Fiscal Unions Research Articles

Correction to: Book Review: Fiscal Unions: Economic Integration in Europe and the United States, by Tomasz Wozniakowski

Correction to: Book Review: Fiscal Unions: Economic Integration in Europe and the United States, by Tomasz Wozniakowski

Fiscal Unions: Economic Integration in Europe and the United States, by Tomasz Wozniakowski

<i>Fiscal Unions: Economic Integration in Europe and the United States</i>, by Tomasz Wozniakowski

Centralization of rule-making versus embeddedness in the Eurozone

ABSTRACT A new consensus has emerged which stipulates that the Eurozone problems are caused by a lack of embeddedness of the euro in proper financial and fiscal unions. This paper reviews the debates on the Eurozone’s state of disembeddedness and argues that it is not enough to embed the monetary union in scaled-up financial and fiscal unions. For the euro problems to disappear it needs to be embedded in social Europe. The transfer of policy prerogatives at the supranational level does not make the structure embedded, but the substance of the policy measures. From a Polanyian perspective, the extent of the Eurozone dis/embeddedness depends not on the level of centralization of policymaking, but on the interplay between the two forgotten Polanyian principles: improvement and habitation. This paper tries to assess the extent of dis-embeddedness through these two principles.

Convergence towards a single economic model? Italy and Germany in the interconnected euro system

Structural reforms have failed to bring about convergence in the Eurozone. This argument is made here by comparing two countries – Italy and Germany – assumed to embody contrasting economic models. Three main points are made in the paper. First, the generalisation of the macroeconomic strategy of the northern countries threatens to undermine political support for European integration, as the disparities it engenders drive the electoral successes of Eurosceptic parties. Second, Italian performance does not display the traits commonly associated with the southern European syndrome. Third, Italy’s core economic problem – its persistently low GDP and productivity growth – is due to its prolonged efforts to reduce a public debt which originated in the 1970s and 1980s. The paper argues for the need to return to a macroeconomic analysis, as opposed to the focus on the microeconomic issue of competitiveness, and for the need to consider other policies in addition to the completion of the banking, financial and fiscal unions.

Regional Spillovers in Sub-Saharan Africa

After close to two decades of strong economic activity, overall growth in sub-Saharan Africa decelerated markedly in 2015–16 as the largest economies experienced negative or flat growth. Regional growth started recovering in 2017, but the question remains of how trends in the economies stuck in low gear will spill over to the countries that have maintained robust growth. This note illuminates the discussion by identifying growth spillover channels. The focus is on trade, banking, financial, remittance, investment, fiscal, and security channels, which are the most prominent and most likely to transmit growth trends across borders. In addition to bringing together findings from a broad array of existing research, the note identifies countries that are the most likely sources of regional spillovers and those that are most likely to be impacted, and provides estimates for the size of these channels. It finds that intraregional trade and remittance flows are an important channel for growth spillovers, while banking channels are less important but will remain a risk going forward. Finally, the note documents other important spillover channels through financial markets contagion, revenue-sharing arrangements in fiscal unions, commodity-pricing policies, corporate investment, and forced migration. The main takeaway is that the level of interdependence among sub-Saharan countries is higher than is generally assumed. Consequently, there is a need for additional emphasis on regional surveillance and spillover analysis, along with traditional bilateral surveillance.

Fiscal Unions

We study cross-country risk sharing as a second-best problem for members of a currency union using an open economy model with nominal rigidities and provide two key results. First, we show that if financial markets are incomplete, the value of gaining access to any given level of aggregate risk sharing is greater for countries that are members of a currency union. Second, we show that even if financial markets are complete, privately optimal risk sharing is constrained inefficient. A role emerges for government intervention in risk sharing both to guarantee its existence and to influence its operation. The constrained efficient risk-sharing arrangement can be implemented by contingent transfers within a fiscal union. We find that the benefits of such a fiscal union are larger, the more asymmetric the shocks affecting the members of the currency union, the more persistent these shocks, and the less open the member economies. Finally, we compare the performance of fiscal unions and of other macroeconomic stabilization instruments available in currency unions such as capital controls, government spending, fiscal deficits, and redistribution. (JEL E62, F31, F32, F41, F45)

Between failure and success of the integration process: explaining the policy impact (the case of the fiscal and energy unions)

The aim of the article is to explain why the EU integration efforts have different outcomes in times of crisis with regards to impact on key stakeholders. Besides traditional political theories of European integration, authors suggest to take into account the importance of behavioural intentions and stimuli to adhere to the reforms agenda. The research results presented in this article explain two recent deep EU crises: energy crisis and fiscal crisis, which evolved simultaneously, but resulted in different integration projects within the same political and institutional background. Authors analysed Eurobarometer public opinion surveys together with empirical data on the impact on stakeholders, based on available indicators in Eurostat. Authors found that the key for a policy to succeed in targeting agents’ and groups’ behaviour is its direct ties with stakeholders’ motivation which can be done only at market level. Thus, policy shift in integration areas should be reinforced by direct and clear market solutions and corrective mechanisms avoiding politically-relevant targets.

