Federalising the Eurozone: Towards a True European Budget?

Abstract:

Discussions about a future fiscal capacity for the euro area are too often limited to a comparison of the technical advantages and disadvantages of different modalities of cross-country fiscal shock absorbers. This paper aims to broaden the debate, by connecting these discussions with debates on fiscal union and the exercise of political power in EMU.

Through an analysis of past and current debates on EMU, the paper identifies five different rationales for deepening budgetary integration in a monetary union: ensuring fiscal discipline and stable sovereign debt markets, protecting euro area countries against the risk of asymmetric shocks, equipping the euro area with a capacity to stabilise the economy over the cycle, providing budgetary support for convergence and providing an appropriate fiscal backstop for the banking union. The paper discusses the relevance of these various rationales in today’s EMU and their different implications as regards to mutualising budgetary resources and powers.