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Editor's Choice Reconciling Insurance with Market Discipline: a Blueprint for a European Fiscal Union

Author

Listed:
  • Mathias Dolls
  • Clemens Fuest
  • Friedrich Heinemann
  • Andreas Peichl

Abstract

This contribution develops a blueprint for a European fiscal union. We argue that a viable European fiscal union can be constructed without joint liability for public debt or a centralized government with a large common budget. Such a fiscal union should combine elements of market discipline with stabilization in case of asymmetric shocks. Our proposal addresses the shortcomings of most other reform designs, which fail to offer a solution for insolvent or non-cooperative euro countries. We suggest a design which combines limited fiscal insurance with an orderly procedure to restructure the debt of insolvent member states. We show that fiscal insurance and a sovereign insolvency procedure are no contradiction but, on the contrary, are mutually reinforcing. Effective fiscal insurance helps to limit the stability risks involved in the implementation of an insolvency regime for sovereigns. And vice versa, a well-defined insolvency procedure reduces the risk that a fiscal capacity motivated as an insurance against transitory asymmetric shocks degenerates into a permanent transfer system. Moreover, we show that both elements promote the functioning of the European banking union and the new European fiscal governance.

Suggested Citation

  • Mathias Dolls & Clemens Fuest & Friedrich Heinemann & Andreas Peichl, 2016. "Editor's Choice Reconciling Insurance with Market Discipline: a Blueprint for a European Fiscal Union," CESifo Economic Studies, CESifo, vol. 62(2), pages 210-231.
  • Handle: RePEc:oup:cesifo:v:62:y:2016:i:2:p:210-231.
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    File URL: http://hdl.handle.net/10.1093/cesifo/ifw004
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    References listed on IDEAS

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    1. Dolls, Mathias & Fuest, Clemens & Neumann, Dirk & Peichl, Andreas, 2013. "Fiscal integration in the eurozone: Economic effects of two key scenarios," ZEW Discussion Papers 13-106, ZEW - Leibniz Centre for European Economic Research.
    2. Davide Furceri & Aleksandra Zdzienicka, 2015. "The Euro Area Crisis: Need for a Supranational Fiscal Risk Sharing Mechanism?," Open Economies Review, Springer, vol. 26(4), pages 683-710, September.
    3. Xavier Sala-i-Martin & Jeffrey Sachs, 1991. "Fiscal Federalism and Optimum Currency Areas: Evidence for Europe From the United States," NBER Working Papers 3855, National Bureau of Economic Research, Inc.
    4. Clemens Fuest & Andreas Peichl, 2012. "European Fiscal Union: What Is It? Does It work? And Are There Really 'No Alternatives'?," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(1), pages 03-09, April.
    5. Barry Eichengreen & Charles Wyplosz, 1998. "The Stability Pact: more than a minor nuisance?," Economic Policy, CEPR;CES;MSH, vol. 13(26), pages 65-113, April.
    6. repec:eee:poleco:v:51:y:2018:i:c:p:69-92 is not listed on IDEAS
    7. Carlo Cottarelli, 2013. "European Fiscal Union: A Vision for the Long Run," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 149(II), pages 167-174, June.
    8. Mathias Dolls & Clemens Fuest & Dirk Neumann & Andreas Peichl, 2018. "An unemployment insurance scheme for the euro area? A comparison of different alternatives using microdata," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(1), pages 273-309, February.
    9. Heinemann, Friedrich & Moessinger, Marc-Daniel & Yeter, Mustafa, 2018. "Do fiscal rules constrain fiscal policy? A meta-regression-analysis," European Journal of Political Economy, Elsevier, vol. 51(C), pages 69-92.
    10. Anna Iara, 2016. "Revenue for EMU: A Contribution to the Debate on Fiscal Union," CESifo Economic Studies, CESifo, vol. 62(2), pages 301-331.
    11. Ashoka Mody, 2013. "Sovereign debt and its restructuring framework in the euro area," Working Papers 788, Bruegel.
    12. Guntram B. Wolff, 2012. "A budget for Europe's monetary union," Policy Contributions 762, Bruegel.
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    Cited by:

    1. repec:eee:jmacro:v:59:y:2019:i:c:p:78-102 is not listed on IDEAS
    2. Mathias Dolls & Clemens Fuest & Dirk Neumann & Andreas Peichl, 2018. "An unemployment insurance scheme for the euro area? A comparison of different alternatives using microdata," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(1), pages 273-309, February.
    3. repec:zbw:svrwjg:201819 is not listed on IDEAS
    4. Ernesto Longobardi & Antonio Pedone, 2018. "On some recent proposals of public debt restructuring in the Eurozone," Chapters,in: Debt Default and Democracy, chapter 6, pages 84-123 Edward Elgar Publishing.
    5. Anna Iara, 2016. "Revenue for EMU: A Contribution to the Debate on Fiscal Union," CESifo Economic Studies, CESifo, vol. 62(2), pages 301-331.
    6. repec:cpn:umkeip:v:16:y:2017:i:4:p:413-432 is not listed on IDEAS
    7. Thirion, Gilles, 2017. "European Fiscal Union: Economic rationale and design challenges," CEPS Papers 12160, Centre for European Policy Studies.
    8. repec:zbw:espost:190795 is not listed on IDEAS
    9. repec:eee:streco:v:44:y:2018:i:c:p:100-114 is not listed on IDEAS
    10. Schelkle, Waltraud, 2017. "Hamilton’s Paradox Revisited: Alternative lessons from US history," CEPS Papers 12963, Centre for European Policy Studies.
    11. Blesse, Sebastian & Boyer, Pierre C. & Heinemann, Friedrich & Janeba, Eckhard & Raj, Anasuya, 2019. "European Monetary Union reform preferences of French and German parliamentarians," ZEW Discussion Papers 17-059, ZEW - Leibniz Centre for European Economic Research.
    12. Dolls, Mathias, 2016. "Chances and risks of a European unemployment benefit scheme," ZEW policy briefs 7/2016, ZEW - Leibniz Centre for European Economic Research.

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