The topic of this paper is fiscal federalism in the European Union. The paper defines fiscal federalism, compares Croatia with EU member states, and analyzes the challenges faced by the EU. The fiscal system can be described as a system of revenue collection for the state (or lower socio-political communities: county, city, municipality) to cover public expenditures. It is a set of principles of institutions and regulations that determine, collect and manage public revenues and expenditures of a state. The challenges lie in achieving a balance between national sovereignty and shared responsibility and ensuring solid economic development of all member states. It is necessary to carefully analyze and assess the long-term effects of fiscal federalism on economic stability and social justice in the EU. One of the key elements of fiscal federalism in the European Union is the Stability and Growth Pact. This pact sets the fiscal rules that member states must respect in order to maintain the stability and sustainability of their public finances.