Free DP Download 27 June 2019 - FISCAL UNION IN THE EUROZONE: What needs to happen next

Thursday, June 27, 2019


Revisiting the Economic Case for Fiscal Union in the Euro Area
Helge Berger, Giovanni DellAriccia and Maurice Obstfeld 
CEPR DP No. 13813 19 June 2019

What are the remaining gaps in the architecture of the Eurozone, and what are the trade-offs that repairing them would present? A new CEPR study by former IMF chief economist Maurice Obstfeld and colleagues suggests the need for long-run progress along three mutually supportive tracks:

  • First, more fiscal risk-sharing, which will help enhance the credibility of the sovereign ‘no bailout’ rule.
  • Second, complementary financial sector reforms to break the link between sovereigns and banks.
  • Third, more effective rules to discourage moral hazard.

This evolution, the authors conclude, would ensure that financial markets provide more incentives for fiscal discipline than they do now. But introducing more fiscal union comes with myriad legal, technical, operational and political problems, raising questions well beyond the domain of economics. These difficulties notwithstanding, without decisive progress to foster fiscal risk-sharing, Europe’s economic and monetary union will continue to face existential risks.

Table 1: Completing EMU: Steps toward a Functioning Fiscal Union

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