Designing a Permanent EU-Wide Stabilization Facility

Roel Beetsma and George Kopits

No 8735, CESifo Working Paper Series from CESifo

Abstract: While the EU recovery plan provides a useful step in alleviating the economic effects of the coronavirus crisis and achieving further European integration, a permanent fiscal stabilization capacity dealing with major crises is still missing. Such a EU-wide stabilization function would be in accordance with the subsidiarity principle, enshrined in the Treaty of Maastricht, as the risk-sharing that it provides can only be conducted at the supranational level. We envisage a mechanism to semi-automatically respond to region- and country-specific shocks via a central fiscal stabilization fund (CFSF). A simple model incorporating hysteresis, cross-border externalities and moral hazard, is deployed to illustrate the optimal responses of the CFSF to these shocks. A well-designed CFSF has the potential to improving welfare not only in crisis-hit member countries, but also in the union as a whole.

Keywords: subsidiarity principle; shocks; fiscal stabilization; transfers; European Union; corona (search for similar items in EconPapers)
JEL-codes: E32 E62 E63 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-eec and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8735

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