Revisiting the Economic Case for Fiscal Union in the Euro Area

By Helge Berger, Giovanni Dell'Ariccia, Maurice Obstfeld

February 20, 2018

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Helge Berger, Giovanni Dell'Ariccia, and Maurice Obstfeld. Revisiting the Economic Case for Fiscal Union in the Euro Area, (USA: International Monetary Fund, 2018) accessed December 21, 2024

Disclaimer: The views expressed herein are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

The paper makes an analytical contribution to the revived discussion about the euro area’s institutional setup. After significant progress during the euro crisis, the drive to complete Europe’s Economic and Monetary Union (EMU) had stalled, and the way forward will benefit from an in-depth look at the conceptual issues raised by the evolution and architecture of Europe, and the tradeoffs involved. A thorough look at the underlying economic issues suggests that in the long run, EMU will benefit from progressing along three mutually supporting tracks: introduce more fiscal risk sharing, helping to make the sovereign “no bailout” rule credible; complementary financial sector reforms to delink sovereigns and banks; and more effective rules to discourage moral hazard. This evolution would ensure that financial markets provide incentives for fiscal discipline. Introducing more fiscal union comes with myriad legal, technical, operational, and political problems, raising questions well beyond the remit of economics. But without decisive progress to foster fiscal risk sharing, EMU will continue to face existential risks.

Subject: Banking, Economic integration, Financial crises, Financial institutions, Financial sector policy and analysis, Fiscal policy, Fiscal union, Monetary unions, Moral hazard, Sovereign bonds

Keywords: Banking system, DP, DPPP, Europe, Exchange rate, Fiscal policy, Fiscal union, Market yield, Monetary policy, Monetary unions, Moral hazard, Public goods, Risk sharing, Single currency, Sovereign bond market, Sovereign bonds, Transmission mechanism

Publication Details

Pages:

63
Volume:

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DOI:

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Issue:

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Series:

Departmental Paper No. 2018/003
Stock No:

RECFUEA
ISBN:

9781484340424
ISSN:

2616-5333

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