Im not familiar enough with government in Oz to say but the closest example in modern times would be the EU, although they have a heavier hand than I'd recommend. If people in say France were unhappy with their government they can more easily move to Germany then if they were separate nations not in the EU. The key is giving the states enough control that they are distinct from one another while allowing people to move between them. If the federal government takes too much power the states become homogeneous and you lose the ability to vote with your feet like that.

How does the EU handle cases where one member wants to treat something as contraband and other do not? With open borsers for people and trade can one meber state have different laws for banned items or substances?

> With open borsers for people and trade can one meber state have different laws for banned items or substances?

The Netherlands have fairly lax laws on substances and are a EU member. If you take something from the Netherlands into a country that doesn't want that item within their borders you are subject to the local laws. Same thing that would happen if you brought contraband from South America to the US really.