Market-Preserving Fiscal Federalism in the European Monetary Union

Proceedings of Workshop No. 21 ‘Toward a Genuine Economic and Monetary Union’, 10-11 September 2015, pp. 101-140. Oesterreichische Nationalbank, Vienna

40 Pages Posted: 22 Mar 2017 Last revised: 24 Mar 2017

See all articles by Ad van Riet

Ad van Riet

United Nations University - Institute on Comparative Regional Integration Studies (UNU-CRIS)

Date Written: October 30, 2015

Abstract

Responding to the euro crisis, European leaders have put in place an enhanced economic and financial governance framework for the euro area, including the main pillars of a banking union, while they have initiated work on a capital markets union. This should more effectively secure sound national macroeconomic and fiscal policies, a healthy financial sector and the stability of the euro. This paper poses the question whether the status quo of half-way political integration is sufficient to safeguard the cohesion and integrity of the euro area. National governments still have considerable leeway to circumvent the “hard” budget constraint and the strong market competition implied by the euro area’s “holy trinity” (one market, one currency and one monetary policy). For example, they might target captive sovereign debt markets or take protectionist measures. This economic nationalism would entrench the crisis-related fragmentation of the single market and frustrate the efficient functioning of the monetary union. A higher level of market-preserving fiscal federalism could prevent member countries from encroaching on markets and foster sustainable economic convergence towards an optimal currency area.

Keywords: European Monetary Union, monetary policy trilemma, protectionism, market fragmentation, fiscal federalism

JEL Classification: E6, F33, F4, H7

Suggested Citation

van Riet, Ad, Market-Preserving Fiscal Federalism in the European Monetary Union (October 30, 2015). Proceedings of Workshop No. 21 ‘Toward a Genuine Economic and Monetary Union’, 10-11 September 2015, pp. 101-140. Oesterreichische Nationalbank, Vienna, Available at SSRN: https://ssrn.com/abstract=2883515 or http://dx.doi.org/10.2139/ssrn.2883515

Ad Van Riet (Contact Author)

United Nations University - Institute on Comparative Regional Integration Studies (UNU-CRIS) ( email )

Brugge
Belgium

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