How to enhance cyclical stabilisation in Europe by addressing the issue from an economic, institutional, legal and political economy perspective
Fiscal stabilisation within the EU and the euro area is inadequate. At the central level, the EU budget primarily focuses on allocating and redistributing funds among EU countries and does not have a role in cyclical stabilisation. This is a deliberate outcome of the Maastricht policy assignment, which avoided establishing a central fiscal capacity, primarily due to concerns about moral hazard.
On the national level, discretionary fiscal policies often exhibit a pro-cyclical bias, a tendency reinforced by fiscal rules that historically aimed at achieving nominal targets. Additionally, automatic stabilisers, inherent in various programmes designed for insurance or distribution purposes, may not always provide sufficient cyclical stabilisation. In fact, in cases of permanent shocks, these stabilisers may inadvertently exacerbate instability by maintaining output at pre-shock levels.
During this workshop, we will explore ways to improve cyclical stabilisation in Europe through comprehensive analysis encompassing economic, institutional, legal, and political dimensions. Key questions include designing a central stabilising mechanism that adheres to common fiscal rules while mitigating moral hazard, assessing the impact of a central fiscal capacity on the euro area's policy mix, and evaluating whether proposed fiscal frameworks would mitigate the risk of pro-cyclical policies. Moreover, the potential for restructuring the EU budget to incorporate stabilisation effects and ensuring compatibility of a central fiscal capacity with existing treaties will be explored. Additionally, the feasibility of a decentralised system of mutual insurance among EU or euro area members will be considered.
Furthermore, the EMU lab will examine the reform of national tax and benefit systems to enhance cyclical stabilisation without compromising efficiency or redistribution losses. This includes exploring the possibility of establishing national fiscal programmes tailored specifically for cyclical stabilisation and identifying best practices from EU countries.
The Economic and Monetary Union Laboratory (EMU Lab) is a collaborative initiative driven by the Tommaso Padoa-Schioppa Chair and the Pierre Werner Chair, aiming to reassess the Economic and Monetary Union's structure in light of current European and global economic conditions. We seek to identify research and policy innovations to promote stability, growth, and fairness in the EMU, enhancing the resilience of the European economy and society.
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