The role of fiscal delegation in a monetary union: a survey of the political economy issues

James Costain and Beatriz de Blas ()

No 2012/11, Working Papers in Economic Theory from Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History)

Abstract: Current proposals to address the European sovereign debt crisis envision some sort of fiscal union to complement the Economic and Monetary Union, backed by stronger sanctions against countries that deviate from budget balance. We argue that sanctions are an indirect approach to balancing budgets, and that member states, and Europe as a whole, could instead consider delegating effective fiscal instruments with a direct budgetary impact to an independent authority. Outside of a fiscal union, a solvent country could establish an independent fiscal authority at the national level, with a mandate to maintain long-term budget balance. Delegating a few powerful fiscal instruments to an institution of this type could cut off speculation about fiscal sustainability without ceding sovereignty to a supranational body. Inside a fiscal union, delegating one or more fiscal levers of each Eurozone member state to a national or European fiscal authority could eliminate moral hazard without relying on sanctions per se. Many fiscal instruments can serve to balance budgets, but in the context of a monetary union the chosen instrument should ideally be one that increases competitiveness when recession looms. The instrument should also be one that is quick and simple to adjust, with a large budgetary impact and minimal redistributional consequences. For consistency with these criteria, we argue that fiscal adjustments should operate on the spending side, rather than the revenue side, and that spending adjustments should affect the prices the government pays, instead of the quantities of goods and services it purchases. We discuss in detail how a system of this sort could be implemented.

Keywords: Fiscal delegation; public spending; sovereign debt; monetary union. (search for similar items in EconPapers)
JEL-codes: E32 E62 E63 F41 H63 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2012-05
New Economics Papers: this item is included in nep-eec and nep-mac
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Citations: View citations in EconPapers (7)

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