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Should Europe Become a Fiscal Union?

Christian Keuschnigg

No 1205, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

Abstract: Moving towards a fiscal union does not address the problems of divergence in Europe. Given cultural heterogeneity and diverse preferences, fiscal policy should remain under national sovereignty while important regulatory power is assigned to the Union. The paper argues that more credible fiscal rules combined with tighter surveillance reduce negative policy spillovers. A better capitalized banking sector imposes more market discipline with sovereign risk-premia. Institutional lending by the ESM (European Stabilization Mechanism) to distressed countries is subject to strict conditionality and will impose structural adjustment that was neglected ex ante. Further reform seems necessary to strengthen the financial capacity and institutional independence of the ESM and to impose tighter regulation and more ambitious recapitalization of European banks to contain cross-country contagion on financial markets. Such reform should prevent or at least much reduce the negative consequences of national decision making on other member countries and would in turn support the political goals of establishing peace and harmony in Europe.

Keywords: Fiscal crisis; fiscal rules; common currency area (search for similar items in EconPapers)
JEL-codes: E62 F15 H63 H77 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2012-03
New Economics Papers: this item is included in nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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