The Common Framework for National Fiscal Policies and the Euro Area Fiscal Union

Abstract

The aims of this chapter are threefold. First, we provide an outline of the existing European regulatory framework for national fiscal policies. Second, we present and discuss some existing proposals of Fiscal Union for the Euro Area. Third, in the perspective of the evolution of Euro Area towards a full Monetary and Fiscal Union, we estimate and identify a structural VAR in order to study the effects of area-wide government spending shocks on aggregate output and other macroeconomic variables during the EMU period. We find that the government spending multiplier is above one, i.e. there are positive and sizeable effects exerted on output by increases in government expenditures. We also find that when fiscal stimuli are accommodated by monetary policy, spending multipliers have a notable increase. This overall picture is reinforced by analyzing the effects of government investment on macrovariables. Our main conclusion is that a centralized fiscal policy might successfully pursue the goal of macroeconomic stabilization in the Euro Area.