Council
(see details in chapter 7) fiscal policies were coordinated within the Financial
Planning Council (Finanzplanungsrat), in cooperation with the Council for
Economic Development (Konjunkturrat). These institutions were of consulta-
tive nature and they were mandated to provide guidelines for budgetary deci-
sions. They provided for a very loose and ineffective coordination, also against
the backdrop that a considerable share of tax revenues in Germany is deter-
mined by joint-decision-making (federal law requiring the assent of the Bun-
desrat). Federalism Reform II did strengthen intergovernmental coordination of
budget policies between all tiers of government, imposing a preventive mecha-
nism (restructuring programs) helping to comply with the new debt brake rules.
69. The strong integrative system of Germany with its highly administrative networks shows why Germany
rightly was called a unitary federalism. See K. Hesse, Der unitarische Bundesstaat, Karlsruhe, (C.F. Müller, 1962).
70. R. Watts, Federal Second Chambers Compared, ed. Institute of Intergovernmental Relations (Queen’s Univer-
sity. Special Working Paper Series on Senate Reform, 2007-2008).
71. The concept was introduced by Scharpf. See, inter alia, Scharpf, W. Fritz, Games Real Actors Play: Actor-
centered Institutionalism in Policy Research (Boulder, Col. Westview Press 1997), 143-145.
72. A. Benz, “Intergovernmental Relations in German Federalism – joint decision-making and the dynamics of
horizontal cooperation,” conference paper, in: www.forumfed.org (last access on 9 March 2012).

From an overseas comparative perspective, Canada is characterized by its

ineffectual bicameralism, an interstate model of federalism, allowing for the
separation of jurisdictional authority between territorial actors and for the pre-
dominance of competition and bipolarity. In contrast to Germany, the Canadian
provinces do not have any direct say in federal legislation or its implementation
but are relatively autonomous in using their own legislative powers and carry out
their own policies. Thus, in Canada, the federal government has an extensive
scope for fiscal policy making. However, it has a weak scope what implemen-
tation concerns as the provinces are independent. It can gain leverage through
negotiation and provision of incentives, but more recently the strategy has rather
been to withdraw from such incentives (for example, shared cost programs) and
leave market forces to impose fiscal discipline on the provinces.73 With regard to
the tax system, Canada has a competition tax system, albeit with a shared col-
lection arrangement for income tax, while Germany has a cooperative one. On
the expenditure side, Canada’s national government can quickly cut expenditure,
whereas the German government is constrained by consensus.
Switzerland like Germany has a cooperative system, but weak government
constraints replaced by the strong democratic check of popular referendums. In
Switzerland, the Council of States represents the cantons, comprising 2 repre-
sentatives for each of the 20 larger cantons and 1 each for six smaller cantons. As
the American Senate, it is a strong house with full legislative powers and a veto
over all legislation. But the fact that its members are directly elected by the people
on a cantonal base means that it lacks to give voice to the cantonal governments.
For this reason, Conferences of the presidents and of other members of govern-
ments have been set up in order to guarantee executive powers to participate at
federal decisions.
Also an increasing number of emerging or recently established federations
have adopted executive federalism mechanisms to resolve financial issues. In
South Africa, a statutory budget council is in force. It is headed by the Minister
of Finance and comprises representatives of the nine provinces as well as repre-
sentatives of local governments and local government associations. This Council
is the primary deliberative body for sub-national finance recommendations.74 In
Spain, the Senate lacks significant policy-making powers; intergovernmental re-
lations have for several years engaged in informal channels as bilateral sectoral
transfer commissions, sectoral conferences, joint planning bodies and cooperative
73. For a comprehensive analysis of the Canadian case see R. Boadway, “Canada,” in: An Global Dialogue on
Federalism - The practice of Fiscal Federalism: Comparative Perspectives, ed. A. Shah (McGill-Queen’s University
Press, Kingston/Montreal, Volume 4, 2007), 99-124.
74. For a comprehensive analysis of fiscal federalism in South Africa see B. Khumalo, and R. Mokate, “Republic
of South Africa,” in: An Global Dialogue on Federalism, - The practice of Fiscal Federalism: Comparative Perspec-
tives, ed. A. Shah (McGill-Queen’s University Press, Kingston/Montreal, Volume 4, 2007), 262-286.

agreements. Increasing multilateral fiscal cooperation and expanding decentrali-

zation were a consequence of strong regionalist parties claims in fiscally compe-
tent Autonomous Communities, their influence at central level and their calls
for joint policy making mechanisms. Since 2004, it informally launched and
later formalized a Conference of Autonomous Community Presidents that now
meets biannually with the Prime Minister. With regard to the Spanish system it is
worth mentioning two issues. First, the extensive use of the framework legislative
powers made from the Central State in matters of shared jurisdiction. The latter
should only set the generic and common principles whereas the Autonomous
Communities should be responsible for implementation through detailed legisla-
tion; in practice, most of the State laws go well beyond these boundaries. Second,
certain competences of the central State can be ascribed as transversal powers,
powers being enabled to interfere in decentralized matters. These transversal pow-
ers have been extensively interpreted by the State; for example in regard with the
exclusive State competence in the “regulation of basic conditions guaranteeing the
equality of all Spaniards in the exercise of their rights and in the fulfillment of their
constitutional duties” or in the “basic rules and coordination of general economic
planning”.75 Even the overwhelming appeal to the notion of “supra-territoriality”
has turned out to be an escamotage for justifying the State intrusion in areas that
otherwise would have fallen within the jurisdiction of the Autonomous Commu-
nities.76 Moreover, even the Spanish Constitutional Court has turned out to be an
ally of re-centralization. For example, in the Judgement over the Catalan Statute,
even if the Court declared the constitutionality of the law, the interpretation it
gave was effective in nullifying de facto all relevant aspects concerning the ‘en-
forcement’ or even the ‘innovations’ in terms of Catalonian competences. These
elements together with the lack of an institutional mechanism enabling effective
participation of the Autonomous Communities in the decision-making process
(with the sole exception of the sectorial conferences) affirm a de facto prominent
status of the central State.77
In Austria, the federal Constitution of 1920 has been revised several times and
every time it has led to a strengthening of the federal level, facilitated by the po-
litical constellations of grand coalitions. The Austrian Länder succeeded only to a
limited extent to stop the trend towards centralization and thus Austria remains
a centralized federation, in which regional power is clearly subordinated to the
federal power (even if theoretically the Länder could have wide ranging powers
75. See Art. 149 Spanish Constitution.

