Thoughts on a Fiscal Union in EMU

Abstract

Reproduction permitted only if source is stated.ISBN 978-3-95729-307-7 (Printversion) Non-technical summary Research QuestionRecently, calls for a deeper fiscal integration in the Euro Area have been voiced. We examine short-and long run effects of precisely three different forms of a fiscal union, ascending in the degree of fiscal integration: i) a per-capita public revenue equalisation scheme, similar to the German Länderfinanzausgleich, ii) tax harmonisation, where labour income tax and social security contribution rates are harmonised and iii) a supranational/centralised fiscal authority at the European level, where both revenue and expenditure-side fiscal instruments and public debt are centralised. ContributionWe analyse and compare the different fiscal union scenarios with the New Keynesian DSGE model GEAR. The model incorporates a detailed fiscal sector and is estimated with a rich set of data for Germany and rest of the Euro Area. It enables us to draw some quantitative conclusions for these (groups of) countries. Furthermore, by means of a welfare analysis, we are able to draw some normative conclusions and provide a ranking of the three fiscal union scenarios, which may be region-specific. ResultsOur analysis shows that all three fiscal union scenarios considered in this paper do not improve international risk sharing significantly. Hence, neither Germany nor the rest of the Euro Area would benefit on a considerable basis from introducing any of these integration steps. Even when introducing risk premia on government bonds, this general finding is not changed -although risk premia per se decrease welfare notably. In the long run, redistribution generates winners and losers depending on the degree of integration and how key macroeconomic variables adjust. Nichttechnische Zusammenfassung FragestellungIn der politischen Diskussion wird zunehmend eine stärkere fiskalische Integration für den Euroraum gefordert. Wir untersuchen in diesem Papier die kurz-und langfristigen Auswirkungen von drei konkreten Formen einer Fiskalunion, ansteigend im Grad der fiskalischen Integration: i) eine Nivellierung öffentlicher Einnahmen pro Kopf, ähnlich dem deutschen Länderfinanzausgleich, ii) eine partielle Steuervergemeinschaftung, bei der Lohnsteuer und Sozialversicherungsabgaben vergemeinschaftet werden, und iii) die Zusammenfassung der nationalen Staatshaushalte in einer zentralen europäischen Fiskalbehörde, in der sowohl die einnahmen-als auch die ausgabenseitigen Fiskalinstrumente sowie die Staatsverschuldung zentralisiert sind. Beitrag AbstractUsing an estimated large-scale New-Keynesian model, we assess welfare and business cycle consequences of a fiscal union within EMU. We differentiate between three different scenarios: public revenue equalisation, tax harmonisation and a centralised fiscal authority. Relative to the status quo, long term consequences generate winners and losers depending on the degree of integration and on how key macroeconomic variables adjust. Short term differences between the regimes are...

Eurozone Crisis Management in Neofunctionalist Approach

“…For instance, the intergovernmental structure of the Fiscal Compact is a good example of this orientation. On the other hand, a (more) centralized fiscal framework can be imagined, which means a (much) deeper budgetary integration (Gadatsch et al [2018]). The second option leads us closer to the notion and phenomenon of a European Fiscal Union or fiscal federalism.…”