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Central governments lead charge against financial meltdowns
By George Anderson
Just as we can learn a lot about a person’s character by how he or she reacts to a crisis, so can we learn much about a federation by seeing how it confronts a crisis.
Crises come in many forms – political, inter-ethnic or religious, security or
economic. What has been extraordinary over the last two years is the unfolding of the world’s most severe economic crisis since the Great Depression of the 1930s. In our globalized world, it has been a storm with few harbours. Virtually every country has felt its negative effects, though their nature and extent has varied a good deal.
While watching the world’s leaders scramble in such an environment is not exactly a “controlled experiment,” it is a rare opportunity for comparisons. This is the reason for our unprecedented decision to dedicate an entire issue of Federations to looking at a broad cross section of federations coping with a global economic crisis.
One stunning similarity is the extent to which leadership has fallen to central governments in all federations, both centralized and decentralized. Central governments, including central banks, typically lead in macro-economic management. They have most of the policy levers and the strongest revenue base. They connect with international efforts to co-ordinate policy. And they, more than governments at the regional or local level, are the ones that voters primarily hold to account for economic performance.
The contrast with the European Union is very telling. While it has some federal characteristics – including now a central bank for most of its members – it is still far from being federal. Brussels has little fiscal heft and only the weakest mandate to co-ordinate fiscal policy. When members’ views differ so greatly, the centre risks ending up as collateral damage. While views differ on Europe’s appropriate policy response, it has been markedly less coherent than that of the federations examined in this issue.
Within the general context of federal leadership, the roles played by constituent unit governments have varied. In most cases, federal governments that have funded major stimulus initiatives look to the constituent units to manage large new transfers quickly. In some cases, as in Canada and Switzerland, constituent units have supplemented the federal fiscal stimulus. In other cases they have either denied themselves this ability, as in the US where many states have constitutions prohibiting deficits, or argued it is not their problem because of their weak fiscal capacity, as in Australia and Brazil. At its worst, this can lead to the federal government running huge pro-cyclical deficits while the constituent units madly slash spending or raise taxes.
A crisis of this magnitude clearly shifts the weight of decision-making towards federal capitals. It can also have a dramatic impact on the general priorities of government. Thus infrastructure, the bailout of key industries (automobile, banking) and longer-term federal priorities (energy, research and development) can find themselves awash in money, while other sectors, notably some that are the responsibilities of constituent units, may be awash in the blood of the budget cutting knife.
The scale of the crisis has varied tremendously, but virtually everywhere it has had major impacts on the functioning of federations, at least for the short term. Whether this means there will be a “new normal” in the
longer term is the next big question. 
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George Anderson is the president and chief executive officer of the Forum of Federations.
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