76. See Pi-Suñer Carles Viver, The transition to a decentralized political system in Spain (Forum of Federations,
2010), 10-14.
77. M. Corretja Torrens, “The cooperation in the Public Administration as a Mechanism of Centralization in
Spain,” in: Governing from the Centre: The influence of the Federal/Central Government over Subnational Govern-
ments, available at <htp://www.foev-speyer.de/veranstaltungen/rueckblick.asp>(last access on 12 March 2012).

because art. 15 B-VG gives them power over all matters not expressly assigned to
the federation). At federal level, the Bundesrat (Federal Council) represents the
interests of the Bundesländer in the decision-making process. Its members are
elected by the Länder parliaments allocating seats roughly proportional to each
Land population and closely linked to their political allies in the Nationalrat,
which deters them from objecting legislation that was approved by a majority of
the National Council as they do follow party logics rather than the interests of
their state government. In theory, the National Council and the federal chamber
could be peers, but in practice the Bundesrat has a limited and rather ineffective
power. As a rule, the Federal Council is only entitled with a veto78 on legislation
that passed the Nationalrat, but this objection may be overruled by a second
voting with a qualified quorum.79 In this way the system aims much more at
granting a federal control over the Länder, than a cooperation of the two levels
of government in adopting decisions. With regard to fiscal area, the Constitution
does not define tax-raising powers. This is left to the federal legislation (Fiscal
Adjustment Act), which cannot be vetoed by the Länder. As a result, the states
don’t have almost tax income on their own and depend on tax income shared by
the federation or transfer by the federal level. In order to counterbalance the little
relevance of the Federal Council, the so-called “26-Commission”80 has been fore-
seen. The latter one is a joint body responsible in solving trials in financial matters
(on laws in matters of taxing power), in case the Federal Council makes use of its
veto power.81 In practice, the “26-Commission” does not have a great impact in
the Austrian financial system. Both because it did not have the possibility to con-
vene often and because negotiations in financial matters between the Federation
and the Länder does not take place within such institutionalized mechanisms,
being rather a negotiation between parties based on a political consensus (among
the federal level and the conference of the Länder presidents, an organ, which
in contrast to the “26-Commission” is not disciplined constitutionally). Thus, in
Austria for many years intergovernmental cooperation has been more political,
than institutional; this was the case until at least 1999,82 the year in which an
agreement on a consultative mechanism and on a future stability pact of sub-
national entities entered into force between the federation, the Länder and the
municipalities (in compliance with 15a B-VG, which as a general rule foresees
the establishment of such mechanisms between the three tiers of government).
78. Art. 42 B-VG

79. See A. Gamper, “The Austrian Bundesrat,” in: A world of second chambers. Handbook for constitutional stud-
ies on bicameralism eds. J. Luther, P. Passaglia, Tarchi Rolando (Centro Studi sul Federalismo, Studi 4, Giuffrè,
Milano, 2006), 801-802.
80. Art. 9 F-VG
81. See M. Mazza, “Il federalismo fiscale nell’ordinamento austriaco,” in: Federalismo, sistema fiscale, autonomie,
ed. G. Ferrari (Donzelli editore, Roma, 2010), 148-152.
82. Agreement between the Federation, the Länder and the Municipalities on a consultative mechanism and on
a future stability pact of subnational entities, BGBl. I, n. 35/1999.

This consultation mechanism has turned out to be quite effective in institu-

tionalizing intergovernmental cooperation.83 Broadly speaking, self-coordination
of the Länder turned out to be an important element of Austrian federalism.84
Intergovernmental cooperation, both legal and informal, is contributing in mak-
ing federalism in Austria more dynamic and, by doing so, it tries to mitigate its
centralized nature. Even though there are no constitutional provisions, high level
meetings such as Länder conferences and the joint liaison office became a device
to coordinate Länder interests next to private law contracts and public treaties
between the federation and the Länder; also in the arena of fiscal federalism,
where the federal level plays a predominant role. As a rule, the Austrian financial
intergovernmental relations are based on a three-tier system of cooperative and
contractual nature (federal-state-municipal level), whereas municipalities are not
constituent units of the federal system. Intergovernmental cooperation involves
all tiers of government.
On the contrary, Italy has failed to institutionalize the participation of the
territorial entities in the decision-making process. The Constitutional Reform in
2001 reshaped the constitutional provisions of the relations between the central
State and the Regions by changing the distribution of legislative and adminis-
trative powers between the State and the Regions.85 However, the 2001 reform
missed to constitutionalize institutions and mechanisms allowing for regional
and local participation in the decision-making process by reviewing intergovern-
mental financial relations. Completing such reforms was not of interest to the
political constellation. The issue of reforming financial relations re-entered the
scene only in 2008, also due to the determinant support of the Northern League
party. Thus, vertical cooperation was not strongly developed in Italy; the same
goes for horizontal relations (due to the weak position of the ordinary Regions).86
The only existing cooperation mechanism, the Standing Conference for Coop-
eration between the State, the Regions and the Autonomous Provinces (Con-
ferenza permanente per i rapporti tra lo Stato, le Regioni e le Province Autonome),
was established in 1983 and formalized by Law no. 400/1988. This Standing
State-Regions Conference is a cooperative body vested with consultative pow-
ers, which discusses regional interests. Over time it gained significant political
influence. Given the absence of a federal council representing territorial interests,
83. See Francesco Palermo, “La costituzione finanziaria austriaca. Tare genetiche di un sistema in evoluzione,”
in: Atripaldi Vincenzo, Bifulco Raffaele (a cura di) Federalismi fiscali e costituzioni (Giappichelli, Torino, 2001),
93-98.
84. R. Sturm, “Austria,” in: Forum of Federations (ed. Handbook of Federal Countries, 2005), 45-57.
85. To recall, art. 117 of the Italian Constitution now lists all exclusive powers of the State as well as the concur-
rent ones, while residual powers lie with the Regions.
86. For an anaylsis of the role and development of Italy’s regions within a multilevel governance system, see
P. Bilancia, F. Palermo, O. Porchia, “The European Fitness of Italian Regions,” in: Perspectives on Federalism,
(Vol. 2, issue 2 Centro Studi Federalismo 2010).

