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A Fiscal Union for the Euro: Some Lessons from History

Author

Listed:
  • Michael D. Bordo
  • Lars Jonung
  • Agnieszka Markiewicz

Abstract

The recent financial crisis starting in 2007--2009 is the longest and the deepest recession since the Great Depression of 1930. The crisis that originated in the US subprime mortgage markets spread and amplified through international financial markets and resulted in severe debt crises in several European countries. Events revealed that the European Union (EU) had insufficient means to halt the spiral of the European debt crisis. The aim of this study is to identify the characteristics of a robust common fiscal policy framework that could have alleviated the consequences of the recent crisis. This is done by using the political and fiscal history of five federal states: Argentina, Brazil, Canada, Germany, and the USA. Our study suggests that a fiscal union is necessary to avoid divergent fiscal policies and we identify five conditions crucial for it to function effectively: (i) a credible commitment to a no-bailout rule, (ii) a degree of revenue and expenditure independence reflecting the preferences of the voters, (iii) a well-functioning European system of transfers in times of distress, (iv) the creation of a euro bond market serviced by taxes collected by the EU government, (v) the ability to learn from and adapt to changing economic and political circumstances. (JEL codes: H10, H70, H73) Copyright The Author 2013. Published by Oxford University Press on behalf of Ifo Institute, Munich. All rights reserved. For permissions, please email: journals.permissions@oup.com, Oxford University Press.

Suggested Citation

  • Michael D. Bordo & Lars Jonung & Agnieszka Markiewicz, 2013. "A Fiscal Union for the Euro: Some Lessons from History ," CESifo Economic Studies, CESifo, vol. 59(3), pages 449-488, September.
  • Handle: RePEc:oup:cesifo:v:59:y:2013:i:3:p:449-488
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    References listed on IDEAS

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    1. Lars Jonung & Eoin Drea, 2009. "The euro: It can't happen, It's a bad idea, It won't last. US economists on the EMU, 1989-2002," European Economy - Economic Papers 2008 - 2015 395, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    2. Jonas Fischer & Lars Jonung & Martin Larch, 2007. "101 Proposals to reform the Stability and Growth Pact. Why so many? A Survey," European Economy - Economic Papers 2008 - 2015 267, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    3. Marco Buti & Daniele Franco, 2005. "Fiscal Policy in Economic and Monetary Union," Books, Edward Elgar Publishing, number 3590.
    4. Hefeker, Carsten, 2001. "The agony of central power: Fiscal federalism in the German Reich," European Review of Economic History, Cambridge University Press, vol. 5(01), pages 119-142, April.
    5. Douglas Sutherland & Robert Price & Isabelle Joumard, 2005. "Fiscal Rules for Sub-central Governments: Design and Impact," OECD Economics Department Working Papers 465, OECD Publishing.
    6. V. V. Chari & Patrick J. Kehoe, 2003. "On the desirability of fiscal constraints in a monetary union," Staff Report 330, Federal Reserve Bank of Minneapolis.
    7. Juan Pablo Nicolini & Josefina Posadas & Juan Sanguinetti & Pablo Sanguinetti & Mariano Tommasi, 2002. "Decentralization, Fiscal Discipline in Sub-National Governments and the Bailout Problem: The Case of Argentina," Research Department Publications 3160, Inter-American Development Bank, Research Department.
    8. Paolera, Gerardo Della & Taylor, Alan M., 1999. "Economic Recovery from the Argentine Great Depression: Institutions, Expectations, and the Change of Macroeconomic Regime," The Journal of Economic History, Cambridge University Press, vol. 59(03), pages 567-599, September.
    9. Dixit, Avinash & Lambertini, Luisa, 2001. "Monetary-fiscal policy interactions and commitment versus discretion in a monetary union," European Economic Review, Elsevier, vol. 45(4-6), pages 977-987, May.
    10. repec:ejw:journl:v:7:y:2010:i:1:p:4-52 is not listed on IDEAS
    11. Sebastian Galiani & Daniel Heymann & Mariano Tommasi, 2003. "Great Expectations and Hard Times: The Argentine Convertibility Plan," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 109-160, January.
    12. Servaas Deroose & Sven Langedijk & Werner Roeger, 2004. "Reviewing adjustment dynamics in EMU: from overheating to overcooling," European Economy - Economic Papers 2008 - 2015 198, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
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    JEL classification:

    • H10 - Public Economics - - Structure and Scope of Government - - - General
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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