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Fiscal Union in Europe? Redistributive and Stabilising Effects of an EU Tax-Benefit System

  • Bargain, Olivier


    (University of Aix-Marseille II)

  • Dolls, Mathias


    (ZEW Mannheim)

  • Fuest, Clemens


    (ZEW Mannheim)

  • Neumann, Dirk


    (Université catholique de Louvain)

  • Peichl, Andreas


    (ZEW Mannheim)

  • Pestel, Nico



  • Siegloch, Sebastian


    (University of Mannheim)

The current debt crisis has given rise to a debate about deeper fiscal integration in Europe. The view is widespread that moving towards a 'fiscal union' would have a stabilising effect in the event of macroeconomic shocks. In this paper we study the economic effects of introducing two elements of a fiscal union: Firstly, an EU-wide tax and transfer system and secondly, an EU-wide system of fiscal equalisation. Using the European tax-benefit calculator EUROMOD, we exploit representative household microdata from 11 Eurozone countries to simulate these policy reforms and to study their effects on the distribution of income as well as their impact on automatic fiscal stabilisers. We find that replacing one third of the national tax and transfer systems by a European system would lead to significant redistributive effects both within and across countries. These effects depend on income levels and the structures of the existing national tax and transfer systems. The EU system would improve fiscal stabilisation especially in credit constrained countries. It would absorb between 10 and 15 per cent of a macroeconomic income shock. Introducing a fiscal equalisation system based on taxing capacity would redistribute revenues from high to low income countries. The stabilisation properties of this system, however, are ambiguous. This suggests that not all forms of fiscal integration will improve macroeconomic stability in the Eurozone.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6585.

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Length: 34 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:iza:izadps:dp6585
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  1. Bargain, Olivier & Orsini, Kristian & Peichl, Andreas, 2011. "Labor supply elasticities in Europe and the US," EUROMOD Working Papers EM1/11, EUROMOD at the Institute for Social and Economic Research.
  2. 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.
  3. Hammond, George & von Hagen, Jürgen, 1995. "Regional Insurance Against Asymmetric Shocks. An Empirical Study for the European Community," CEPR Discussion Papers 1170, C.E.P.R. Discussion Papers.
  4. Fuest, Clemens & Peichl, Andreas, 2012. "European Fiscal Union: What Is It? Does It Work? And Are There Really 'No Alternatives'?," IZA Policy Papers 39, Institute for the Study of Labor (IZA).
  5. Eichengreen, Barry, 1990. "One Money for Europe? Lessons from the US Currency Union," Department of Economics, Working Paper Series qt6ks1k831, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  6. Keuschnigg, Christian, 2012. "Should Europe Become a Fiscal Union?," Economics Working Paper Series 1205, University of St. Gallen, School of Economics and Political Science.
  7. Konrad, Kai A. & Zschäpitz, Holger, 2011. "The future of the Eurozone," Munich Reprints in Economics 13966, University of Munich, Department of Economics.
  8. 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.
  9. Dixit, Avinash & Lambertini, Luisa, 2003. "Symbiosis of monetary and fiscal policies in a monetary union," Journal of International Economics, Elsevier, vol. 60(2), pages 235-247, August.
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