Fiscal unions redux

Before the advent of sophisticated international financial markets, a widely accepted belief was that within a monetary union, a union-wide authority orchestrating fiscal transfers between countries is necessary to provide adequate insurance against country-specific economic fluctuations. A natural question is then: Do sophisticated international financial markets obviate the need for such an active union-wide authority? We argue that they do. Specifically, we show that in a benchmark economy with no international financial markets, an activist union-wide authority is necessary to achieve desirable outcomes. With sophisticated international financial markets, however, such an authority is unnecessary if its only goal is to provide cross-country insurance. Since restricting the set of policy instruments available to member countries does not create a fiscal externality across them, this result holds in a wide variety of settings. Finally, we establish that an activist union-wide authority concerned just with providing insurance to member countries is optimal only when individual countries are either unable or unwilling to pursue desirable policies.

Euro After the Crisis: Key Challenges and Resolution Options

The recent Global Financial Crisis (2008-2010) and the accompanying Great Recession (2008-2011) show that the level and the rate of monetary and financial systems integration deployed within the Euro area is not sustainable in the long run. Instead of acting as a buffer against external shocks and internal imbalances within the Euro area, the common currency has acted as a driver, firstly, of some imbalances that prompted the crises, and as a factor restricting economies’ ability to deal with the real economic recession that followed the financial crisis.Both, theoretical models of monetary policy integration and the recent empirical evidence show that in order to achieve functional common monetary policy, member states of a currency union must achieve fiscal and political unions. However, with full federal EU lacking democratic and popular mandate, a U.S.-styled centralised federalisation does not represent a feasible alternative for the EU. As the result, to prevent a disorderly unwinding of the Euro area over time and the accumulation of significant long-term economic costs of maintaining the current status quo, the EU should pursue a restructuring of the EMU along the following lines. Firstly, the Euro area should be reduced to a core group of states financially, fiscally and politically ready to undertake both a full monetary and political federalisation. Secondly, core EU institutions should be reformed toward achieving a bottom-up democratically anchored momentum toward a Swiss-styled confederation, retaining significant member states’ autonomy on core competencies.

Political economy of fiscal unions

Fiscal unions often use fiscal transfers to counter asymmetric shocks, but such transfers may be politically controversial. I present a model of a two-region fiscal union with region-specific shocks where the threat of secession imposes a limit on fiscal redistribution between regions. I show that both correlation of shocks across regions and their persistence over time are important for political support for integration. The gains from inter-regional risk sharing are potentially large when shocks are negatively correlated and temporary. In contrast, unions with negatively correlated permanent shocks are likely to be fragile.

Banking and Fiscal Unions in the EU: What is More Relevant?

The article deals with financial system structures in the eurozone member states, linkages between banking sectors and fiscal solvency of states and EU initiatives towards improving frameworks to prevent and if necessary to deal with crises in the future. The global economic and financial crisis has revealed a close interrelation between banks problems and sovereigns in the EU. The instruments which were used by national governments in order to save systemically important banks forced the EU to revise approaches to bank supervision and establish new mechanisms for banks' restructuring. At the same time sovereign debt crises in a number of member-states, on the one hand, showed lack of an effective EU-wide system of control over a fiscal discipline and, on the other hand raised questions about lack of any system of fiscal transfers to countries hit by a negative shock. The New Banking and Fiscal unions have been designed to withshand those challenges. The author analyses problems which might be solved with the help of the new instruments established within theabove mentioned unions. At the same time far from all initiatives aimed at achieving greater fiscal consolidation might turn out to be effective when dealing with systemic problems in times of a crisis.

