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Formation of a Fiscal Union: an Effective Tool to Stabilise the Eurozone?

Author

Listed:
  • Charles B. Blankart
  • Katharina Gnath
  • Jörg Haas
  • Thiess Büttner
  • Frank Westermann

Abstract

In June 2015 Jean-Claude Juncker, Donald Tusk, Jeroen Dijsselbloem, Mario Draghi and Martin Schulz presented proposals to “strengthen the currency union in the long term”. Among other things, these proposals included setting up of an advisory European Fiscal Council to coordinate the work done by national councils for financial policy. Could such a council be an effective tool for stabilising the Eurozone? According to Charles B. Blankart, Humboldt-University of Berlin and the University of Lucerne, the European Union has changed fundamentally since around 1992. Prior to that date it facilitated bilateral trade in private goods, and since that time the euro as a public good has come to the foreground. Blankart sees the well-known “public good problem” of the euro in the targets of the proposals. The quid pro quo principle does not necessarily prevail. Free riding behaviour is not eliminated. Katharina Gnath, Bertelsmann Foundation, and Jörg Haas, Jacques Delors Institut, Berlin, argue that a fiscal union can only have a stabilising effect if it encompasses both credible budgetary rules and risk distribution components. It is an important means of effectively strengthening the Eurozone, but should not be the only tool. Thiess Büttner, University of Erlangen-Nuremberg, believes that the proposal cannot achieve a sweeping stabilisation of the European Currency Union. Depending on its design, it could even turn out to be counterproductive. Frank Westermann, University of Osnabrück, sees parallels between recent developments in the European currency union and those in eastern Germany following reunification. Developments in real wages precede those in productivity and a transfer system develops that facilitates the postponement of key labour market reforms. A long-term expansive fiscal policy that would be institutionalised in a fiscal union could only stimulate demand in the short-term, but would result in permanently higher public debt levels and recurrent crises in the future.

Suggested Citation

  • Charles B. Blankart & Katharina Gnath & Jörg Haas & Thiess Büttner & Frank Westermann, 2015. "Formation of a Fiscal Union: an Effective Tool to Stabilise the Eurozone?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 68(20), pages 03-16, October.
    • Handle: RePEc:ces:ifosdt:v:68:y:2015:i:20:p:03-16
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    References listed on IDEAS

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    1. Hans-Werner Sinn & Frank Westermann, 2000. "Two Mezzogiornos," CESifo Working Paper Series 378, CESifo.
    2. Hans-Werner Sinn, 2014. "Austerity, Growth and Inflation: Remarks on the Eurozone's Unresolved Competitiveness Problem," The World Economy, Wiley Blackwell, vol. 37(1), pages 1-13, January.
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    More about this item

    JEL classification:

    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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