07 December 2018

Vox EU: The case for a central fiscal capacity in EMU

The authors of this column re-state the case for a central fiscal capacity. In essence, whilst financial union and a euro area fiscal stabilisation are substitutes in normal times, they are complementary in bad times.

[...]Critics of the fiscal capacity make several points. They claim that: i) sizeable asymmetric shocks are infrequent; ii) private risk-sharing mechanisms, including as enhanced by the completion of banking union and CMU, could suffice to provide considerable shock absorption; iii) fiscal stabilisation can in any event rely on national budget stabilisers, provided that Member States properly adhere to fiscal rules of the Stability and Growth Pact (SGP). 

Finally, critics claim that any common fiscal tool could only be an incentive to moral hazard and a door for non-legitimised permanent transfers. They conclude that the risks of a fiscal capacity outweigh its advantages. 

Authors beg to disagree with this analysis. So too do the international organisations, which strongly favour the introduction of a fiscal capacity (e.g. Lagarde 2018, Draghi 2018, OECD 2018). 

In the rest of this column they take the points of the critics in turn. Hence they examine three analytical questions:

• Q1: Is there evidence of large cyclical fluctuations in EMU, including country-specific components?
• Q2: Does private risk sharing via the completion of banking union and CMU eliminate the case for a central fiscal capacity?
• Q3: Do national automatic stabilisers within the SGP suffice to smooth the remaining shocks?
• Q4: Does a central fiscal capacity necessarily entail moral hazard and permanent transfers? 

Authors finally recall, in conclusion, how together with other contributions, the Commission has proposed to move forward by tabling a balanced proposal. [...]

Full column on VoxEU

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