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Should Europe Become a Fiscal Union?

  • Keuschnigg, Christian

    ()

Moving towards a fiscal union does not address the problems of divergence in Europe. Given cultural heterogeneity and diverse preferences, fiscal policy should remain under national sovereignty while important regulatory power is assigned to the Union. The paper argues that more credible fiscal rules combined with tighter surveillance reduce negative policy spillovers. A better capitalized banking sector imposes more market discipline with sovereign risk-premia. Institutional lending by the ESM (European Stabilization Mechanism) to distressed countries is subject to strict conditionality and will impose structural adjustment that was neglected ex ante. Further reform seems necessary to strengthen the financial capacity and institutional independence of the ESM and to impose tighter regulation and more ambitious recapitalization of European banks to contain cross-country contagion on financial markets. Such reform should prevent or at least much reduce the negative consequences of national decision making on other member countries and would in turn support the political goals of establishing peace and harmony in Europe.

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/econwp/EWP-1205.pdf
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Paper provided by University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1205.

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Length: 19 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:usg:econwp:2012:05
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  1. Martin S. Feldstein, 2011. "The Euro and European Economic Conditions," NBER Working Papers 17617, National Bureau of Economic Research, Inc.
  2. André Sapir & Benedicta Marzinotto & Guntram Wolff, 2011. "What Kind of Fiscal Union ?," ULB Institutional Repository 2013/174293, ULB -- Universite Libre de Bruxelles.
  3. ,, 2009. "Economics of Monetary Union," OUP Catalogue, Oxford University Press, edition 8, number 9780199563234.
  4. C. Randall Henning & Martin Kessler, 2012. "Fiscal federalism: US history for architects of Europe's fiscal union," Essays and Lectures 669, Bruegel.
  5. Andr� Sapir, 2011. "European Integration at the Crossroads: A Review Essay on the 50th Anniversary of Bela Balassa's Theory of Economic Integration," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 1200-1229, December.
  6. Wallace E. Oates, 1999. "An Essay on Fiscal Federalism," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1120-1149, September.
  7. Hans-Werner Sinn & Timo Wollmershaeuser, 2011. "Target Loans, Current Account Balances and Capital Flows: The ECB's Rescue Facility," NBER Working Papers 17626, National Bureau of Economic Research, Inc.
  8. De Grauwe, Paul, 2011. "Governance of a Fragile Eurozone," CEPS Papers 5523, Centre for European Policy Studies.
  9. Roel Beetsma & Massimo Giuliodori, 2010. "The Macroeconomic Costs and Benefits of the EMU and Other Monetary Unions: An Overview of Recent Research," Journal of Economic Literature, American Economic Association, vol. 48(3), pages 603-41, September.
  10. Michael D. Bordo & Agnieszka Markiewicz & Lars Jonung, 2011. "A Fiscal Union for the Euro: Some Lessons from History," NBER Working Papers 17380, National Bureau of Economic Research, Inc.
  11. Feldstein, Martin S., 2011. "The Euro and European Economic Conditions," Scholarly Articles 9949289, Harvard University Department of Economics.
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