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On deficits and symmetries in a fiscal capacity

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  • Hebous, Shafik
  • Weichenrieder, Alfons J.

Abstract

There is a growing debate about complementing the European Monetary Union by a more comprehensive fiscal union. Against this background, this paper emphasizes that there is a trade-off in designing a system of fiscal transfers ("fiscal capacity") in a union between members of different size. A system cannot guarantee symmetric treatment of members and simultaneously ensure a balanced budget. We compute hypothetical transfers for the Eurozone members from 2001 to 2012 to illustrate this trade-off. Interestingly, a symmetric system that treats shocks in small and large countries symmetrically would have produced large budgetary surpluses in 2009, the worst year of the financial crisis.

Suggested Citation

  • Hebous, Shafik & Weichenrieder, Alfons J., 2015. "On deficits and symmetries in a fiscal capacity," SAFE Working Paper Series 112, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:112
    DOI: 10.2139/ssrn.2637776
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    References listed on IDEAS

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    1. Paul de Grauwe, 2013. "Design Failures in the Eurozone: Can they be fixed?," Europe in Question Discussion Paper Series of the London School of Economics (LEQs) 7, London School of Economics / European Institute.
    2. 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(01), pages 03-09, April.
    3. 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.
    4. von Hagen, Jurgen & Hammond, George W, 1998. "Regional Insurance against Asymmetric Shocks: An Empirical Study for the European Community," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(3), pages 331-353, June.
    5. Grégory Claeys & Zsolt Darvas & Guntram B. Wolff, 2014. "Benefits and drawbacks of European Unemployment Insurance," Policy Briefs 847, Bruegel.
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    Cited by:

    1. Nicolas Carnot & Magdalena Kizior & Gilles Mourre, 2017. "Fiscal stabilisation in the Euro-Area: A simulation exercise," Working Papers CEB 17-025, ULB -- Universite Libre de Bruxelles.

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    More about this item

    Keywords

    fiscal union; asymmetric shocks; federal transfers; optimum currency area;
    All these keywords.

    JEL classification:

    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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