Fiscal Transfers and Structural Reforms in the European Monetary Union

Abstract

In a monetary union, fiscal transfers are an important policy tool to adjust to asymmetric shocks. However, fiscal transfers cannot substitute structural reforms especially when shocks are permanent. In this way, the design of fiscal transfer systems determine whether structural reforms or non-reforming is preferred by governments. Inter-regional transfers provide the lowest incentive for structural reforms. Inter-temporal transfers might promote structural reforms as long as debt cannot be accumulated. Therefore, I oppose an EU-tax budget, call for a strict application of the Stability and Growth Pact, and explain low reform activity in the EMU by interest rate convergence.

Keywords: Fiscal Transfers Systems, Structural reforms, Principal-Agent Model, European Monetary Union, EU Taxation

JEL Classification: D78, E61, E62, F15, P11