Professor Tomasz P. Woźniakowski has written an excellent scholarly book on the emergence of fiscal unions in the United States during the 1780s and in the European Union during the sovereign debt crisis in the 2010s. This book is a must-read for scholars of federalism, political economy, political science, economic history, comparative politics, and readers of Perspective on Politics. Woźniakowski’s point of departure is William Riker’s classic theory on the emergence of federal unions that postulates that an external threat (e.g., military or diplomatic) will trigger a process leading to federalism because the governing elites will strike a bargain to credibly deter the emerging external threat. Woźniakowski’s innovative theoretical approach takes Riker’s theory and turns it on its heads by arguing that an internal threat or the perception thereof is a necessary precondition for the central federal government to receive the right to levy taxes on the constituent federal units—a process that the author terms “fiscalization.” He distinguishes fiscalization from undefined concepts such as “fiscal capacity,” which he rightly stresses are too imprecise to adequately capture the intricacies of emerging fiscal unions. With this refined analytical toolkit, Woźniakowski goes on to scrutinize the process of fiscalization that started with the internal threat triggered by Shays’ Rebellion in the United States when rising taxes threatened the internal coherence of the confederation and led, thanks to Alexander Hamilton and the founding fathers, to the creation of a fully fledged federal union with the right to tax.
Woźniakowski revisits various primary sources, and the depth of his comprehensive archival research is truly impressive. His writing is superb and is highly accessible to non-expert readers. He brings to the fore the rhetorical arguments that were made at the time of the Articles of Confederation to convince the opponents of fiscalization of the benefits to move toward a new constitution. By juxtaposing the lengthy bureaucratic and complex fiscal rule framework embedded in what is called the “European Semester” with the American history of forming a fiscal federation, the author shows that ultimately the lack of the right to levy taxes at the European level incentivized the political elites to double down on the regulation of national fiscal capacities, rather than creating a true “Hamiltonian moment.” This, however, created resentment toward the union rather than strengthening the social fabric underpinning a strong federal union. One of the strongest points in Fiscal Unions is that the right to tax can create a good equilibrium in which taxation becomes not only more effective but also has the potential to lower the overall tax burden, thereby creating a beneficial cycle of higher trust in the union and lower social unrest. In doing so, fiscal unions can even “buy out” previous opponents of a fiscal union. Woźniakowski invokes Alexander Hamilton to show that it is fundamental that the union has “regular and adequate” revenues (57); otherwise, states would use their leverage over the center and try to continuously renegotiate the level of their contributions, as was the case in the so-called pre-US fiscal union requisition system.
The comparison with the current EU fiscal framework is intriguing because it shows that the EU has never been able to go beyond a “requisition system.” Whenever additional fiscal resources are required at the European level, horse trading is set in motion that slows down emergency responses. creating Euroskepticism and distrust in the process. It is interesting to follow the author when he distills the arguments of the US founding fathers from the discourse about the advantages and disadvantages of a fiscal union and applies them to the EU. When assessing the preferences of EU member states for the creation of a true fiscal union, Fiscal Unions reveals that many member states hide behind preconditions that they know are close to impossible to achieve; for example, “risk reduction” must precede “risk sharing.”
Fiscal Unions is structured as follows. After motivating the research question and providing a solid theoretical foundation grounded in the federalism literature, the author provides a fiscal “state of the union” before describing in detail the debates that took place during the ratification process of the US Constitution. The depth of his historical analysis provides a perfect stage for the comparison with the policies enacted during the European sovereign debt crisis. The author does not merely describe the EU fiscal rule framework but is also keenly aware of its shortcomings and the lack of enforcement. His analysis is concise because his refined analytical toolkit scrutinizes the EU’s sovereign debt crisis architecture for indications that some sort of fiscalization has taken place. Here, the book’s analysis is prescient because it focuses on the European Financial Stabilization Mechanism (EFSM), which to some extent inspired new emergency vehicles during the pandemic by providing a blueprint for “quasi-fiscalization.”
Woźniakowski’s book imparts important lessons for those working toward the creation of a European fiscal union (150–53). First, he argues that debt-increasing policies such as defense spending and bank bailouts will lead to higher debt burdens for the citizenry and result in public unrest, threating the social fabric of the union. Thus, union-wide taxing powers to provide public goods could help avoid unrest in the first place. Hamilton had stressed that the federal power to tax will create the certainty that the government—if push comes to shove—always has a wide tax base to draw on. The common borrowing done by the EU during the pandemic had a similar short-term effect. However, it was not long-lasting because the EU lacks the power to tax its member states. As a result, it is still cheaper for the highly rated sovereigns to issue their own national debt rather than European debt.
Second, Woźniakowski shows that fiscalization can spur the democratization of central institutions because citizens will demand a greater say following the credo, “No taxation without representation.” A European fiscal union may therefore remedy its democratic deficit via a neo-functional spillover effect. Third, Woźniakowski points out that a wide democratic bottom-up debate is essential; to create the consensus that will enable the central level to levy taxes on its constituent units. Fourth, the author argues that the opponents of fiscalization need to see potential benefits to giving their consent to fiscalization in order to be bought out. He provides the example of New York State that was opposing the creation of a fiscal union in the new constitution but ultimately gave in because the perceived benefits of the union taking over defense spending were too appealing for a state under permanent threat of being invaded.
Fiscal Unions emphasizes that internal threats can facilitate fiscalization. Recent events in the EU during the COVID pandemic have provided additional empirical evidence to support his theory. European policy makers were extremely worried that the virus could threaten intra-EU supply chains if member states with limited fiscal space would not receive sufficient support. With Euroskeptism in some member states on the rise, it was agreed to issue “Coronabonds” to help struggling member states hit hardest by the virus with grants through a newly created recovery fund. Although issuing these bonds did not surpass the entrenched logic of fiscal regulation, it was what Woźniakowski calls “quasi-fiscalization”— even if the decision whether to add targeted revenue-raising capacity to the European level in the form of specific taxes was kicked down the road. Overall, the pandemic demonstrates the analytical power of Woźniakowski’s notion of fiscalization and the great scholarly contribution that Fiscal Unions has already made to the field of federalism.
