Just Round the Corner? Pros, Cons, and Implementation Issues of a Fiscal Union for the Euro Area
27 Pages Posted: 25 Mar 2015
Date Written: November 20, 2014
The experience of other successful monetary unions and economic theory suggest that the euro area would benefit from the establishment of a supranational fiscal capacity. Institutional reforms prompted by the crisis (e.g., the European Stability Mechanism and the banking union) are introducing – though to a limited extent – elements of cross-country risk sharing. Nevertheless, further steps are probably needed. Proposals to create a sort of rainy-day fund present major practical difficulties – associated, inter alia, to the uncertainty characterizing the identification of shocks in real time. A more appropriate solution, consistent with how risk sharing operates in existing federations, may be centralizing specific public functions (for instance, by introducing a common unemployment benefit scheme). We argue that consideration could also be given to the creation of a euro-wide, notional defined-contribution pension scheme.
Keywords: fiscal union, intergovernmental transfers, risk sharing
JEL Classification: E42, E62, F15, F42, H77
Suggested Citation: Suggested Citation