On Deficits and Symmetries in a Fiscal Capacity
SAFE Working Paper No. 112
14 Pages Posted: 30 Jul 2015
Date Written: July 30, 2015
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.
Keywords: fiscal union, asymmetric shocks, federal transfers, optimum currency area
JEL Classification: H500, H600
Suggested Citation: Suggested Citation