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The degree of fiscal decentralization in European Union countries in different stages of the economic cycle

The debate surrounding fiscal decentralization is revived in times of threats to sustainable development whose effects are first experienced at the decentralized (local) level and are then transferred to the central level. The extent to which the management of public funds is decentralized is determined mainly by a country’s legal system, but also by economic, political and historical factors. A balanced relationship between central control and local autonomy in fiscal management can improve a country’s economic performance. This factor could play a key role in planning effective measures to minimize the adverse consequences of the economic recession caused by the Covid-19 pandemic. The aim of this study was to evaluate the degree of fiscal decentralization in European Union (EU) countries, to identify groups of EU Member States characterized by a similar degree of fiscal decentralization, and to describe their economic performance. The degree of fiscal decentralization was evaluated based on local government revenues as a percentage of the GDP in EU Member States. Agglomerative clustering and k-means clustering methods were used to identify groups of countries with similar degrees of fiscal decentralization. The economic performance of countries in each group was evaluated with the use of standard macroeconomic indicators. Three groups of countries with similar degrees of fiscal decentralization were identified. The most decentralized countries were Denmark, Sweden and Finland. These countries were characterized by the highest levels of economic growth. Eco-nomic growth was lowest in the countries that joined the EU after 2004. These countries were characterized by the relatively highest inflation rates and the lowest average household incomes.