vertical coordination between the State and the Regions developed along less
institutionalized lines (with the exception of the institutionalized relationships
between the State and the special Regions). The Standing Conference System
meets in three different settings: the so-called “State-Regions Conference”, the
“State-cities and Local Autonomies Conference” and the “Joint Conference”, which
brings together the three levels of government (State-Regions-local government).
In its different settings the Conference System is composed of representatives
of the State and territorial entities, who respectively get involved in the specific
subject matter under discussion.87 Even if not vested with any legal power to veto
a national bill, the Conference provides a political and technical forum where
the interests of the Regions and the State can be balanced against each other. In
a large number of cases its opinion is now actually compulsory. The Conference
System became the solely forum for vertical negotiation between the different
levels of government; it fostered a system, in which Regions focused on bilateral
State-Regions negotiation as horizontal cooperation is as a general rule seen as a
second-best choice. This trend and the increasing political weight of the Standing
Conference State-Regions did strengthen the role of the executives at all levels of
government. Moreover, the Conference System is limited by its inherent diver-
sity. Put differently, it is difficult to define common positions due to the variety
of territorial representatives and interests, which translate into cleavages between
different government levels, cleavages between different political views and cleav-
ages due to socio-geographical differences along the North-South line. This was
also a reason why other bodies were newly established to deal with delicate issues
as fiscal federalism (see chapter 7).
Moreover, the 2001 Constitutional Reform has acknowledged to the Italian
State the exclusive legislative power on certain subject matters that touch regional
competences, pursuing through an indirect path a re-centralizing outcome (so-
called transversal powers). To this regard it is worth mentioning the State com-
petence on the regulation of the “essential level of functions concerning civil and
political rights” to be guaranteed at an equal level in all the Country or even of the
“fundamental functions” of local bodies. With their identification and ruling the
State can therefore strongly interfere in the autonomy recognized to the territorial
entities. Furthermore, this effect is amplified by the extensive interpretation given
over the State legislative competences by the Constitutional Court.
87. For an evaluation of these forms of cooperation from the different perspectives of ‘mature Federations’ on
the one side, and of ‘emerging Federations’ on the other side, and for a detailed analysis of the evolution of
the Italian system of conferences, see: R. Bifulco, “The Italian Model of State-Local Autonomies Conferences
(also) in the light of Federal Experiences,” in: A world of second chambers. Handbook for constitutional studies
on bicameralism eds. J. Luther, P. Passaglia, R. Tarchi (Centro Studi sul Federalismo, Studi 4, Giuffrè, Milano,
2006), 1051-1083.

It goes without saying that intergovernmental fiscal relations pose different

challenges according to the distinct economic and societal characteristics of each
country. Common to all countries undergoing reforms in the area of fiscal feder-
alism is the fact that both decentralization processes and democratic deficits pose
a challenge for maintaining sustainable macroeconomic conditions. A further
common trend of present-day intergovernmental systems can be denoted in the
increasing use of contracts and reliance on asymmetric arrangements. In practice,
unequal bargaining powers deriving either from de jure or de facto asymmetries
often leads to arrangements that attribute different degrees of authority to the
single sub-national entities. For example, in Spain Navarra and the Basque Com-
munities have formal tax and expenditure powers beyond those of other Autono-
mous Communities; bilateral agreements were of utmost importance in address-
ing their claims of ‘historic communities’ even if the balance between bilateral
and multilateral agreements has gradually shifted to an ascendancy of the latter.88
Also in Italy, bilateralism and specialty played and still play a fundamental
role.89 Financial autonomy has, for example, been crucial for conflict settlement
in the Autonomous Province of Bolzano/Bozen (South Tyrol). It was a milestone
for implementing the Second Autonomy Statute (1972) and regulating the living
together of the three linguistic groups: German, Italian and Ladin. Within the so
called “fiscal federalism reform” (Law no. 42/2009) special Regions are negotiating
bilaterally on how to participate in the new financial framework. As a frontrun-
ner, on 30 November 2009 South Tyrol has signed a financial agreement with the
central government defining the new rules on how to comply with the objectives
and how to participate in the equalization fund.90
Generally speaking, different regional interests and bargaining powers are
important for fiscal decentralization as nation constitutions do not always fully
specify the degree of decentralization and thus decentralization is determined by
political bargains.91 Often the power to make fiscal decisions at provincial and
local level is the result of the negotiations between various levels of governments.
As a consequence many federal and unitary states have highly decentralized fiscal
88. See Ruiz Almendral, Violeta, “The Aysmmetric Distribution of Taxation Powers in the Spanish State of
the Autonomies: The Common System and the Foral Tax Regimes”, Regional and Federal Studies, 13 (2003),
4: 41-66.
89. For an analysis of special autonomies and fiscal federalism, C. Panzera, “Autonomie speciali e federalismo
fiscale, tra ‘solidarizzazione’ della responsabilità e ‘responsabilizzazione’ della solidarietà,” in: Federalismo Fiscale:
Una Sfida Comparata, (eds. F. Palermo, E. Alber, S. Parolari CEDAM, 2011), 233-279.
90. For a comprehensive analysis of the new South Tyrolean Financial Autonomy; A.Valdesalici, “L’intesa finan-
ziaria per il Trentino-Alto Adige/Südtirol tra specialità e solidarietà,” in: Federalismo fiscale tra differenziazione e
solidarietà. ed. Woelk Jens Profili giuridici italiani e comparati, Eurac research, n. 55, Bolzano (2010): 95-114.
See also the Law Review Istituzioni del Federalismo, Maggioli, Rimini, no. 1, 2012 for a detailed analysis of the
newest developments concerning the financial systems of the five special Italian Regions.
91. From a comparative perspective see R. Bird, and R. Ebel, “Fiscal Federalism and national unity”, in: Hand-
book of Fiscal Federalism, ed. E. Ahmad and G. Brosio (Edward Elgar Publishing, 2006), 499-520.

and regulator systems, while others are highly centralized.92 All in all, intergov-
ernmental cooperation in the fiscal and financial area is of utmost importance for
a sound and sustainable national economy because means of cooperation based
on pure legislative procedures might be easily bypassed.
7. New fiscal coordination bodies and financial rules in a nutshell
Many institutional solutions have been discussed to effectively face current

challenges of the economic and financial crisis and of the very nature of single
systems (due to delayed implementation of institutional reforms that are mainly
conducive to political factors). In practical terms, such solutions translate into
different reforms resulting, inter alia, in tax autonomy for sub-national entities,
constitutional debt brakes, restructuring programs and stability laws. In order to
implement reforms, coordinating bodies and procedures have also to be either re-
vised (as a general rule in the case of mature federations) or newly introduced (as
a general rule in the case of emerging federations or regionalized). Bodies need to
be adapted to the single constitutional and socio-economic context of each State
to effectively respond to the new rules of the game. As a general rule the presence
of such bodies—if vested with appropriate powers—does provide for tighter rules
within the State and foster a rather re-centralizing trend (especially if strong hori-
zontal intergovernmental relations are absent). Without entering into details, the
following subparagraphs intend to both shed light on the most important bodies
and rules in the fiscal and financial area, and briefly reflect on their interaction
within the multi-tier legal orders subject of this paper.
… the German way forward

