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Designing a Permanent EU-Wide Stabilization Facility

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  • Roel Beetsma
  • George Kopits

Abstract

While the EU recovery plan provides a useful step in alleviating the economic effects of the coronavirus crisis and achieving further European integration, a permanent fiscal stabilization capacity dealing with major crises is still missing. Such a EU-wide stabilization function would be in accordance with the subsidiarity principle, enshrined in the Treaty of Maastricht, as the risk-sharing that it provides can only be conducted at the supranational level. We envisage a mechanism to semi-automatically respond to region- and country-specific shocks via a central fiscal stabilization fund (CFSF). A simple model incorporating hysteresis, cross-border externalities and moral hazard, is deployed to illustrate the optimal responses of the CFSF to these shocks. A well-designed CFSF has the potential to improving welfare not only in crisis-hit member countries, but also in the union as a whole.

Suggested Citation

  • Roel Beetsma & George Kopits, 2020. "Designing a Permanent EU-Wide Stabilization Facility," CESifo Working Paper Series 8735, CESifo.
  • Handle: RePEc:ces:ceswps:_8735
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    References listed on IDEAS

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    3. Roel Beetsma & Simone Cima & Jacopo Cimadomo, 2021. "Fiscal Transfers without Moral Hazard?," International Journal of Central Banking, International Journal of Central Banking, vol. 17(3), pages 95-153, September.
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    5. Nathaniel G Arnold & Bergljot B Barkbu & H. Elif Ture & Hou Wang & Jiaxiong Yao, 2018. "A Central Fiscal Stabilization Capacity for the Euro Area," IMF Staff Discussion Notes 18/03, International Monetary Fund.
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    8. Beetsma, Roel & Burgoon, Brian & De Ruijter, Anniek & Nicoli, Francesco & Vandenbroucke, Frank, 2020. "What kind of EU fiscal capacity? Evidence from a randomized survey experiment in five European countries in times of corona," CEPR Discussion Papers 15094, C.E.P.R. Discussion Papers.
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    More about this item

    Keywords

    subsidiarity principle; shocks; fiscal stabilization; transfers; European Union; corona;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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