Just Round the Corner? Pros, Cons, and Implementation Issues of a Fiscal Union for the Euro Area

27 Pages Posted: 25 Mar 2015

Date Written: November 20, 2014

Abstract

The experience of other successful monetary unions and economic theory suggest that the euro area would benefit from the establishment of a supranational fiscal capacity. Institutional reforms prompted by the crisis (e.g., the European Stability Mechanism and the banking union) are introducing – though to a limited extent – elements of cross-country risk sharing. Nevertheless, further steps are probably needed. Proposals to create a sort of rainy-day fund present major practical difficulties – associated, inter alia, to the uncertainty characterizing the identification of shocks in real time. A more appropriate solution, consistent with how risk sharing operates in existing federations, may be centralizing specific public functions (for instance, by introducing a common unemployment benefit scheme). We argue that consideration could also be given to the creation of a euro-wide, notional defined-contribution pension scheme.

Keywords: fiscal union, intergovernmental transfers, risk sharing

JEL Classification: E42, E62, F15, F42, H77

Suggested Citation

Balassone, Fabrizio and Momigliano, Sandro and Romanelli, Marzia and Tommasino, Pietro, Just Round the Corner? Pros, Cons, and Implementation Issues of a Fiscal Union for the Euro Area (November 20, 2014). Bank of Italy Occasional Paper No. 245. Available at SSRN: https://ssrn.com/abstract=2584486 or http://dx.doi.org/10.2139/ssrn.2584486

Fabrizio Balassone (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Sandro Momigliano

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Marzia Romanelli

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Pietro Tommasino

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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