A Way Out of the Euro Crisis: Fiscal Transfers Are Indispensable for Sustainability in a Union with Heterogeneous Members

Taiji Harashima

MPRA Paper from University Library of Munich, Germany

Abstract: This paper theoretically examines a way out of the euro crisis based on a model of inflation acceleration and differentials. The conclusion is that, unless more advantaged states (e.g., Germany) systematically transfer a necessary amount of money to less advantaged states (e.g., Greece) in every period, the euro area cannot necessarily reach equilibrium where all heterogeneous states achieve optimality. In this case, fiscal transfers are not a tool of risk-sharing or a buffer against asymmetric shocks; rather, they are indispensable for escaping from indefinite disparity acceleration within a union consisting of heterogeneous member states. Such fiscal transfers should not be viewed as alms for the less advantaged states but as a right these states should justly assert. The model indicates that the lack of a fiscal transfer mechanism inevitably generates inflation differentials and huge current account imbalances among member states. As a result, although relatively more advantaged member states obtain “extra” benefits from the euro, less advantaged member states eventually lose most of their capital ownership and their economies are devastated.

Keywords: The euro; Monetary union; Inflation; Inflation differential; Current account imbalance; Fiscal transfer; Time preference (search for similar items in EconPapers)
JEL-codes: E31 E58 E63 F33 N14 O52 (search for similar items in EconPapers)
Date: 2015-04-02
New Economics Papers: this item is included in nep-eec, nep-mac, nep-mon and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:63025

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