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                                                                                                     aktualisiert/updated: 1st November 27th, 2017


Reforming EU frameworks or EU countries? The case of a public risk-sharing capacity for the Euro area

The debt crisis of the euro area’s banking and sovereign sectors has challenged the architecture and the functioning of the monetary union, and the position of Europe in the global economy and politics. What Europe needs is a new project, a vision, a new understanding of sovereignty as President Macron has recently stated. The major impediment to such a project is something I call it the original-sin of the European unification process. It is rooted in the nation building process of the 19th century and the demand for a sovereign state. Nation states are the legal basis of the European Union. I am convinced the union will be able to develop her own sovereignty, which does not replace, but complement the sovereignty of her member countries. This is the only way to sustain the European unification despite its original-sin.

In the realm of economics, the tension between European and nations’ sovereignty is best reflected by the controversially debated proposal of a central fiscal capacity in the monetary union. I discuss the issue from the perspective of cross-border risk-sharing. To begin with, have a look at the figure below:


 Compared to other monetary unions, fiscal risk sharing was almost nonexistent, both in the EU and the euro area. This is due to the Maastricht design of the EU and its monetary union. Many commentators argue that this lack have contributed to aggravate the severity of the economic downturn in the euro periphery and may have delayed the recovery in the entire area.

The Maastricht design is based upon 3 major contentions:

      The existing fiscal framework equips sufficiently national governments to deal effectively with shocks that have an asymmetric and cyclical character.

      National fiscal automatic stabilizers can sufficiently compensate for ups and downs in the cycle.

      In case of  common shocks, centralized monetary policy disposes of all instruments to deal with them.

These contentions root in the state of economics of the 1970s and 1980s and do not reflect practical experience and theoretical achievement since them. Hence, a wise economist should have – at least –doubts.

         Isolated asymmetric shocks, justifying a country-specific reform approach, have lost its earlier importance due to trade integration:  Asymmetric shocks become common shocks. In addition, a severe shock has the unpleasant property to transmute into a persistent shock.

        Country traditions and reforms of the social and tax systems caused the cyclical sensitivity of public budgets in member countries to shrink and even to differ. This includes strongly different income multipliers of automatic adjustments.

       Monetary and fiscal policies are not complete substitutes, at least not at the zero lower bound and ‘diminishing returns to unconventional monetary policies’. Centralized monetary policy becomes ineffective in the case of a common shock.

With all this at hand, the community might want to protect against negative spillovers from reform actions unilaterally undertaken by one or some countries. However, many economists, politicians, and the press prefer the expanding of private cross-border risk-sharing, for example, with the ongoing Commission’s project of a capital markets union. A fiscal risk-sharing capacity remains vague and postponed to some future. However,

        experience has taught that financial crisis gained strength despite increasing international risk-sharing, and

        theory (Battiston et al. (2012) and Acemoglu et al. (2013) and others have explained why systemic risks might increase when risk-sharing networks expand.

But, is a central fiscal capacity possible without a change of the treaties and the transfer of national sovereignty? I believe, yes it is. A new authority may represent a new sovereignty. The central fiscal capacity would be an overlay over the existing system, completing it according to the distinct features of the monetary union as being a federation of single nation-states. The capacity would balance the common risks from different country systems. The legal instrument would be an intergovernmental contract. This approach goes with a stabilization fund dedicated to investment, complemented by a European unemployment insurance system, but less with a full-fledged budget of the EU or monetary union.  A central capacity offers some benefits: (i) softening the cross-country spillovers of shocks of political and economic origin; (ii) return of some control over the Euro area macroeconomics; and (iii) making the existing fiscal framework more reliable.

The last benefit is of specific importance. A central risk-sharing capacity is not sui generis subject to the present fiscal rules and quantitative fixings, which apply only to national governments. That allows for some common borrowing for financing greater risk-sharing.  Then, the principle of ‘sound fiscal policy’ at the national level can be reconciled with the principle of functional finance at the central level. In such a fiscal-federal system, the principle of no-bail-out would gain credibility and raise market discipline on the national governments. What is more, bonds of the central fiscal capacity, financed by own resources would provide a safe asset to the financial markets and insert there more stability, after bonds of many national governments have lost their property of being an risk-less asset in a financial crisis.


Allard,  Brooks, P. K.,  Bluedorn, J. C., Bornhorst, F., Christopherson, K., Ohnsorge, F., Poghosyan, T. and an IMF Staff Team. 2013. “Toward a Fiscal Union for the Euro Area” , IMF Discussion Note September. - Acemoglu, D., Ozdagla, A., and Tahbaz-Salehi, A. 2013. “Systemic Risk and Stability in Financial Networks”. MIT Working Paper 1303. - Battiston, S., Delli Gatti, D., Gallegati, M., Greenwald, B. C., and Stiglitz, J.  E. 2012. Liaisons dangereuses: Increasing connectivity, risk sharing, and systemic risk, in Journal of Economic Dynamics and Control, vol. 36, no. 8, 1121-1141.

* See he long version of this comment see at: 


(1 November 2017)

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Autumn 2017:'Monetary policy independence reconsidered: evidence from six non-euro members of the European Union'. Empirica, 44(3), 567-584, Euro 41,94. Download info: https://link.springer.com/article/10.1007/s10663-016-9337-3?wt_mc=Internal.Event.1.SEM.ArticleAuthorAssignedToIssue

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Winter 2017: ‚Der Einfluss grenzüberschreitender Finanzströme auf Nachfrage,  Wettbewerbsfähigkeit und Leistungsbilanzen in der Eurozone‘. In: H. Hagemann und J. Kromphardt: Die Krise der europäischen Integration aus keynesianischer Sicht. Schriften der Keynes-Gesellschaft Band 10, metropolis: Weimar (Lahn), S. 47-69, Euro 29,80.

The Big 2013-2016 Balkan Project: 

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                This report is the English Version of:

‘Steigerung der Wettbewerbsfähigkeit in der Balkanregion – Möglichkeiten und Grenzen‘. (with Doris Hanzl-Weiss, Mario Holzner, Michael Landesmann, Johannes Pöschl and Hermine Vidovic. wiiw Research Report in German language No. 3, Dezember 2015 , 217 pages including 27 Table and 110 Figures. Download: http://wiiw.ac.at/steigerung-der-wettbewerbsfaehigkeit-in-der-balkanregion--moeglichkeiten-und-grenzen-p-3755.html