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Fiscal Integration in the Eurozone: Economic Effects of Two Key Scenarios

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  • Dolls, Mathias
  • Fuest, Clemens
  • Neumann, Dirk
  • Peichl, Andreas

Abstract

The 2008-09 crisis has shown that some euro area member countries were unable to sufficiently stabilize their economies which has given rise to a debate about deeper fiscal integration in Europe. In this paper, we analyze the redistributive and stabilizing effects of two scenarios of fiscal integration in the Eurozone, namely the introduction of i) a joint tax and transfer system that replaces 10 per cent of national systems and ii) a system of fiscal equalization that equalizes 10 per cent of differences in taxing capacity. Based on the European tax-benefit calculator EUROMOD and representative household micro data for the current 17 euro area member states, our conceptual experiment shows that a joint tax and transfer system would only lead to moderate gains in terms of stabilization while redistribution would flow especially towards the Eastern European member states. In contrast, a fiscal equalization mechanism that redistributes revenues across countries could even lead to destabilizing effects.

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Paper provided by EUROMOD at the Institute for Social and Economic Research in its series EUROMOD Working Papers with number em1-14.

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Date of creation: 24 Jan 2014
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Publication status: published
Handle: RePEc:ese:emodwp:em1-14

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  1. Holly Sutherland & Francesco Figari, 2013. "EUROMOD: the European Union tax-benefit microsimulation model," International Journal of Microsimulation, Interational Microsimulation Association, vol. 1(6), pages 4-26.
  2. Thiess Buettner, 2005. "The Incentive Effect of Fiscal Equalization Transfers on Tax Policy," CESifo Working Paper Series 1404, CESifo Group Munich.
  3. Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2012. "Automatic stabilizers and economic crisis: US vs. Europe," Journal of Public Economics, Elsevier, vol. 96(3), pages 279-294.
  4. Olivier Bargain & Mathias Dolls & Clemens Fuest & Dirk Neumann & Andreas Peichl & Nico Pestel & Sebastian Siegloch, 2013. "Fiscal union in Europe? Redistributive and stabilizing effects of a European tax-benefit system and fiscal equalization mechanism," Economic Policy, CEPR & CES & MSH, vol. 28(75), pages 375-422, 07.
  5. Ivan Werning & Emmanuel Farhi, 2012. "Fiscal Unions," NBER Working Papers 18280, National Bureau of Economic Research, Inc.
  6. Evers, Michael P., 2012. "Federal fiscal transfer rules in monetary unions," European Economic Review, Elsevier, vol. 56(3), pages 507-525.
  7. Philipp Engler & Simon Voigts, 2013. "A Transfer Mechanism for a Monetary Union," SFB 649 Discussion Papers SFB649DP2013-013, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  8. Alan J. Auerbach & Daniel Feenberg, 2000. "The Significance of Federal Taxes as Automatic Stabilizers," NBER Working Papers 7662, National Bureau of Economic Research, Inc.
  9. Michael D. Bordo & Agnieszka Markiewicz & Lars Jonung, 2011. "A Fiscal Union for the Euro: Some Lessons from History," NBER Working Papers 17380, National Bureau of Economic Research, Inc.
  10. Giuseppe Bertola, 2013. "Policy Coordination, Convergence, and the Rise and Crisis of EMU Imbalances," European Economy - Economic Papers 490, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
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