Deepening EMU and fiscal union: Risk sharing versus risk reduction

Briefing 14-07-2017

The debate on how to deepen economic and monetary union (EMU) is in full swing, despite gradual recovery since 2015 from the 2007-2008 crisis. There is controversy surrounding whether delegation of monetary sovereignty to EMU necessarily entails some euro-area fiscal stabilisation competences and, if so, what kind. Proposals for such a mechanism range from (re)insurance solutions, investment strategies and funding instruments, to actual budgetary competence for the euro area. Current research supports a stronger EMU fiscal union and the introduction of stabilising policy instruments. However, the capacity to absorb future shocks will also depend on the ability to off-set diverging trends between Member States, caused by different economic systems and labour market institutions. Despite recent signs of economic recovery, divergence may prove difficult to reverse. In June 2015, the Five Presidents' Report contributed to the debate about a euro-area 'fiscal union' by suggesting the development of a fiscal stabilisation function by 2025. Initially announced as a white paper, the European Commission's reflection paper on the 'deepening of the economic and monetary union', presented on 31 May 2017, does not formulate concrete steps, as envisaged in the 2015 report. Instead it offers four guiding principles on how to build the future EMU architecture. 'At the latest' by 2025, a 'central stabilisation function' could take the form of a European investment protection scheme or a European unemployment reinsurance scheme. This briefing is one in a series on the European Commission's reflection papers following up the March 2017 White Paper on the future of Europe.