Pathways to achieve a Genuine Fiscal Union

The eurozone crisis is obliging the EU institutions and the member states to reform the existing governance mechanisms of Monetary Union. Many now contend that some degree of fiscal integration is necessary to overcome the structural problems of the euro area. To fulfill this role, any form of fiscal union must accomplish, regardless of its institutional shape, two basic functions: preventing the emergence of endogenous asymmetric crises, and correcting acute economic and fiscal crises. While the European Monetary Union has made some progress concerning the prevention of future crises, further action is needed to put in place true corrective mechanisms. Also, in the long run, more democratic legitimacy is required to ensure the sustainability of European Monetary and Fiscal Union.

In this Policy Brief, Francesco Nicoli analyses the reforms undertaken so far to strengthen Monetary Union, and suggests the way forward to progressively achieve a functioning fiscal union for the eurozone countries. The paper argues that the creation of a genuine fiscal union must be a political priority for euro-area countries, if they are truly committed to protecting monetary integration, the European construction and their own interests. The author suggests moving towards a threefold fiscal union, based on a strong European budget, a strengthened coordination mechanism of national budgets in relevant areas (providing guarantees for complying countries), and a residual and fully independent national budget.