Federal dynamics in times of economic and financial crisis

Abstract

Abstract The global economic and financial crisis is a challenge for all governments, but particularly for federal states because divided and/or shared territorial powers make federations susceptible to coordination problems in fiscal policy making. This article explores the effects of the ongoing crisis on federal relations. Three kinds of problems that may become the cause of federal tensions and conflicts are evoked: opportunism of subgovernments, centralisation and erosion of solidarity among members of the federation. Our analysis of fiscal policies and federal conflicts of 11 federations between 2007 and the present reveals three kinds of coordination problems: shirking in the use of federal government grants, rent‐seeking in equalisation payments, and over‐borrowing and over‐spending. Our results show that shirking remained limited to few cases and occurred only in the first part of the crisis. However, rent‐seeking and over‐borrowing and over‐spending led to a reduction of solidarity among subgovernments and to increased regulation of the fiscal discretion of the members of the federation. Subsequently, tensions in federal relations increased – although only in one case did this challenged the federal order.

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