With regard to the German case, the German Financial Council93 is now
upgraded to the so called Stability Council (Stabilitätsrat),94 which controls the
compliance with the new borrowing rules (Bund and Länder are required to have
a balanced budget by being part of the vertical network of debt limitation) and
provides for procedures aiming at containing the indebtedness of all government
tiers (restructuring programs). Both federal and states’ governments register too
92. The German Länder have little power to taxation, while for example the substantial income tax of Sweden
is a local matter rather than a national one.
93. Prior to the establishment of the Stability Council there was no close cooperation in force, nor between the
Länder themselves, nor between the Länder and the Bund. Besides the “investment-oriented debt ceiling rule”
in the German Basic Law expiring in 2020, the so called Financial Planning Council provided only for loose
agreements and not for any kind of preventive instrument.
94. The legal basis for the Stability Council are art. 109a of the German Basic Law (budgetary emergency) and
the Stability Council Act [Stabilitätsratsgesetz vom 10. August 2009 (BGBl. I S. 2702)]. The Consolidation Aid
Act, the Fiscal Equalisation Act and the Act on Basic Budgetary Rules vest the Stability Council with further
tasks. Consult <www.stabilitaetsrat.de>for more details (last access on 8 March 2012).

high levels of public debts, which are creating considerable problems within the
multi-tier system of Germany.95 The Stability Council is a joint body representing
the Bund and the Länder.96 It is empowered to control fiscal policies of all tiers of
government. The Stability Council is composed of the Federal Finance Minister,
the Finance Ministers of all Länder and the Federal Economy Minister. It evalu-
ates the Länder budgets according to financial indicators, which are defined by
taking Länder average as a benchmark (structural financial balance, credit financ-
ing ratio, debt level per capita, ration of interest expense to tax revenue); even if
highly criticized and differently interpreted, all in all, the choice of the key ratios
does leave relatively sizeable scope for individual limits and interpretation; this
also to reflect the different starting positions of the states. The Stability Council
is mandated to help states to ensure the achievement of close to balance budg-
ets as foreseen in the new debt brake. In other words, it accompanies states in
their endeavour of maintaining a zero structural debt from 2020 onwards. Based
on the calculated position of regular economic situation, the Stability Council
decides upon whether the Bund or a Land faces a recession or is having a boom-
ing economy, and, in a second step, whether new debts can be made or not.
The evaluation procedure by the Stability Council does not trigger any assistance
from the federation or the other Länder; aid is still left to the close financial ties
within the Länder equalization system (excluded from the scope of Federalism
Reform II and due in 2019). The basis for the review of the budget situation is
the stability reports, which both the Bund and the Länder have to submit annu-
ally; they include a report of the current and short-term budget situation and one
of the projection of medium-term budget development. The latter is as a matter
of fact limited by its qualitative political and individual nature, by the multiple
assumptions made and by the different financial planning methods in the Länder.
The Stability Council is considered to be a watchdog that should exert public
pressure by making budget and fiscal policy transparent. Governments should
by these means be induced to avoid debts. Put differently, the Stability Council
is meant to be the coordinator of budgetary and financial planning, also with
regard to the obligations that arise from the Stability and Growth Pact. It is early
to make any in-depth evaluation on its works, but one can say that the procedure
95. See the cases of Saarland and Bremen as well as the case of Berlin. While in the former two, the Constitu-
tional Court in 1992 ruled that they were eligible to federal bailout transfers (BVerfGE 86, 148, 358 ff.), it did
not rule in favour of it in the case of Berlin in 2006. The federal government was not compelled to grant Berlin
a bailout. It demanded Berlin to solve its crisis by its own and the German policy makers to formulate effective
borrowing restrictions to avoid the need for bailouts in the future. Under the new rules of the Federalism Re-
form II, Berlin, Bremen, Saarland and Schleswig-Holstein will be paid transfers in the next years. These transfers
were a political compromise while agreeing on the debt brake and are subject to strict controls. As a precondi-
tion for receiving the transfers the Länder had to agree in dismantling their structural deficits until 2020.
96. See Research Briefing, Deutsche Bank Research (ed.), “Stability Council: Financial Inspector of Germany’s
Länder”, 15 September 2011, available on <www.dbresearch.com>(last access 30 March 2012).

provided with the Stability Council is taking the wind out of the entities’ po-
litical interpretation of public debts; budget offender are now obliged to submit
restructuring programs and this procedure eases the introduction of unpleasant
containment and savings measures by the policy makers. Additionally, the entity
not obeying to the rules is barred from participating in relative votes. Resolutions
of the Stability Council are adopted by the votes of two thirds of the Länder and
the votes of the Bund. If a decision with regard to a single Land is subject to vote,
then the respective state is not allowed to participate in the vote. However, it is
worth noting that at the end of the day the Stability Council does not have any
scope to impose ultimate direct sanctions (for example the denial of voting rights
in the Bundesrat). If any restructuring program or procedure fails, so far it can
only point with the fingers at the black sheep(s) and renegotiate the implemen-
tation of the restructuring program. The future will prove if there is evidence
of the degree of compliance with the restructuring programs and whether the
whole Stability Council procedures lead to successful outcomes. At the end of the
day, it is a quite complex system and politicians are careful in welcoming such a
transparent procedure, which might lead to an implicit performance comparison
based on an average benchmarking of efficiency (a sort of horizontal competi-
tive coordination). The restructuring programs directly influence the financial
planning of the respective Land, even if the framework legislation excludes as-
sessment of the budget structure by the Stability Council. The restructuring pro-
gram is implemented under each Land’s own directive and the Land is obliged to
regularly report back to the Stability Council. In theory, consolidation measures
could equally occur on the expenditure side and on the income side. In practice,
however, the Stability Council Act stresses that the measures are only appropriate
if they lie solely in the jurisdiction of the affected level of government; as a con-
sequence, the restructuring measures will focus on the expenditure side owing to
the limited revenue autonomy of the Länder (the real property transfer imposed
in several Länder is to be regarded as an exception to the rule). The functioning
of the new arrangements is based on an average calculation taking all Länder into
account; this shows that the procedure is both creating more institutional en-
tanglement and indirectly reinforcing the position of the Bund over the Länder,
aimed at avoiding too large discrepancies between the Länder. This is not the case
in Switzerland, where fiscal competition is viewed as preferable. The possibility of
reforming and making the German fiscal system more responsible was missed in
Federalism Reform II, in favour of an agreement on the new borrowing rules. It is
also argued that an emerging tax competition could most probably be beneficial
also for Germany.97
97. P. Feld Lars, Baskaran Thunshyanthan, Federalism Commission II – Recent Reforms of the Federal-Länder
Financial Relationships in Germany, in: www.forumfed.org, 26.10.2009.

