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Does EMU need a fiscal federation?

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  • Antonio Fatás

Abstract

Summary Redistribution vs insurance Does Europe need a fiscal federation?The stabilization provided by the US federal budget has been used as an example of the adjustment mechanisms that are lacking in Europe and which are needed to make a currency area viable. This paper presents four sets of .ndings that suggest that the benefits of a European fiscal federation would be modest. First, we show that some of the previous estimates of the benefits of the US federal budget overestimate the amount of interstate insurance by a factor of 3. Second, Europe already has national tax systems which, according to our estimates, can insure more than 50% of a European fiscal federation. Third, we .nd evidence that the potential insurance benefits of a European fiscal federation have decreased over time. Fourth, there are large cross-country differences in the benefits provided by federation. We conclude that the potential to provide interregional insurance by creating a European fiscal federation is too small to compensate for the many problems associated with its design and implementation.— Antonio Fatás

Suggested Citation

  • Antonio Fatás, 1998. "Does EMU need a fiscal federation?," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 13(26), pages 164-203.
    • Handle: RePEc:oup:ecpoli:v:13:y:1998:i:26:p:164-203.
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    File URL: http://hdl.handle.net/10.1111/1468-0327.00031
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