Fiscal Federalism in Monetary Unions: Hypothetical Fiscal Transfers within the Euro-zone

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