… the Swiss way forward

By contrast to Germany, Switzerland avoids both a bailout guarantee for
subnational entities and the negative incentive effects of an intense equalization
scheme. The costs of fiscal indiscipline afflict other jurisdictions to a much lesser
extent. The high tax autonomy of its constituent units creates loyal ties between
citizens of a certain territory and the public services offered within the same. After
years of rising deficits and debt in the 1990s, Switzerland’s citizens adopted the
debt brake as a constitutional amendment in 2001. The rule was implemented
starting in 2003. Essentially, the rule calls for structural balance in each year and
absolute balance over the course of an economic cycle. The rule did initially allow
for “extraordinary spending” if a qualified parliamentary majority approved, but
recent changes have made this spending count as normal expenditures (see differ-
ences to the German model).
… the UK way forward

Contrary to the case of Germany, in the United Kingdom a non-political
body, the Office for Budget Responsibility (OBR),98 was recently set up for moni-
toring fiscal policies99 (previously this function was vested in the Financial Serv-
ices Authority, accountable to the Treasury Ministers, and through them, to the
Parliament). The permanent Office for Budget Responsibility (OBR) was estab-
lished by the Budget Responsibility and National Audit Act in April 2011 and
its mandate is to examine and report on the sustainability of the public finances
include forecasting, rule achievement and long term projections. The UK gov-
ernment has thus ‘contracted out’ its fiscal forecasts, previously prepared by the
Treasury. The OBR is considered to be the “most extreme case of positive analysis”
in a comparative perspective, as it has to restrict itself to the analysis of the current
government’s existing policies and cannot look at the impact of different policy
options.100 The OBR is a body under the aegis of the Treasury (its budget is part
of the Treasury’s); however, it is an independent and very transparent body that
is accountable to the Parliament; latter has also a veto over appointments to and
dismissals from the OBR.
98. The official web page is www.budgetresponsibility.independent.gov.uk (last access on 8 March 2012).
99. The Golden Rule and the Sustainable Investment Rule are the main principles of fiscal policies formalized
in the Financial Act 1998. The Golden Rule states that over an economic cycle the government will borrow
only to invest and not to fund current spending, while the sustainable investment rule foresees that the public
sector net debt as a proportion of gross domestic product will be held over the economic cycle at a prudent level
and below 40% of the GDP.
100. For a detailed analysis see Wren-Lewis, Simon, “Fiscal Councils: The UK Office for Budget Responsibil-
ity”, CESinfo DICE Report 3/2011 available at <www.cesifo-group.de>(last access on 8 March 2012).

… the Austrian way forward

By contrast to the UK, the Austrian Public Debt Committee (Staatsschulde-
nausschuss) established in 2002,101 comprises twelve members with voting rights
(six appointed by the federal government and three each by the Austrian Federal
Economic Chamber and the Chamber of Labour) and three members without
voting rights (one each for the Austrian Association of Municipalities, the Aus-
trian Association of Austrian Cities and the Austrian Land Governors). It receives
financial support from the Austrian Central Bank and provides recommendations
on the direction of fiscal policy and the overall fiscal stance (no macro forecasts).
Membership in the committee is an honorary post and discussion is going on
about transforming the committee from an advisory body concerned with the
effects of debt financing to a council for advice in matters of fiscal policy.
… the Spanish way forward

In Spain, the weakness of the Senate facilitated the creation of alternative fiscal
intergovernmental coordination. The Spanish Council for Fiscal and Financing
Policy (CPFF) of the Autonomous Communities (ACs) is the coordinating body
between the central State and the Autonomous Communities (except the Basque
Country and Navarra). It is the most important multilateral body for financial
matters and is composed of the National Minister of Economy and Finance, its
respective counterpart in each AC and the Minister of Public Administration. Its
nature is consultative and the agreements reached within the CPFF form the basis
for developing the AC’s financial arrangements. In practice, this instrument has
been defined as being at the mercy of whims, a merely symbolic body which fos-
ters institutional courtesy.102 In the case of Spain the weak institutionalization of
territorial representation at central level fostered the establishment of multilateral
subnational coordination, pushed by the strong regionalist parties; this prevents
backward Regions from exploiting institutional devices to block fiscal decentrali-
zation (for example revenue centralization). Procedures for setting budgetary sta-
bility objectives have to be passed by the Spanish Parliament after having taken
into account a report by the CPFF. If on approval of the Congress of Deputies
the stability objective were rejected by the Senate, the objective will be put on a
further vote in the Congress of Deputies and will be approved if ratified by a sim-
ple majority. Even if in theory each public administration has autonomy to all the
procedures and regulations needed to meet budgetary stability, the central level
is responsible for monitoring and ensuring the compliance with the budgetary
101. See detailed information at <www.staatsschuldenausschuss.at>(last access on 8 March 2012).

102. J. P. Gordin, “Paradoxes of Federalism?: Political Institutions and Fiscal decentralization in Argentina and
Spain,” in: Institut d’Estudis Autonomics, REAF, num. 11, Barcelona, (October 2010): 142-168.

objectives. The National government is however obliged to inform the CPFF on

the degree of the fulfillment of the budget stability objective. The CPFF also plays
a facilitating role in enforcing the stability objectives in budget offender Regions.
… the Italian way forward

The Italian situation up to now recalled the Spanish one of the 1980s, where
the Autonomous Communities were granted greater legislative and administra-
tive functions but not the power to levy taxes. Recently, the so called Italian
“fiscal federalism reform”103 (Law no. 42/2009) provides all Regions with more
autonomy as far as both revenue and expenditure are concerned and aim at cre-
ating a stronger link between taxation and spending.104 The reform also foresees
the establishment of new coordination bodies to be integrated with the existing
Standing State-Regions Conference. This can be traced back to the fact that the
principles that inform the Italian reforms in public finance and fiscal federalism
are institutional loyalty among all levels of government as well as the principle of
participation by all public administrations in attaining the objective of the na-
tional public finances consistent with the restrictions imposed by the European
Union and international treaties. With the reforming process of 2009, the princi-
ples that govern tax powers have been modified in light not only of the wording
of the new art. 119 (Financial Autonomy) of the Italian Constitution, but also
with regard to the indispensable link that the Constitution establishes between
art. 119 and art. 117 (State and regional Legislative Powers). In detail, art. 117
grants the State exclusive power over national taxes and the equalization system.
It also grants both the State and the Regions concurrent competency in relation
to coordination of the public finances and taxation system; as a consequence
103. Consult <www.portalefederalismofiscale.gov.it>and <http://federalismo.sspa.it>for detailed information

