An evolutionary path for a European Monetary Fund? A comparative perspective.

15-05-2017

Eurozone reformers are looking to the United States and other federations as they seek to craft a more sustainable architecture for the Euro. This paper first extracts lessons about mechanisms of inter-regional insurance and redistribution, and then turns attention to related debates about moral hazard and fiscal discipline. In the United States, inter-regional fiscal stabilization is achieved through a progressive income tax. Contrary to common wisdom, federal direct expenditures and grants are targeted neither to states suffering from short-term asymmetric negative shocks nor to relatively poor states in the long term. Fiscal policies of state and local governments are highly pro-cyclical, and partially undermine the stabilizing role of the system of federal taxes and transfers. Thus the U.S. experience suggests a number of design challenges facing any future Eurozone stabilization mechanism. The paper also places proposals for even stronger top-down surveillance and correction mechanisms of Eurozone member states’ fiscal policies in comparative perspective, arguing that such powers are not found in unions of sovereigns like the United States, Canada, and Switzerland. Moreover, there are reasons for concern about the credibility of such efforts in the Eurozone as currently structured. Unless political will can be found for extraordinary political and fiscal centralization, reformers should assume that member states will continue as sovereigns, and hence will be disciplined (or not) by voters and credit markets rather than European regulators. Thus it might be useful to consider policies that would make the “no-bail out clause” credible.

Eurozone reformers are looking to the United States and other federations as they seek to craft a more sustainable architecture for the Euro. This paper first extracts lessons about mechanisms of inter-regional insurance and redistribution, and then turns attention to related debates about moral hazard and fiscal discipline. In the United States, inter-regional fiscal stabilization is achieved through a progressive income tax. Contrary to common wisdom, federal direct expenditures and grants are targeted neither to states suffering from short-term asymmetric negative shocks nor to relatively poor states in the long term. Fiscal policies of state and local governments are highly pro-cyclical, and partially undermine the stabilizing role of the system of federal taxes and transfers. Thus the U.S. experience suggests a number of design challenges facing any future Eurozone stabilization mechanism. The paper also places proposals for even stronger top-down surveillance and correction mechanisms of Eurozone member states’ fiscal policies in comparative perspective, arguing that such powers are not found in unions of sovereigns like the United States, Canada, and Switzerland. Moreover, there are reasons for concern about the credibility of such efforts in the Eurozone as currently structured. Unless political will can be found for extraordinary political and fiscal centralization, reformers should assume that member states will continue as sovereigns, and hence will be disciplined (or not) by voters and credit markets rather than European regulators. Thus it might be useful to consider policies that would make the “no-bail out clause” credible.