Fiscal Federalism and Governance in the European Union

Project on 21st Century City Governance | September 2017 Fiscal Federalism and Governance in the European Union TERESA TER-MINASSIAN BERNARD SOULAGE NICOLAS LÉTÉ CAROLINE CONROY MARIAMA SOW THE AUTHORS Teresa Ter-Minassian is a senior consultant to the Global Economy and Develop- ment program at the Brookings Institution. She is the former director of the Fiscal Affairs Department of the International Monetary Fund. Bernard Soulage is a professor of economy and the secretary general of the Climate Chance Association. He is the former vice president of the Rhône-Alpes region and its representative for Europe and external relations and a former member of the European Parliament. Nicolas Lété is a policy advisor for the cabinet of the president at European Com- mittee of the Regions. He is a former representative of the Auvergne Rhône-Alpes Region (France) to the European Union in Brussels. Caroline Conroy is a research analyst in the Global Economy and Development program and the Centennial Scholar Initiative at the Brookings Institution. Mariama Sow is a research analyst in the Global Economy and Development program at the Brookings Institution. ACKNOWLEDGEMENTS This paper was prepared for the Project on 21st Century City Governance, a collaborative effort of the Brookings Institution’s Centennial Scholar Initiative and the Global Economy and Development Program. Alaina Harkness, fellow for the Project on 21st Century City Governance, provided overall editorial guidance. The Brookings Institution is a private non-profit organization. Its mission is to conduct high-quality, independent research and, based on that research, to provide innovative, practical recommendations for policymakers and the public. The conclusions and recommendations of any Brookings publication are solely those of its author(s), and do not reflect the views of the Institution, its management, or its other scholars. CONTENTS Local Finances in Italy ........................................................ 1 Teresa Ter-Minassian Fiscal Decentralization and 21st Century Cities in France ......................... 23 Bernard Soulage with Caroline Conroy and Mariama Sow Fiscal and Federal Structures in Germany....................................... 42 Caroline Conroy Features of Territorial Goverance in Europe ..................................... 68 Bernard Soulage with Nicolas Lété Local finances in Italy1 TERESA TER-MINASSIAN INTRODUCTION by the aftermath of the global and subsequent Eu- taly has a complex system of intergovernmental ropean financial crises, reflected a shift toward re- Irelations. It has three basic levels of government: centralization. a national one (the Central Government, or CG); a regional one, composed of 15 “ordinary statute” This paper, which has been prepared for the Brook- regions and five “special statute” ones;2 and a local ings Project on 21st Century City Governance, be- one, comprising 100 provinces, 10 metropolitan gins in Section II with a brief overview of the ebbs cities, and 8,100 municipalities. Broadly speaking, and flows of the decentralization process in Italy the national and regional levels share normative in recent decades, highlighting the main institu- and policy functions, as well as the delivery of tional changes affecting all the subnational levels public goods and services in their respective areas of government and relating them to the evolving of responsibility, while the local level is primarily political, economic, and fiscal trends of the period. responsible for the delivery of local services. The subsequent sections focus especially on the lo- The system of fiscal relations among the three lev- cal level of government, analyzing the current state els of government has been in a state of flux for of affairs regarding: decades. After a phase during the 1990s of enthu- siasm for fiscal decentralization, a constitutional • Governance arrangements and spending amendment was enacted in 2001 calling for an responsibilities (Section III). expanded role in spending and increased revenue autonomy of the subnational governments • Own sources of revenues, in particular the (SNGs). However, the necessary implementing central government-induced travails of the legislation was delayed until the end of the decade, local property tax and their cost for the and subsequent reforms, being largely influenced municipal finances (Section IV). 1 The author wishes to acknowledge gratefully the useful comments received from Kemal Derviş, Giorgio Brosio, Bernard Soulage, Alaina Harkness, and Caroline Conroy. 