The European Union is starting a big debate about fiscal federalism. There are many questions involved. The one I want to focus on is whether a Europe-wide fiscal arrangement with common transfers would help smooth economic performance across participating countries while at the same time helping them to converge on similar levels of income per capita. The line you often hear is that this is how federal transfers work in the United States: rich states like New York and Massachusetts bankroll poorer states in the south and west of the country both when times are tough and in order to foster the whole of the U.S. economy.
In reality, the U.S. federal transfer system does not work that way. The richer states in the north-east of the country get more federal transfers per capita than the poorer states in the south and west. The reason is that the U.S. federal fiscal system was designed to support people as individuals (or households) and not as clusters or places on the map. Moreover, that design reflects important differences across state and local governments. State governments that believe in more redistribution tend to get more redistribution; state governments that do not believe in redistribution tend to leave people to fend for themselves. In this sense, state sovereignty and democratic legitimacy are powerful influences even when the ‘states’ in question are U.S. states rather than national states (or Member States).