on the state of the art of Italy’s fiscal federalism reform.
For a general analysis of the implementation of Italy’s Fiscal Federalism Reform that takes into account the con-
tents of the different enactment decrees, see; E. Alber, C. Zwilling, A. Valdesalici, “Italiens Finanzföderalismus:
Finanzautonomie, gesamtstaatliche Koordinierung und politischer Druck aus dem Norden,” in: Europäisches
Zentrum für Föderalismus-Forschung Tübingen ed. Jahrbuch des Föderalismus 2010 (Nomos, Baden-Baden,
2010), 245-259.
E. Alber, “Einer für alle, alle für einen? Eine finanzföderalistische Zwischenbilanz rund um das Jubiläum ‘150
Jahre italienische Staatseinheit’,” in: Europäisches Zentrum für Föderalismus-Forschung Tübingen ed. Jahrbuch des
Föderalismus 2011 (Nomos, Baden-Baden, 2011), 242-254.
C. Fraenkel-Haeberle, “Verfassungsrechtliche Schuldenbremse und neue Haushaltsregeln in Italien,” in: Eu-
ropäisches Zentrum für Föderalismus-Forschung Tübingen ed. Jahrbuch des Föderalismus 2011 (Nomos, Baden-
Baden, 2011), 255-267.
104. According to art. 119 of the Italian Constitution subnational entities are to set and levy taxes and collect
revenues of their own. The new system foresees that financial coverage of all areas except essential services is
to be provided by own taxes and the central state will no longer be the paymaster of last resort. The principle
of historic expenditure (transfers based on last year’s expenditure) is being replaced by a so called standard
cost system (predefined costs). Calculations are contracted out to an agency; consult <https://opendata.sose.it/
fabbisognistandard>for latest details (last access on 9 March 2012). See also Rivosecchi, G., La determinazione
dei fabbisogni standard degli enti territoriali: un elemento di incertezza nella via italiana al federalismo fiscale,
in: <www.federalismi.it> 2011.

residual exclusive competence over regional and local taxes is attributed to the Re-
gions. In practice, law no. 196/2009 105 and law no. 42/2009 reshape the whole
setting in the area of public finance. Both laws aim at introducing an integrated
system of horizontal and vertical coordination. The provisions contained in law
no. 196/2009 establish new rules for the government accounting and public fi-
nance; its provisions are to be seen as complementary106 to the provisions within
the framework law on fiscal federalism (law no. 42/2009). More precisely, the
Accounting and Public Finance Law 2009 provides for coordination implement-
ing art. 117, whereas the Fiscal Federalism Law 2009 implements art. 119 of the
Italian Constitution. No decentralized fiscal regime (read standard costs system)
can be implemented without previously undertaking reforms with regard to ac-
counting and public finance. The Accounting and Public Finance Law 2009 is in-
formed by the principle of good faith collaboration and sets up a single regulatory
framework governing public finance and accounting by harmonizing accounting
systems as well as the budget systems of general government. In general terms, the
governance problems of the Italian public finances are rooted in the budget prep-
aration and execution as well as in its political culture. The whole budget process
is a very fragmented, bottom-up in budget preparation and tightly centralized in
budget execution. A single data base107 within the Ministry of the Economy and
Finance now collects all data concerning budgets, final balances and information
relating to management transactions, so as to ensure a more effective and timely
monitoring of public finance performance, implemented fiscal federalism as well
as to prepare the necessary information to start the analysis and assessment of
spending.108 In short, the new planning cycle (Public Finance Decision) is sup-
posed to better ensure the necessary coordination of all levels of government (the
Chamber of Deputies and the Senate as well as the Permanent Conference for the
Coordination of Public Finance).109 The latter body was provided by the Fiscal
Federalism Law 2009 and is mandated to bridging the gap between the elabora-
105. And as modified by Law no. 39/2011 with regard to the European economic governance. See R. Dick-
mann, la seconda riforma della legislazione di finanza pubblica in conseguenza delle esigenze della Governance
economica europea, in: <www.federalismi.it>2011.
106. For example in both laws art. 2 touches upon the harmonization of public budgets, law 42 with regard to
regions and local entities, law 196 with regard to all other public administration.
107. It can be accessed by the Parliament.
108. See Italy’s Stability Program for more details; available at <www.tesoro.it>(last access on 9 March 2012).
109. The opinion of the Permanent Conference for the Coordination of Public Finance on the draft of the
Public Finance Decision is compulsory. For a detailed analysis on the procedural rules concerning this dynamic
coordination process, see L. Cadeddu Cavallini, “Il coordinamento dinamico della finanza pubblica nelle ri-
forme,” in: <www.federalismi.it> no. 11/2011 (13-20).
For a detailed picture of the functioning of the Conference see N. Lupo, “Il procedimento di attuazione della
delega sul federalismo fiscale e le nuovi sedi della collaborazione tra i livelli territoriali: commissione bicamerale,
commissione tecnica paritetica e conferenza permanente,” in: <www.federalismi.it>no. 23/2009 (chapter 9).

tion and insertion of certain objectives in the Public Finance Decision and the
new fiscal rules afflicting the territorial entities.
The Fiscal Federalism Law 2009 also foresees an ad hoc commission to draft
the contents of the implementation decrees, which acts within the Standing
Conference State-Regions and helps the government in drafting the bylaws.110
The ad hoc Commission to draft the contents of the reform (Commissione tecnica
paritetica per l’attuazione del federalismo fiscale)111 is composed of fifteen mem-
bers appointed by the central government and fifteen members appointed by the
representatives of territorial entities. Its task is to coordinate the implementation
of the framework law 42/2009, to act as an advisory body for the territorial enti-
ties and as a secretariat of the Permanent Conference for the Coordination of
Public Finance (Conferenza permanente per il coordinamento per la finanza pub-
blica). The latter one has important functions as co-defining budget objectives
(also with regard to tax pressure and indebtedness), advising on the equalization
fund, monitoring the territorial entities’ compliance with set objectives and pro-
mote the enforcement of convergence programs as well as managing the reward
or sanctions system.112 Other bodies, as the parliamentary commission for the
implementation of the fiscal federalism with the committee of representatives of
the territorial autonomies have advisory and control function as well as its sup-
portive body.113 These new bodies were introduced as a corrective measure and are
complementary to the Standing State-Regions Conference, which until now has
been the solely forum of coordination with all its limits previously described.114
In practice, the Permanent Conference for the Coordination of Public Finance
is the advisory body accountable to the government once the whole fiscal regime
is in force and the Standing State-Regions Conference preserves its function as
prior to the reform of 2009. Considering the reforms examined here, the State
ends up in reserving itself a managerial re-centralizing function, contrary to the
very nature of federalism. Time will show if the new systems will undermine the
110. The Fiscal Federalism Law no. 42/2009 vests the responsibility with the national government, bypassing
thus the parliament and not adequately taking into account the opinions of the representatives of local and
regional authorities. Bylaws are indeed being adopted without reaching a consensus with the representatives of
local entities (for example in the case of the so called municipal federalism bylaw 23/2011 or in case of the bylaw
regulating the reward and sanction system with regard to the compliance to the new objectives).
111. N. Lupo, “Il procedimento di attuazione della delega sul federalismo fiscale e le nuovi sedi della collabo-
razione tra i livelli territoriali: commissione bicamerale, commissione tecnica paritetica e conferenza perma-
nente”, in: <www.federalismi.it> no. 23/2009 (chapter 8).
112. The fiscal federalism reform is aiming to introduce a kind of a “carrot and sticks system” with regard to
budget stability objectives introducing rewards and sanctions depending on the performance of the bodies (for
example disqualifications from office).
113. N. Lupo, “Il procedimento di attuazione della delega sul federalismo fiscale e le nuovi sedi della collabo-
razione tra i livelli territoriali: commissione bicamerale, commissione tecnica paritetica e conferenza perma-
nente,” in: <www.federalismi.it> no. 23/2009 (chapter 6).
114. See G. Rivosecchi, “Autonomia finanziaria e coordinamento della finanza pubblica nella legge delega sul
federalismo fiscale: poche luci e molte ombre,” 2009, in Astrid Rassegna, www.astrid.eu.

