Revisiting the Economic Case for Fiscal Union in the Euro Area

32 Pages Posted: 30 Jul 2019

See all articles by Helge Berger

Helge Berger

International Monetary Fund (IMF)

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department; Centre for Economic Policy Research (CEPR)

Maurice Obstfeld

University of California, Berkeley - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: June 2019

Abstract

After significant progress as an immediate result of the euro crisis, the drive to complete Europe's Economic and Monetary Union (EMU) has decelerated. While there is a broad consensus in Europe that EMU needs further development, the exact nature and timing of the reform agenda remains controversial. This paper makes an analytical contribution to the ongoing discussion about the euro area's institutional setup. An in-depth look at the remaining gaps in the euro's architecture, and the trade-offs that repairing them would present, suggests the need for long-run progress along three mutually supportive tracks. First is more fiscal risk sharing, which will help enhance the credibility of the sovereign "no bailout" rule. Second is complementary financial sector reforms to delink sovereigns and banks. Third is more effective rules to discourage moral hazard. Helpfully, this evolution would ensure that financial markets provide more incentives for fiscal discipline than they do now. Introducing more fiscal union comes with myriad legal, technical, operational, and political problems, however, raising questions well beyond the domain of economics. These difficulties notwithstanding, without decisive progress to foster fiscal risk sharing, EMU will continue to face existential risks.

Keywords: Banking Union, ESM, Euro Area, Optimal Currency Area, Risk Sharing

Suggested Citation

Berger, Helge and Dell'Ariccia, Giovanni and Obstfeld, Maurice, Revisiting the Economic Case for Fiscal Union in the Euro Area (June 2019). CEPR Discussion Paper No. DP13813. Available at SSRN: https://ssrn.com/abstract=3428333

Helge Berger (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8135 (Phone)
202-623-4352 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Maurice Obstfeld

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-643-9646 (Phone)
510-642-6615 (Fax)

HOME PAGE: http://emlab.berkeley.edu/users/obstfeld/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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