Is an Increase of the Fiscal Budget at EMU Level Desirable?

Davide Furceri

Chapter 7 in Financial Developments in National and International Markets, 2006, pp 118-132 from Palgrave Macmillan

Abstract: Abstract The birth of the European Monetary Union (EMU) has determined the creation of a common currency, the Euro, but unlike other monetary unions, the EMU does not have a central fiscal authority. The role of fiscal policy is left to the responsibility of the governments of the EMU member States. The new architecture modifies the assignment of the instruments to the objectives, especially those of stabilization. The loss of the sovereignty of monetary policy and exchange rate control by the individual member states has determined the inability to use two important instruments of insurance against the risks of shocks. Moreover, the Treaty of Maastricht and the Stability and Growth Pact (SGP) could limit considerably the room of stabilizing national fiscal policies in some circumstances. In such a context, it could be important to investigate whether fiscal policy conducted by the individual governments is sufficient to insure countries against symmetric and asymmetric shocks. The results in the literature point to the fact that a transfer mechanism at the central level or an increase of the cooperation among the member states could improve substantially the capacity of the entire union to insure itself against shocks. Another important role of fiscal policy is to provide redistribution among the member states. Redistribution, in terms of income transfers from rich regions to depressed ones, might be necessary in order to guarantee a more rapid convergence towards higher living standards and in some cases could compensate individuals living in regions that are climatically and structurally disadvantaged.

Keywords: European Union; Monetary Policy; Fiscal Policy; European Central Bank; Monetary Union (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-52237-4_7

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DOI: 10.1057/9780230522374_7

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