rebounds of responsibility between the different levels of government, which have

been characterizing far too long Italy’s political landscapes.
As far as time is concerned, one has to keep in mind that according to the
framework law the new fiscal federalism regime should be implemented within
the next five years, but the bylaws to the framework law leave much room for
maneuver. As a matter of fact, a time frame of only five years would have been too
tight for getting public debt under control and meeting the objectives of the new
criteria reshaping and responsibilize sub-national entities in their expenditures.115
Allocating financial resources is a delicate process and takes time. Overall, the role
of Regions and local entities in the whole reform is very weak. It is difficult to un-
derstand how the new coordinating bodies116 are going to interact with existing
ones as the Standing Conference State-Regions, which in any case keeps the lead-
ing role. The Standing Conference itself is considered to be an almost unreadable
body, complex and conflict-ridden; so far, the system does not allow filtering the
single entities’ positions117 and increasing number of interlocking and interacting
bodies under an unclear roof of rules could have a Politikverflechtung as undesired
outcome. The new planning and coordination system provides for a multiplicity
of bodies to be involved in implementing the new fiscal and financial rules. So
far, the new rules did establish specialized bodies that are complementary to the
work of the main mechanism, the Standing Conference State-Regions, but at
the end of the day they are accountable to the executive.118 The decision-making
procedure within the Conference is limited to its governmental components and
thus subject of criticism, especially in relation to its so called democratic deficit.
As the German case demonstrates, the Bundesrat does not preclude the necessity
of a body, which is mandated to govern fiscal and financial rules. Additionally,
compared to other legal orders,119 Italian bodies and procedures of fiscal and fi-
nancial coordination are also in a rather weak position considering their legal base
(not being constitutionalized). The risk that such a polycentric system evolves
without any clear design of who monitors and decides on what should not be un-
derestimated. In particular, two things are missing for a more effective intergov-
115. See N. Lupo, “Il procedimento di attuazione della delega sul federalismo fiscale e le nuovi sedi della
collaborazione tra i livelli territoriali: commissione bicamerale, commissione Tecnica Paritetica e conferenza
permanente,” in: <www.federalismi.it>no. 23/2009 (chapter 3).
116. Next the above mentioned bodies, law no. 196/2009 provides also for a Public Administrations Commit-
tee for Accounting Principles (23 members, 4 appointed by the government, 1 each from the both chambers,
1 from the Audit Court, 1 from the National Statistics Office, 7 representing territorial entities, 3 experts).
117. The Conference works based on the consensus principle. The regions as a rule should come to a unanimous
position. If this is not the case, the regions’ opinion is determined by majority vote.
118. For a critical analysis see G. Carpani, “La collaborazione strutturata tra Regioni e tra queste e lo Stato.
Nuovi equilibri e linee evolutive dei raccordi ‘verticali’ e ‘orizzontali’,” in: <www.federalismi.it>2009.
119. See for example the “German constitutional block” and the Spanish LOFCA and Ley Organica no. 5/200,
de 13 diciembre, complementaria a la Ley General de Estabilidad Presupuestaria.

ernmental coordination system within Italy’s constitutional design of cooperative

regionalism: a sound institutional framework representing the territorial enti-
ties’ interests and a political cooperative culture. Both the Standing Conference
State-Regions as well as the Associations representing the Italian provinces and
municipalities call for a federal institutional design.120 It is important to recall,
that a peculiarity of the Italian system of intergovernmental financial relations
compared to other federal or regionalized states is the fact that both, Regions
and local entities have direct relations to the government; in federations, finance
matters with regard to local entities are normally attributed to the intermediate
level, which provides for equalization schemes. In the Italian case the latter model
is valid only for some of the special Regions (Aosta Valley, Friuli Venezia Giulia
and the two Autonomous Provinces of Bolzano/Bozen and Trento composing the
Autonomous Region of Trentino-Alto Adige/South Tyrol). It goes without say-
ing that reforms of the intergovernmental financial relations and its coordination
bodies were badly needed as disparities in the financial treatment between the
Regions were getting too large and the whole economical system became a victim
of its dysfunctionality.
Conclusions
The paper has provided an overview on the main features of current ongoing
fiscal and financial reform processes in European compound States. It did so from
an institutional point of view by looking at mature and emerging federations
from a comparative perspective. Even if the challenges the States are facing may
be very similar, the solutions are not. While analyzing the legal orders, we found
various differences in normative intention, constitutional design and governance
practices. All in all, the institutional perspective of fiscal federalism reminds us
that there is more to the design of a new era of fiscal federalism than just allocat-
ing functions to the appropriate levels of government. As shown in the paper, for
a federal scholar, constitutionalist as well as for a political scientist, the allocation
of powers in sub-national authorities has also to be guaranteed with respect to
the central level, either by constitutional rules or informal constraints. That said,
the paper shows that the ongoing reforms are—as a general rule—all informed
by both the principles of autonomy and differentiation, as well as the principles
of solidarity and equality. Each of the guiding principles has a different weight
in each State. To what extent such principles mingle is up to the constitutional
design of each compound State. In short, the paper emphasized the need to move
120. See for example Doc. 24.03.11, Modifiche II parte Costituzione: valutazioni giuridiche su scenari; the
Standing Conference State-regions stresses how the role of the regions within the decision-making process is
weakened; the same Conference also pointed out that all stability budget objectives defined in the so-called
manovra 2011-2013 have been approved without being discussed in the forum of the Standing Conference.

