Policy paper 220

No Escape from Politics: four tests for a successful fiscal instrument in the Euro area

The coming months will be a critical juncture for euro area reform. In this paper, Lucas Guttenberg and Johannes Hemker argue that a common fiscal instrument is necessary to improve the policy mix in the euro area.

To be successful, a fiscal instrument needs to pass four tests:
1. Macroeconomic significance
2. Politically sustainability, implying avoidance of salient blanket transfers
3. Effective governance via a legitimate political process
4. Fit with the rest of the EU’s structures

Lucas Guttenberg, senior research fellow at the Jacques Delors Institut – Berlin,  and Johannes Hemker, guest author at the Jacques Delors Institut – Berlin, argue that fiscal instruments conceived exclusively for the purpose of economic stabilization will have difficulty passing these tests. Instead, marrying the need for stabilization with the benefits of European public goods provision could be a promising avenue.