Europe's sovereign-debt crisis highlights democratic flaws in EU economic governance. Interstate bargaining to negotiate assistance programmes and bail out debtor countries, have soured intergovernmental relations and undermined the EU's democratic legitimacy: dividing it into winners and losers, promoting citizen unrest and formation of anti-austerity eurosceptic parties.
In established federations like Canada and Germany, 'fiscal federalism' (cash grants) exists to address regional economic disparities and asymmetric shocks. However, without political integration, the EU cannot use conventional fiscal transfers to share the burden of adjustment. The intergovernmental bargain that produced Economic and Monetary Union (EMU) - a single monetary policy without a fiscal union - created incentives for breakdowns in fiscal discipline and revealed lack of mutual trust and shared values.
I analyse recent changes in EU policymaking and decisions (notably the Commission's scrutiny of national budgets) to assess whether fiscal federalism is replacing intergovernmentalism in EU economic policy.