beyond traditional classifications of government and governance tools by explor-

ing the institutional conditions that regulate the coming into force of reforms for
a new era of fiscal federalism. Our tentative results show that financial relations
in multilevel systems are the outcome of a dynamic process that ties to balance
decentralization and re-centralization factors. No equilibrium can be reached for-
ever and the systems require constant updates to keep track of changes and de-
velopments. As a matter of fact, federalism can be conceived as a well-organized
waterworks able to minimize water leakages, but only if regularly under construc-
tion.121 Techniques and systems both have to undergo regular maintenance and to
avoid institutional entanglement. The rules of the game have to be kept flexible
but not loose. This is in line with the very nature of federal and highly regional-
ized systems: their being dynamic. The outcomes of ongoing reforms have much
to contribute in the long run as the allocation of financial resources was and
is crucial in the quest for good governance and economic efficiency, especially
against the backdrop of the economic and financial crisis.
The paper analyzed reforming processes through the lens of multiple spheres
of government of compound states, and tried to shed light on the rationale of
the reforms, the tax regimes and some broader aspects of economic intergovern-
mental governance. The variety of the systems reflects the different legacies and
developments of each constitutional design. It also confirms the very nature of
federalism in its never-ending search for balance. Constitutionals designs are be-
ing delimited by formal institutions as specified in constitutions and legal inter-
pretation, but also by the exercise of informal power. All in all, it seems that the
federal pendulum swings in an alternating manner in favour of re-centralization
and decentralization of powers, trying to find the right balance between auton-
omy and solidarity within multi-tier governments. However, due to the current
macroeconomic constraints, for the time being re-centralization seems to have a
slight advantage over decentralization.
Abstract
Against the backdrop of the financial and economic crisis, federal and regional States are engaging
in several reforms. The financial constitutional design and institutional setting in the area of fiscal and
financial matters are being revised in order to better adapt to the current challenges, which result both
from the supranational sphere of economic governance and the domestic one. The rationale behind these
reforming processes lies in the struggle between the apparent needs to re-centralize while accommo-
dating decentralization claims. The paper focuses on federal and highly regionalized European States by
adopting a comparative domestic perspective and investigates reform processes in the area of fiscal mat-
ters and financial intergovernmental relations. It explores the most significant features that permeate
the various legal orders, trying to single out the different trends in shifting powers in favour of either (re)
centralization or decentralization. To this extent the recognition of autonomy on the revenue side and the
accommodation of autonomy and solidarity within the new fiscal regimes will be analyzed. Moreover,
121. F. Palermo, “Per un quadro normativo del federalismo fiscale,” in: Federalismo fiscale: una sfida comparata,
ed. F. Palermo, E. Alber, S. Parolari (Cedam, Padova, 2011), 412-413.

intergovernmental cooperation in fiscal and financial areas will be scrutinized trying to point out crucial
characteristics from a comparative perspective. To this regard particular attention will be given to major
recently established bodies and procedures in the fiscal and public finance area as well as to their role
within domestic economic governance.
Résumé
Sur toile de fond de crise économique et financière, les États fédéraux et régionaux se sont engagés
dans diverses réformes. Le modèle constitutionnel financier et le cadre institutionnel fiscal et financier
sont en train de se modifier afin de mieux s’adapter aux défis du temps, qui relèvent à la fois de la sphère
supranationale de la gouvernance économique, et de la sphère nationale. Les raisons qui motivent ces
processus de réforme tiennent à la contradiction entre les apparentes nécessités de recentraliser tout
en s’accommodant des revendications de décentralisation. Cet article s’intéresse aux États européens
fédéraux et hautement régionalisés en adoptant une perspective comparative nationale, et étudie les
processus de réforme dans le domaine des matières fiscales et des relations financières intergouvernemen-
tales. Il étudie les éléments les plus significativement présents dans les différents ordres juridiques, en
cherchant à identifier les diverses tendances du transfert de pouvoir en faveur de la (re)centralisation
ou de la décentralisation. C’est dans ce contexte que seront analysées l’autonomie du point de vue des
recettes, et la conjonction l’autonomie et de la solidarité dans les nouveaux systèmes fiscaux. En outre,
la coopération intergouvernementale dans les matières fiscales et financières sera étudiée afin d’en dé-
terminer les caractéristiques fondamentales de l’analyse comparée. Enfin, une attention particulière sera
portée aux récentes innovations en terme de d’organismes et de procédures dans le domaine des finances
publiques et fiscales, ainsi qu’à leur rôle dans la gouvernance économique interne.

Reforming Fiscal Federalism in Europe Where Does The Pendulum Swing

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Reforming Fiscal Federalism in Europe Where Does The Pendulum Swing

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REFORMING FISCAL FEDERALISM IN EUROPE: WHERE DOES THE

Elisabeth Alber, Alice Valdescalici

Centre international de formation européenne | « L'Europe en Formation »

2012/1 n° 363 | pages 325 à 365

Distribution électronique Cairn.info pour Centre international de formation européenne.

Powered by TCPDF (www.tcpdf.org)

Elisabeth Alber & Alice Valdescalici

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

2. The rationale behind the reforms: decentralization or (re)centralization

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

7. BVerfG, 2 BvF 2/98, 11.11.1999.

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

legislation at central level (known as LOFCA)15 had to be revised in order to

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

3.The tax systems: trends in shifting accountability by fiscal decentraliza-

Fiscal relations in multi-tier systems can be conceived as the outcome of cen-

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

In Austria, the reforming project aims at conferring the intermediate level of

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

As previously analyzed, the tax system of European multilevel States remains

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

and solidarity principles in order to grant equal or at least similar opportunities

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

needs.50 It entails both a vertical and a horizontal component, the horizontal

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

guarantee of an equivalent basis-level (nivel base equivalente) of fundamental pub-

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

5. The importance of intergovernmental relations for a new era of fiscal

Growing complexity and specialisation in the vertical (but also horizontal)

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

tal mechanisms aiming at insuring intergovernmental harmony and cooperation,

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

6. Casting intergovernmental cooperation as ‘pulling together or apart

There is no single model when it comes to deciding who should be responsible

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

From an overseas comparative perspective, Canada is characterized by its

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

agreements. Increasing multilateral fiscal cooperation and expanding decentrali-

75. See Art. 149 Spanish Constitution.

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

78. Art. 42 B-VG

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

This consultation mechanism has turned out to be quite effective in institu-

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

It goes without saying that intergovernmental fiscal relations pose different

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

7. New fiscal coordination bodies and financial rules in a nutshell

Many institutional solutions have been discussed to effectively face current

… the German way forward

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

L’Europe en formation nº 363 Printemps 2012 - Spring 2012

L’Europe en formation nº 363 Printemps 2012 - Spring 2012