DP15382 Fiscal policy in Europe: a helicopter view

Author(s): Florin Ovidiu Bilbiie, Tommaso Monacelli, Roberto Perotti
Publication Date: October 2020
Programme Areas: International Macroeconomics and Finance, Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15382

We discuss the main fiscal policy issues in the Eurozone, focusing on two that are at the core of the current debate. The first is that, right from the start, the government deficit and debt were the key objects of contention in the debate that led to the creation of the Eurozone, and they still are. The second issue is that a currency union implies the loss of a country-specific instrument, a national monetary policy. This puts a higher burden on fiscal policy as a tool to counteract shocks, a burden that might be even heavier now that the European Central Bank has arguably reached the Zero Lower Bound. Two obvious solutions are mutual insurance (or risk sharing, we use the two expressions interchangeably) between countries; and a centralized stabilization policy. Yet both have been remarkably difficult to come by.