Solving the Eurozone Trilemma: Federalism By Exception

  The crisis in the euro-area has given rise to a wide debate on political or fiscal union. The key arguments can be subsumed under the broad categories “more” vs. “less” Europe. This article argues that such a debate misses the point and instead advocates a much more issue specific approach to integration. Transfers of fiscal sovereignty should only be sought in so far as the lack thereof would hamper the functioning of the single currency. The article points to a three-way trade-off in the design of any monetary union: it shows that it is very difficult to combine at the same time (i) national sovereignty over economic policy-making, (ii) successful crisis prevention, and (iii) the avoidance of moral hazard. The article then identifies four areas where further integration could lead to overcoming this trilemma and lead to “federalism by exception”: (i) completing the single market, (ii) establishing a shock-absorption mechanism to correct cyclical imbalances, (iii) building a European Debt Agency, (iv) implementing a banking union based on ex-ante burden-sharing and a single supervisory framework. The result would be a “sui generis” approach to fiscal federalism in Europe. Put in a broader theoretical context, the article demonstrates that the dichotomy between “sovereignist” vs. “federalist” approaches to European integration should be replaced by a much more functionalist approach leading towards a “Federalism by Exception”.