New Fiscal Institutions for Europe?

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

Recently, politicians and researchers have discussed 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.

A first research issue is the trade-off between the symmetry of the macroeconomic insurance provided and the desire for a balanced budget of the system. In a first paper, the authors emphasize 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.

A second paper was planned to deal with the proposition that a growth oriented system of fiscal transfers has considerable stabilizing effects in the face of asymmetric shocks, while having almost no moral hazard effects.

A third paper deals with the EU Parliament’s objective to substitute the current system of own-resources of the EU and to have an “EU tax” instead. A working paper has already been produced: “A Decentralization Theorem of Taxation” by Vilen Lipatov and Alfons Weichenrieder. It formalizes the trade-off between introducing a genuine EU tax and keeping the current system of national contributions and finds that national contributions should be the default. The paper has already been successfully submitted to conferences (see below). The authors have also been asked to contribute to a project of FiFo Institute for Public Economics “Future of EU-Finances” with a related paper. The FiFo projects responds to a call for tenders by the German Ministry of Finance.

Within the SAFE project, there is also a finished working paper on the question of fiscal fiscal capacity: Shafik Hebous and Alfons Weichenrieder: “On Deficits and Symmetries in a Fiscal Capacity”.

Complementary to the question of how different fiscal transfers systems can stabilize member countries in the face of asymmetric shocks, a further project paper is shedding light on the question how multiplier effects and therefore stabilization measures may differ depending on the labor market flexibility of countries. The results of the working paper “Fiscal Stimulus and Labor Market Flexibility suggest that the value of stabilization measures for peripheral countries currently may be limited and prior liberalization measures were advisable to allow the working of fiscal stimuli. The paper is the job market paper in the dissertation of Ms Topal.

While the vast majority of the targeted research output has been achieved, technical issues and the leave of Topal and Lipatov are slowing down progress when it comes to analyzing differential multiplier effects of transitory and continual fiscal capacities.


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

Related Policy Publications

Towards a Fiscal Union? On the Acceptability of a Fiscal Transfer System in the Eurozone
White Paper No. 28