Chapter 2 moves from the constitutional foundations of the European legal order to the architecture of fiscal federalism constructed atop them. It investigates where the constitutional principles identified in Chapter 1 inhere in the legal architecture of EMU, and explains the basic principles of economics inscribed for their attainment. The principles of fiscal sovereignty, price stability, and fiscal discipline are shown to penetrate three levels of investigation: The travaux préparatoires and the mandate for EMU (Article 119 TFEU); the allocation of competences in economic policy (Articles 2(3) and 5(1) TFEU); and the technical architecture governing public finance itself (Articles 121-126 TFEU). By those provisions, EU fiscal federalism rests on two principles: (1) Fiscal sovereignty – member state economic/fiscal competences remain outside the EU legal order altogether; and (2) market discipline –member states are exposed to ‘hard budget constraints’ and ‘market discipline’ to ensure fiscal discipline.

Chapter 1 evaluates competing EU and member state claims over the constitutional boundaries of ‘constitutional identity’ and Kompetenz-Kompetenz in the European legal order, and identifies two constitutional boundaries of the EU legal order which will impinge on the selection of fiscal federalism models for the EU. The first is fiscal sovereignty. Member state fiscal sovereignty is a permanent constitutional constraint on the application of fiscal federalism theory in the EU. The Union can have no powers other than what the member states have given it, and nemo plus iuris, what the member states have given it is limited by their own ‘constitutional identities’ – of which fiscal sovereignty lies at the core. The second is comprised of the fundamental guiding principles of price stability and ‘fiscal discipline’ (sound public finances, and sustainable balance of payments) binding on the mandate for EMU itself under Article 119(3) TFEU.