On deficits and symmetries in a fiscal capacity

Shafik Hebous and Alfons Weichenrieder

No 112, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: There is a growing debate about complementing the European Monetary Union by a more comprehensive fiscal union. Against this background, this paper emphasizes that there is a trade-off in designing a system of fiscal transfers ("fiscal capacity") in a union between members of different size. A system cannot guarantee symmetric treatment of members and simultaneously ensure a balanced budget. We compute hypothetical transfers for the Eurozone members from 2001 to 2012 to illustrate this trade-off. Interestingly, a symmetric system that treats shocks in small and large countries symmetrically would have produced large budgetary surpluses in 2009, the worst year of the financial crisis.

Keywords: fiscal union; asymmetric shocks; federal transfers; optimum currency area (search for similar items in EconPapers)
JEL-codes: H50 H60 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-mac and nep-pbe
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:112

DOI: 10.2139/ssrn.2637776

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