DP16829 One Scheme Fits All: A Central Fiscal Capacity for the EMU Targeting Eurozone, National and Regional Shocks
This paper proposes a central fiscal capacity for the euro area that generates transfers in response to eurozone, country, and region-specific shocks. The main novelty of this fiscal capacity is that it allows a joint response to these three types of shocks within a single scheme. Thus policymakers can decide on the stabilisation of one shock versus the others according to political and economic considerations. Based on NUTS3 regional data over the last two decades, our analysis shows that - with a limited risk of moral hazard - substantial stabilisation could have been achieved in response to the eurozone and regional shocks, while country-specific shocks were less severe and therefore needed less stabilisation. Aggregating the transfers over the three levels, they are in the order of magnitude of the EU’s Recovery and Resilience Facility, which was adopted in response to the Covid-19 pandemic.