Market-preserving fiscal federalism in the European Monetary Union

Ad van Riet

MPRA Paper from University Library of Munich, Germany

Abstract: Responding to the euro crisis, European leaders have put in place an enhanced economic and financial governance framework for the euro area, including the main pillars of a banking union, while they have initiated work on a capital markets union. This should more effectively secure sound national macroeconomic and fiscal policies, a healthy financial sector and the stability of the euro. This paper poses the question whether the status quo of half-way political integration is sufficient to safeguard the cohesion and integrity of the euro area. National governments still have considerable leeway to circumvent the “hard” budget constraint and the strong market competition implied by the euro area’s “holy trinity” (one market, one currency and one monetary policy). For example, they might target captive sovereign debt markets or take protectionist measures. This economic nationalism would entrench the crisis-related fragmentation of the single market and frustrate the efficient functioning of the monetary union. A higher level of market-preserving fiscal federalism could prevent member countries from encroaching on markets and foster sustainable economic convergence towards an optimal currency area.

Keywords: European Monetary Union; monetary policy trilemma; protectionism; market fragmentation; fiscal federalism (search for similar items in EconPapers)
JEL-codes: E6 F33 F4 H7 (search for similar items in EconPapers)
Date: 2015-10-30
New Economics Papers: this item is included in nep-mac, nep-opm and nep-pbe
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Citations: View citations in EconPapers (2)

Published in Proceedings of Workshop ‘Toward a Genuine Economic and Monetary Union’, 10-11 September 2015 No. 21 (2016): pp. 101-140

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https://mpra.ub.uni-muenchen.de/78584/1/MPRA_paper_77772.pdf revised version (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:77772

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