A Model for a Fiscal Union? What Europe Can Learn from the German Experience

AbstractThe euro has strengthened the economic differences between a more affluent north and a struggling south, which is the core problem of the current crisis in the euro zone. A potential solution to this problem could be to transform the monetary union into a fiscal union. This article sketches two different models for fiscal unions: a federal structure like that of Germany, where federal revenues and expenditures are controlled in significant part by federals laws, which has an extensive bailout system built in; and a confederal system like that of Switzerland, where Cantons are autonomous in their fiscal policies but clear bankruptcy rules are implemented. The article describes the reasons for which the German arrangement, one that strongly relies on income equalisation, have not proven successful in harmonising the financial position of the Länder and municipalities and why bailouts have become rather the rule than the exception. In consequence Germany has introduced a debt brake that does not allow expenditures to be structurally higher than revenues. Although it is too early to evaluate the sustainability of such a mechanism yet, the debt brake seems to be a promising means for preventing an unsustainable built‐up of debt under normal economic conditions. This article concludes that as long as debt brakes are not fully implemented and further fiscal harmonisation cannot be expected, the European Union will still have to rely on market‐based regulatory instruments and the disciplinary function of interest rates, possibly culminating in a bankruptcy procedure.

Political Economy of Fiscal Unions

Political Economy of Fiscal Unions

Fiscal Unions

Fiscal Unions

Are there Spillover Effects From Munis?

This paper studies the spillover effects both within the bond markets for individual U.S. states and between the latter and the market for U.S. Treasury securities. We perform the Forbes and Rigobon (2002) spillover test using daily bond yield data over the period 2005 to 2011. Results are twofold. First, we find that between most markets for individual U.S. state bonds there are negative spillovers. In other words, an increase in borrowing costs in one U.S. state results in better borrowing conditions for other states. Second, we find no substantial spillover effect between shocks originating from state securities and from federal markets, except for a few large issuers. Using causality tests in the frequency domain, we find that the Treasury bond market directly causes changes in the markets for municipal bonds in both the short and long run. There is also some evidence of causality from the municipal to the Treasury bond market, but only of a long-run nature. Our results shed some light on the policy debate on the nature of spillover effects within fiscal unions.

How Can Firms Choose Their Leverage? Tax Planning for Implementing Tax Induced Debt Finance

This paper identifies tax planning strategies necessary to implement tax induced debt finance and tests empirically if German multinationals use such tax planning strategies. This check allows to verify, whether the empirically well documented increase of the leverage with corporate tax rates is due to multinationals' corporate financial policy (tax planning) or possibly to other factors.I argue that the leverage of multinationals' subsidiaries in high tax countries mainly increases because of the lack of retained earnings there and not because multinationals prefer debt for tax considerations. I also point to the importance of finance holdings in combination with fiscal unions to implement tax induced debt finance. Such finance holdings carry significant amounts of debt finance and a high corporate tax rate increases the probability of multinationals establishing a finance holding.

Economic Risk and Political Risk in Fiscal Unions

A fiscal programme that redistributes income from rich to poor individuals indirectly redistributes tax revenues from regions hit by a favou-rable shock to regions hit by an unfavourable one. Centralised fiscal redistribution has therefore been advocated as a way to insure individuals against region-specific shocks. In this paper, we argue that a centralised fiscal policy, while reducing the uncertainty on the tax base, may create additional uncertainty on the tax rate. Using a simple model we show that the higher uncertainty on the policy instrument might more than offset the lower uncertainty on the tax base. Several countries around the world are breaking up (e.g., the former Soviet Union), and in others regional movements are becoming more vocal in demanding more autonomy (e.g., Italy, Spain); at the same time, several Western European countries are integrating in a supernational community. Fiscal policy issues, and, in particular, the level of centralisation of fiscal decisions are important considerations in the formation or collapse of political jurisdictions or of federations of regions and countries. 1 A long tradition in public finance argues that a centralised fiscal system can reach more efficient outcomes by better internalising the numerous externalities associated with both the expenditure and the revenue sides of fiscal policy, particularly when factors are mobile. This line of argument applies to both the provision of public goods (Gordon, 1983) and to redistributive fiscal policy (Pauli, 1973; Ladd and Doolittle, 1982; Brown and Oates, 1987). A counter argument to this conclusion is developed in Perotti (1997), who shows that in the presence of differences in, say, labour markets or the administration of fiscal policy, centralised redistribution can lead to a more inefficient allocation of resources. A second argument in favour of centralised fiscal policy is based on the insurance properties of redistribution. When different countries are hit by

Togetheror separately? Issues on the costs and benefits of political and fiscal unions

Around the world one observes a tendency toward political separatism. The economic literature generally (but not always) emphasizes several benefits of large fiscal (and, therefore, political) jurisdictions. In this paper we discuss several politico-economic arguments which reconcile this tension between “normative” economic models and empirical observations.