New Fiscal Institutions for Europe?

Project Start:07/2014
Researchers:Alfons J. Weichenrieder
Category: Macro Finance
Funded by:LOEWE

Topic and Objectives

In the post-financial crisis era, the EU is looking for better and tighter fiscal institutions. Politicians and researchers are intensively discussing the introduction of fiscal federalism schemes that could act as macroeconomic shock absorbers in the case of asymmetric shocks in a federation or union. Such shock absorbers could be particularly valuable for countries that have ceded national monetary policy and are restricted in their use of national fiscal policy through a fiscal compact. A second fiscal innovation for Europe and one that is high on the agenda of the European Parliament is the introduction of an EU tax to substitute (fully or in part) for member countries’ contributions. Against this background, the project has contributed to the understanding of the different trade-offs.

Key Findings

  • A first research issue that has been tackled within the project is the trade-off between the symmetry of the macroeconomic insurance provided and the desire for a balanced budget of the system. In SAFE Working Paper 112, it is shown that a system with a balanced budget in every period cannot be symmetric for participating countries of different size. Conversely, a symmetric system may lead to large temporary surpluses and deficits. Informed policies should be aware of this trade-off.
  • The SAFE Policy White Paper No. 28 deals with the moral hazard costs of a macroeconomic insurance system and, among other things, proposes a novel institutional framework in which participating countries may leave the insurance after some announcement period.
  • In SAFE Working Paper 90, Pinar Topal looks at the reasons for different effects of fiscal policies on macroeconomic output. Here, findings show that differences across countries correlate with the inflexibility of national labor markets. More inflexible labor markets seem to reduce the benefit of anticyclical fiscal policies. This leaves some role for national remedies and casts doubt as to which extent European stabilization may be effective in the southern periphery, where labor markets are often particularly rigid.
  • Further doubt about the power of fiscal stabilization efforts is cast by the results of Hebous and Zimmermann in the SAFE Working Paper 93. They point out conceptual problems of the so called narrative approach of measuring the Keynesian multiplier and show that a consistent implementation via an instrumental variables approach leads to much smaller and even statistically insignificant effects. The plan to determine a further discrimination of multiplier effects depending on permanent and transitory payments (via a fiscal federalism scheme) was not successful.
  • A further project output deals with the EU Comission's and the EU Parliament’s objective to substitute the current system of own-resources of the EU and to have an “EU tax” instead. In SAFE Working Paper 105, Lipatov and Weichenrieder formalize the trade-off between introducing a genuine EU tax and keeping the current system of national contributions. They find that national contributions should be the default as they better conform to the benefits provided by subsidiarity.

Related Published Papers

Author/sTitleYearProgram AreaKeywords
Vilen Lipatov, Alfons J. WeichenriederA Decentralization Theorem of Taxation
CESifo Economic Studies
2016 Macro Finance fiscal federalism, taxing rights, decentralization theorem
Shafik Hebous, Alfons J. WeichenriederToward a Mutualization of European Unemployment Insurance? On Limiting the Downsides of a Fiscal Transfer System for the Eurozone
CESifo Economic Studies
2016 Macro Finance EMU, Eurozone, European unemployment insurance, fiscal transfers

Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
112Shafik Hebous, Alfons J. WeichenriederOn Deficits and Symmetries in a Fiscal Capacity2015 Macro Finance fiscal union, asymmetric shocks, federal transfers, optimum currency area
90Pinar TopalFiscal Stimulus and Labor Market Flexibility2015 Macro Finance fiscal policy, labour economics, labour market policies, threshold vector auto-regressive models, panel VAR, non-linear VAR, impulse analysis
93Shafik Hebous, Tom ZimmermannRevisiting the Narrative Approach of Estimating Tax Multipliers2015 Macro Finance Narrative Approach, Fiscal Stabilization, Tax Multiplier, Weak Instruments
105Vilen Lipatov, Alfons J. WeichenriederA Decentralization Theorem of Taxation2015 Macro Finance fiscal federalism, taxing rights, decentralization theorem

Related Policy Publications

Shafik Hebous,
Alfons J. Weichenrieder
Towards a Fiscal Union? On the Acceptability of a Fiscal Transfer System in the Eurozone
White Paper No. 28