Should Europe Become a Fiscal Union?
AbstractMoving towards a fiscal union does not address the problems of divergence in Europe. Given cultural heterogeneity and diverse preferences, fiscal policy should remain under national sovereignty while important regulatory power is assigned to the Union. The paper argues that more credible fiscal rules combined with tighter surveillance reduce negative policy spillovers. A better capitalized banking sector imposes more market discipline with sovereign risk-premia. Institutional lending by the ESM (European Stabilization Mechanism) to distressed countries is subject to strict conditionality and will impose structural adjustment that was neglected ex ante. Further reform seems necessary to strengthen the financial capacity and institutional independence of the ESM and to impose tighter regulation and more ambitious recapitalization of European banks to contain cross-country contagion on financial markets. Such reform should prevent or at least much reduce the negative consequences of national decision making on other member countries and would in turn support the political goals of establishing peace and harmony in Europe.
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Bibliographic InfoArticle provided by Ifo Institute for Economic Research at the University of Munich in its journal CESifo Forum.
Volume (Year): 13 (2012)
Issue (Month): 1 (04)
Other versions of this item:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F15 - International Economics - - Trade - - - Economic Integration
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
- H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
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