What are the prerequisites for a euro area fiscal capacity?

ABSTRACT

This paper discusses a pathway towards achieving fiscal union in the euro area. It outlines three steps and their prerequisites. In the first step, Banking Union would be completed to increase the financial stability of the euro area. It would render the “no bailout” clause more credible and thereby allow to deal better with insolvent governments. In the second step, more centralised funds would be created in order to provide important public goods and in order to deal with large asymmetric shocks. The third step, which is currently unattainable, consists of a true federalisation of important government functions.

KEYWORDS:

• Banking union
• EMU
• European public goods
• fiscal federalism
• governance

JEL CLASSIFICATION:

• E60
• H77
• G20

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. See for example Kenen (2010), Verdun (2010), Marzinotto, Sapir, and Wolff (2011); Pisani-Ferry, Vihriälä, and Wolff (2013), Von Hagen (2014), Benassy-Quéré, Ragot, and Wolff (2016), Macron and Gabriel (2015), Van Rompuy (2012), Eichengreen and Wyplosz (2016), Mody (2015), Allen, Carletti, and Gulati (2018) and for an overview Schlosser (2019).

2. Commission of the European Communities (1977), available: http://ec.europa.eu/archives/emu_history/documentation/chapter8/19770401en73macdougallrepvol1.pdf .

3. Frieden (2016) and Henning and Kessler (2012) provide overviews.

4. Figures retrieved from AMECO (last updated 9 November 2017) for 2016, excluding Ireland.

5. According to surveys from YouGov, support for remaining in the EU increased relative to leave in Germany, Finland, France and Sweden, while it decreased in Denmark, between end-May and end-July 2016.

6. See Tusk (2016); Schäuble (2016).

7. See Gabriel and Schulz (2016); Verhofstadt (2016).

8. Baldwin and Giavazzi (2015) formulate an economists’ “consensus” narrative. This, however, is not uniformly shared, showing the disagreement in academic circles.

9. Juncker et al. (2015) and Press and Information Office of the Federal Government (2018), respectively.

10. Darvas and Leandro (2015) and Efstathiou and Wolff (2018) document how ineffective policy coordination through the European processes is.

11. The three steps are comparable but not identical to those outlined in the Five Presidents’ Report: https://ec.europa.eu/priorities/sites/beta-political/files/5-presidents-report_en.pdf.

12. The table in the annex summarises our three steps and lists the conditions that are needed in each case.

13. This is one of the parallels with the proposals in the Five Presidents’ Report.

14. See Veron (2015) for an account.

15. Schoenmaker and Véron (2016) provide a first assessment of the effectiveness of the new supervision.

16. Goncalves Raposo and Wolff (2017, 2017) show that so far, the creation of Banking Union has not changed the merger behaviour of banks in the euro area. Mergers remain predominantly national.

17. Claeys, Darvas, and Wolff (2014).

18. Brandt and Wohlfahrt (2018) discuss design of the backstop.

19. Corsetti et al. (2016); Moghadam (2016). Andritzky et al (2016) propose the introduction of automatic debt restructuring clauses as debt is rolled over. They argue that this would allow for a smooth process, but this can be debated.

20. Veron (2017).

21. An example of a new rules framework would be along the lines of Claeys, Darvas, and Leandro (2016) with emphasis on government expenditure, debt and a special golden rule to allow for investment expenditure.

22. Bayoumi and Eichengreen (1994), Frankel and Rose (1998).

23. Demertzis and Hughes Hallett (1998), Demertzis, Hughes Hallett, and Rummel (2000a), Demertzis, Hughes Hallett, and Ma (2000b), Pissarides (1997).

Additional information

Funding

This work was supported by the SSHRC funding and the (Connection) grant number (611-2016-0153).