E Pluribus Euro: Minimum Fiscal Capacity for Collective Trade Policy in a Currency Union

Joseph Kopecky ()
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Joseph Kopecky: Department of Economics, Trinity College Dublin

No tep0426, Economic Papers from Trinity College Dublin, Economics Department

Abstract: As major powers deploy trade policy as coercion, what fiscal capacity does a currency union need to sustain a credible collective response? I embed the multi‐sector trade model of Caliendo and Parro (2015) into a monetary union with heterogeneous members, calibrated to the world input‐output database (WIOD) for 20 individual Eurozone members. A US tariff escalation of 20% plus EU retaliation requires 0.69% of Eurozone GDP (€97 billion); a Chinese critical minerals restriction requires 0.44% (€62 billion); both simultaneously require 1.12% (€157 billion). A substantial share of the fiscal need arises from the asymmetric costs of collective action itself: the costs that EU counter‐tariffs impose on members with concentrated trade exposures. This reframes the fiscal requirement as the price of strategic credibility. Single market deepening generates welfare gains, but barely reduces the fiscal requirement, showing that integration and fiscal capacity are complements. Joint borrowing is needed, as budget‐balanced redistribution cannot sustain collective action. However, the headline fiscal requirement is an upper bound. Embedding the model in existing EU institutions (cross‐conditionality of EU fiscal flows and qualified majority voting rules) reduces the practical requirement to 0.33% of Eurozone GDP (€46 billion) in the combined scenario, since the EU need only compensate a handful of pivotal large members to prevent a blocking minority.

Keywords: Fiscal unions; currency unions; trade policy; economic coercion; Eurozone; strategic autonomy (search for similar items in EconPapers)
JEL-codes: E62 F13 F15 F42 F45 H77 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2026-03
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