Transformation of the fiscal framework of the euro area

The paper presents the economic rationales for a political project: the implementation of a central fiscal capacity in the Euro Area (EA). In completing the existing literature on fiscal reforms, risk-sharing is the analytical perspective, and compensating the effects of uneven national policy responses is a major concern for the design of a central fiscal capacity. The methodology is based upon the theories of fiscal federalism and monetary unions; data analysis relates to the fiscal stance of member countries.

The topic is timely: the past two years might have opened a window of opportunity for reforming the EU and the EA, including a reform of the fiscal framework. I intend to examine the rationales of a central fiscal capacity with respect to the unique character of the monetary union, which is not a single state or federation of states with a central government. Up to date, this unique character favors fiscal reforms at the member country level and regards a central fiscal player as redundant. The great challenge is to reconcile the sovereign fiscal responsibility of EA member countries and the mistrust against a redistributive transfer union with a possible EA wide fiscal risk-sharing instrument. My conclusion is that this is possible, when the central fiscal capacity is restricted to cushion the negative feedback effects of (i) external and policy shocks and (ii) of unequal national policy responses on the entire euro area. Then, the room for necessary fiscal reforms and responsibilities at the national level will be sustained and would even gain reliability; no national sovereignty of relevance needs to be transferred to the EA level. In view of this concept, my reasoning includes an overview on risk-sharing in EA, discusses why public risk-sharing might be necessary to complete private risk-sharing, and examines some solutions for a central fiscal capacity that are not in conflict with the unique character of the EA as a confederation of sovereign states