Discussions about a future fiscal capacity for the euro area are too often limited to a comparison of the technical advantages and disadvantages of different modalities of cross-country fiscal shock absorbers. This Policy paper aims to broaden the debate, by connecting these discussions with debates on fiscal union and the exercise of political power in EMU.
Through an analysis of past and current debates on EMU, this Policy paper by Eulalia Rubio identifies five different rationales for deepening budgetary integration in a monetary union: ensuring fiscal discipline and stable sovereign debt markets, protecting euro area countries against the risk of asymmetric shocks, equipping the euro area with a capacity to stabilize the economy over the cycle, providing budgetary support for convergence and providing an appropriate fiscal backstop for the banking union. The paper discusses the relevance of these various rationales in today’s EMU and their different implications as regards to mutualizing budgetary resources and powers.
A key message of the paper is the need to reflect on the sequence and consistency between actions taken in response to different logics for budgetary integration. For instance, the creation of an ambitious Eurobonds scheme, while not intended to stabilize national economies, it would undoubtedly provide a financial buffer to countries in economic difficulty, thus diminishing the need for a euro-area cross-country stabilisation mechanism. On the contrary, if Eurozone leaders opt for moving towards a market-based fiscal discipline regime, they shall assume that the existence of powerful EMU-level fiscal stabilisation mechanisms is imperative.
This Policy paper is a contribution to the Istituto Affari Internazionali (IAI) and Centro Studi sul Federalismo (CSF) research project “Which Government for the European Union? An analysis of the current European institutional balance and its possible development”. It is also available on the IAI website.