2 The regions with special statutes (Aosta Valley, Trentino-South Tyrol, Friuli-Venezia Giulia, Sicily, and Sardinia) were created in the aftermath of World War II with the new Republican Constitution, to recognize ethnic, linguistic, or other historical distinguishing characteristics of these regions. These regions have traditionally received larger CG transfers than the ordinary ones, although the gap has been shrinking in recent years. Global Economy and Development at Brookings Centennial Scholar Initiative at Brookings 1 • The system of intergovernmental trans- procedures; and the main existing mecha- fers, in particular the innovative system of nisms for vertical and horizontal intergov- equalization transfers introduced in recent ernmental cooperation. years (Section V). • Entrepreneurial activities of local govern- • The constraints imposed on the local financ- ments, including through municipal en- es by the past Internal Stability Pacts and the terprises and public-private partnerships national legislation implementing the EU (PPPs) (Section VII). Fiscal Compact of 2012, and their impli- cations for local investments (Section VI). The paper concludes in Section VIII with a discus- This section also discusses the problems of sion, in the light of the analysis of the previous sec- hidden debts and arrears of municipalities, tions, of priorities for further reform of the local past bailouts, and municipal bankruptcy finances in Italy. 2 Fiscal Federalism and Governance in the European Union A BRIEF HISTORICAL REVIEW OF ernmental transfers. Specifically, Article 117 of the THE DECENTRALIZATION PROCESS new Constitution substantially expanded the leg- IN ITALY3 islative power of the regions in key areas, such as he decentralization process in Italy over the last health, education, energy, transport, environment, Tfew decades has been all but linear. The 1970s and regulation of markets. and 1980s witnessed various waves of spending decentralization, with the devolution of import- However, most of these functions were defined as ant expenditure responsibilities to the newly cre- areas of concurrent responsibility between the CG ated Regioni a Statuto Ordinario, as well as to the and the regions, leaving to subsequent national local authorities (provinces and municipalities). legislation a precise determination of respective The spending decentralization was not accompa- competencies in each area. Since such implement- nied, however, by a devolution of revenue-raising ing legislation was substantially delayed by politi- responsibilities. As a result, the SNGs financed cal wrangling, ample scope arose for jurisdictional their expenditures mainly through transfers from conflicts around the extensive areas of overlap in the CG. This contributed, along with inadequate spending responsibilities, which often were esca- controls and poor information on subnational ac- lated up to the Constitutional Court. counts, to significant local deficits and accumula- tion of arrears, and to repeated bailouts by the CG. When a framework law on fiscal decentralization (Law 42/20094) was finally enacted, it still left most Against a background of national focus on fiscal of the reform specifics to subsequent government consolidation as precondition for Italy joining the decrees, which were to focus on: the enhancement euro during the 1990s, concern grew over these of regional and local revenue autonomy; the rede- trends, as did political pressures for greater fiscal sign of the system of intergovernmental transfers, autonomy, especially by the richer northern re- to base them on standardized measures of fiscal gions. That led to the assignment to the SNGs of capacity and spending needs; the harmonization significant own sources of revenues, specifically of accounting standards across levels of govern- health contributions, a motor vehicles tax, and a ment; and the improvement of intergovernmental tax on the value added of enterprises (IRAP) to the coordination mechanisms. regions; surcharges on the personal income tax to both regions and municipalities; and a new prop- However, by 2010, in the aftermath of the global erty tax to the municipalities. financial crisis that took a serious toll on the public finances, and with the onset of the euro crisis, poli- This decentralization phase culminated in the cy imperatives shifted to fiscal adjustment, and the passage in 2001 of a constitutional amendment, subnational finances were required to make a large which, among other things, substantially re- (some believe disproportionate)5 contribution to duced the areas of exclusive competency of the the adjustment. The latter included substantial CG and affirmed the principle that SNGs should cuts in CG’s transfers to the SNGs and a tightening be financed mainly through own revenues and of constraints under the so-called Internal Stabil- non-earmarked, equalization-oriented intergov- ity Pacts6 (see Section VI). The toll was especially 3 For

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